Portugal Is a Reason to Buy, Not Sell

 | Jul 10, 2014 | 3:18 PM EDT
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Europe is not a reason to sell, it is a reason to buy. I don't know when that idea will get into the thick skulls of those who can't get their heads out of the Great Recession sand. But the hugely down opening off the concerns of a Portuguese bank, and then the subsequent recovery with the averages coming back nicely, might jar some people out of the complacency of European-based bearishness.

There's not a lot of good that comes of hand surgery, but today may be one of those days, because it reminds me of how the 2014 market really works.

This morning, I was totally out of action, both in pre-op and then passed out under the knife. When I came to, I saw the market down a little less than a half of a percent, and I had to work backwards to find out whether we were up from the get-go or down and then rallied.

Sure enough, for those who weren't unconscious when the market opened, we were crushed because of the potential collapse of a bank I had never heard of until the anesthesia had worn off. Yep, Banco Espirito Santo did us in with a huge decline, one that in retrospect should not have been all that much of a surprise, given that its bonds have been plummeting for weeks. No matter, Banco Espirito Santo is too big to fail, apparently, if you live in Lisbon.

But we don't live in Lisbon, unless you mean Lisbon, Ohio, population 2,821, a town which has the distinction of being the northwestern-most city the Confederates raided during the Civil War. The subject of Portugal did come up in the pre-op. But that's because you have to state what you are allergic to, and last summer I went into anaphylactic shock after eating some sardines of Portuguese lineage. Like then, with my blood pressure dropping to 80 over 50, I am doing the show regardless.

Now here's the real advantage of hand surgery, beyond having the great doctor Nelson Botwinick performing the deed. I didn't have the chance to be swayed by the horrendously negative futures activity, which of course was a bleed-off of the 1% to 2% declines in Europe off the ultra-crucial, unbelievably important, totally imperative Portuguese bank that I had never heard of until I came to. You didn't see the 160-Dow-point decline as stentorian bears assert that we were all whistling past the Iberian graveyard.

I also didn't have the luxury to sift through the bizarre ownership of this most important bank in Portugal, a lineage that seemed pretty impenetrable and was most certainly part of the kind of European cronyism we are all so sick of.

But here's something I remembered when I snapped out of the anesthetic haze: Stress Test, not the stress I feel under my bandage as the crazed pulsing in my fingers fires into my brain, but the book Stress Test by Tim Geithner, who, somehow, isn't getting that due he deserves for forcing our banks to raise capital, trim bad loans and make themselves better capitalized than ever before. Geithner's demand, some would say his almost totalitarian insistence, that our banks be able to withstand not just a Great Recession but a Great Depression makes it so we don't wake up to a Banco Espirito Santo, which, I am sure, rocked Portugal even more than the 4-0 shutout at the feet of Germany in the World Cup, although that was no doubt mollified by the crushing blow Germany delivered to the Portuguese-speaking Brazil.

Put simply, this Portuguese amalgamation of bad loans mixed with automated teller machines is precisely what Geithner was aiming at when he forced banks to raise capital so they could reserve against bad loans. It's why money is coming here and not going there, as we saw when cooler, less emotional investors intercepted the ball.

Much of Europe, if you haven't noticed, is slipping back into a deflationary recession not unlike Japan, which reported some god-awful machine tool numbers last night. The work rules, which affect outfits as varied as their pathetic airlines and engineering concerns, coupled with vastly undercapitalized banks, have resulted in a stalled recovery at best. No wonder they have such low bond yields. It's not an aberration; it's prudence for those who need European exposure.

The only European companies that seem to be worth investing are the ones that take down a U.S. corporate tax rate through the now-infamous inversion process.

Oh, we have our problems: a less-than-robust housing market, a spotty retail group as those poor folks who own Lumber Liquidators (LL) or Tractor Supply (TSCO) can tell you, as well as some overvaluation among the momentum flames that the growth moths keep running into. We are trying to process federal government regulations, including bizarre, hard-to-navigate healthcare rules that company after company has told us makes hiring a problematic affair.

But in the end, you don't wake up to the denouement of an important bank. You come to and enjoy a takeover bid for TRW (TRW), an automotive parts supplier that was already up 25% for 2014 going into the session. You discover in the good number from United Continental (UAC) that the U.S.-based airlines -- not the miserable European ones -- really are back. And you continue to see the rally in old tech, you know, Microsoft (MSFT), Intel (INTC), Seagate (STX) and the like, that gives you all-star-like performance right into the All-Star break.

Meanwhile, how about our economic backdrop? Two weeks ago, the oh-so-smart grizzlies were chuckling at that rube Fed Chair Janet Yellen for calling inflation "noisy." Since then, oil and therefore gasoline have been down for 10 straight days, despite spreading turmoil in the Middle East.

Natural gas has given up its giant gains, and the grain complex has repealed four years of rallies. You catch a couple of days of rain in California, and you come up with a good piglet vaccine, and you will be talking about deflation.

No, I am not advising that you go elect some surgery to beat the European blues, even elective surgery of the Allergan (AGN) kind. And I am not saying that we aren't occasionally prone to a real shock in this country, no doubt related to the endless partisanship in Washington and a president who is focused on a lot of non-business issues, although that may not be all that bad for the stock market.

But you have to remember that Europe isn't a reason to dump U.S. stocks, it's a reason to purchase shares in U.S. businesses that aren't prone to the cronyism, indecision and indolence of an increasingly irrelevant Europe, an irrelevance that almost seems mandated from on high. Let's hope Germany wins the World Cup. At least that would keep their minds off screwing up the recovery that had seemed so in the cards just a few months ago.

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