Don't Kid Yourself: Europe Remains a Risk

 | Sep 12, 2011 | 2:01 PM EDT
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"We held! Could have been worse. Great bounceback from the lows. We aren't as linked to Greece as we thought." That's the pabulum we deal with each day. The silly relative game that says we have "shrugged off" Europe.

The problem is that we have shrugged off nothing. We come in here every day being thrilled that we aren't crushed by Europe. That we aren't down as much as France or Germany or Spain or Italy.

To which I say, arguably we shouldn't be down at all if we actually knew how to quantify Europe. I went over the big list, the companies that have more than 10% exposure to Europe, and it turns out that 142 of the S&P 500 fit that bill, but when I looked them over, many of them were pharmaceuticals. I don't think they should even count as part of the worry.

There are others, notably a bunch of large industrials with about 25% exposure, notably Eaton (ETN), DuPont (DD), Xerox (XRX), Alcoa (AA), Stanley Black & Decker (SWK), U.S. Steel (X), Honeywell (HON), Goodrich (GR), Owens-Illinois (OI) and Illinois Toolworks (ITW). These stocks are all pretty whipped, certainly enough to factor in a big decline in earnings per share because of Europe. It isn't like their stocks are oblivious to the pain of Europe. They get crushed constantly. So do Deere (DE), Cummins (CMI) and Caterpillar (CAT). The inability of China to call an all-clear in tightening, I think courtesy oil's outrageously high price, doesn't give any offset.

Oddly, neither tech nor financials is as heavily correlated to Europe as I thought. But nobody trusts the banks to tell the truth about their holdings, and given that they can do whatever they want in derivatives, we have no idea what the real exposure is. If you don't know what the exposure is, you assume it is too much.


Here I am willing to take risks, but only because they were totally trashed ahead of this moment.

My take.

We've dodged nothing. Everything goes down. Then a couple of stocks bounce. That's just not good enough.

Hardly comforting.

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