The Euro Has No Good Options
The challenges facing the Euro zone including most recently Italy seem so enormous and intractable that it’s easy to contemplate previously unimaginable outcomes. Der Spiegel reports that the German government is preparing for a possible Greek exit from the Euro. The currency was designed without an exit – it’s unclear how Greece could extricate itself. A weekend nationalization of banks with all deposits converted to drachma? The new currency would immediately collapse from its initial level as unwilling holders of drachma sold, and in any case the days and weeks leading up to such an event would no doubt see a sharp run on deposits from Greek banks. As it is there’s a tax on money leaving the country. And we read every day that supporting Italy will require the IMF and a reinforced EFSF. What will happen if Italy can’t refinance its debt, €250BN of which rolls over in 2012?
But you don’t need to bet on disasters to see downside for the Euro. Just muddling through and avoiding any of the crisis scenarios is going to involve slower growth. The Austerity Solution so favored by the EU and IMF is assuredly lowering GDP growth in the region as well as consumer confidence. The growth differential between the U.S. and the Euro-zone continues to widen. JPMorgan now forecasts +1.7% 2012 GDP growth in the U.S. versus -0.6% in the Euro-zone. Solutions and non-solutions seem to lead to the same place. The next 10% move in the exchange rate looks far more likely to be lower.
The Financial Times notes that Liquid Natural Gas (LNG) tanker ships are experiencing increased demand, one of the very few areas of shipping for which that is true. The rest of the shipping industry has shot itself in both feet as every operator positioned for a 10% increase in market share, which has crushed shipping rates through overcapacity and made the sector even less friendly than U.S. residential construction (if that’s possible). But the virtual shutdown of the Japanese nuclear energy industry following the earthquake has increased Japanese demand for LNG imports and is raising prices. Regrettably, producers of domestic natural gas in the U.S. are not direct beneficiaries because the U.S. currently has no facilities at which natural gas can be compressed for export, but greater global demand is a positive over the long term (i.e. 3-5 years).
Still on the subject of shipping, we continue to be invested in Aegean Marine Petroleum (ANW). They provide bunker fuel to the shipping industry and so operate a very different business model than their customers. Their stock price has been beaten down with their peers, although they continue to generate operating profits and just reported a third quarter of solid margins. If you can believe their book value (assets are ships and fuel inventory) the stock trades at a 40% discount. On their earnings call last week management asserted that market value for their ships was no lower than carrying value – much of the fleet is recently purchased so that ought to be true, although they did take a loss versus book value on the sale of one vessel in the third quarter. Even after rallying on last week’s earnings it still trades at less than 7 X ’12 estimated earings. We continue to hold a modest position in ANW.
Berkshire Hathaway (BRK) remains one of our biggest holdings, for reasons articulated the other day. Warren Buffett’s appearance on CNBC this morning was never boring, and he revealed an investment in IBM which is not a stock we would have bought ourselves. Many large cap U.S. stocks appear attractively priced, and the dividend yield on the S&P500 (SPY) remains more attractive than long-term government or high-grade bonds. The equity risk premium is not as wide as it was but remains nonetheless attractive in favoring equities over fixed income.
Disclosure: Author in Long EUO, BRK, ANW, SPY
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