More Damage to Come From Europe

 | May 15, 2012 | 11:10 AM EDT
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When will Europe not matter to prices? We know that we are in very different places. Our banking system is strong. Theirs is weak. Our employment situation is improving. Theirs is worsening. Our housing crisis seems to be on the mend. Theirs is just beginning. Our companies have terrific, refinanced balance sheets. Theirs are opaque and weaker.

We have optimism, as expressed by a USA Today poll in the front of the paper expressing a very optimistic belief in the future of this country. Over there, pessimists abound. We have one currency that works. They have another currency that keeps the ne'er-do-well countries from taking the radical action they need to stop pulling down other countries and get their assets cheap enough that they are attractive.

So why can't we just shrug off Europe? Why are we simply "not as bad" as they are, and our stocks "don't go down as much as they do"?

I think the answer is price. Markets routinely overshoot where they have to go. When they are going there, they get real hideous real fast. Right now, the perception is that Europe can crush us. The prevailing wisdom is that we are simply repeating the Europe-inspired swoon of last year, and there's little hope of avoiding it.

So, how is that assumption rebutted? The answer is price. In other words, prices get so low that they factor in a statement like the one that came from Fossil (FOSL) last week, a statement that says that Europe, no matter how unimportant it might be in the vast scheme of things, killed our earnings.

As for the renters of stocks, namely the hedge funds, Fossil means that Caterpillar (CAT) will blow it. Fossil is saying that United Technologies (UTX) will be crushed, as will VF Corp. (VFC) and PVH (PVH). Fossil says that it is just a matter of time before things unravel, and we don't want to get ahead of a European freight train.

Now, you could say, wait, these stocks have already been hammered. Caterpillar is down 10% in the last year, for heaven's sake. But Caterpillar is up for this year. Up 3%. That's too high compared with where it needs to be if Fossil strikes.

Or how about VF Corp.? It's an apparel maker. It has substantial business in Europe. The stock is up 40% year over year. It used to be at $90. Who's to say that can't go down $20, still well above where it was a year ago, on the basis of what's happening in Europe?

You can play out this game on so many stocks that have run so far since the crisis was last front and center.

If you get the stocks low enough, though, you are going to be able to withstand that kind of pressure.

Do I think it will happen? I don't even care. I like the stocks that have no exposure or limited exposure to Europe. If they get hit, I don't have to worry about the next conference call. There are enough companies that fit that depiction that I say, why venture on to a battleground?

It's just too hard, and it is not worth it.

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