Q&A Time: Bailout’s Affect on the Euro and Earnings Season’s Winners and Losers

Question: Portugal’s Prime Minister said the three-year loan was a “good agreement that defends Portugal.” That’s another bailout for another European country. Does this spell the demise of the European Union or the euro?

Answer:

The euro is not centered on Portugal, Italy Greece or Spain, commonly known as the PIGS nations. Germany is the backbone of the euro.

• The reason the euro may not work is because Germany is the core of the euro.
  • Germany has caps on labor cost;
  • Germany has higher productivity than the other nations, so they export everything, and
  • Germany has to be the one to agree to continue to bailout the PIGS nations.
• Currency has to be managed.
  • When Germany’s growth gets out of hand they have to raise interest rates no matter what is going on elsewhere.
  • This hurts weaker countries as the cost of borrowing increases, further hurting their economies as:
    • Their credit rating is already low, and
    • Monetary policy is set by the stronger nations.
• We see the euro as too disjointed.
  • Individual countries set their own fiscal policy; however
  • Their currency is regulated by one group: Germany, the strongest economy.
  • We do not know how long Germany will agree to bailouts.
• In contrast, the United States works because:
  • Our system is more fluid, and
  • We have good productivity from every state.

Question: Earnings season is winding down. Who are your picks for this season’s winners and losers?

Answer:

Winners:

• Materials sector
• Energy sector
  • Oil was not at or above $100 a barrel for the entire first quarter, but has been since March;
  • Oil’s price pushed earnings up 44% for the sector, and
  • Oil is down 15% at this time, from its top in late April.
    • Time to trim back Energy holdings;
    • With oil declining, sector may not have same earnings for second quarter, and
    • Better for airlines as oil is coming down.
  • Across the board earnings growth was near 25%.

Losers

• The worst performing sector year-to-date was Financials.
• However earnings averaged 18.36% growth for the sector in the first quarter.

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