Europe, the Millstone Around Our Necks

 | Oct 20, 2011 | 2:31 PM EDT  | Comments
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Here's a question that doesn't matter, and it angers me that it doesn't matter: Where would this market be without Europe? It angers me because I think the answer is pretty simple: higher. Not substantially higher, because we have a ton of confidence issues in this country. But definitely above where we are.

What makes me think that?

What doesn't?

Think of the sectors.

First, the transports. The rails are telling you that things are just fine, thank you. If autos and chemicals and energy and assorted industrials are all strong, how can you dislike the market?

Second, the techs. If it weren't for the Thai flood we have been seeing lots of good news in tech. Intel (INTC) told a good story. eBay (EBAY) told a good story but then pooh-poohed itself, which hurt. Google's (GOOG) got accelerating revenue growth. That stock simply hasn't stopped since it reported its earnings, and Google truly does matter in terms of size and heft.

Let's take Apple (AAPL) at face value, and you can argue the future's darned good. (It remains a show-me stock). In fact, the only company that had very weak things to say about orders was Cypress (CY), and it just announced a gigantic buyback and a new 9-cent dividend. What's not to like?

Third, we've got some industrial companies that have been putting up some terrific numbers. We started off soft with Alcoa's (AA) miss, but since then we have some dynamite number from the likes of two diversified industrials, Parker-Hannifin (PH) and Cooper (CBE), that touch a whole host of business from aerospace to tools and electrics. You might not like Nucor's (NUE) downbeat projections, but this quarter's revenues and earnings were terrific. Get this -- automotive, heavy equipment, energy and general manufacturing markets are all improved.

Fourth, aerospace, a gigantic industry, is truly starting to turn on the jets. I know Alcoa wasn't anything to write home about, but Klaus Kleinfeld, the CEO, made it very clear that the aerospace business is booming in this country. He's got a great call on that because planes use a massive amount of aluminum and fasteners, and Alcoa dominates both. Some didn't like the United Tech (UTX) quarter but you saw no flaws in its aerospace division.

Fifth, retail is gearing up for an excellent holiday season, augmented by private labels that are costing less to make but with price increases have already been put through so that they reap the benefits. We talk about the dollar stores hitting new highs but Macy's (M) is just a point off its high. Nordstrom (JWN) is a hair below it. Target's (TGT) inching back. Costco's (COST) going back to its high. TJ Maxx (TJX) had gotten hit, off of its European division (of course) but even that's been strong. Phillips Van Heusen (PVH), VF Corp. (VFC), Nike (NKE), Jones (JNY) -- all doing well. So's Ralph Lauren (RL). I am not worried about Coach (COH) and Tiffany (TIF) even though shorts won't give up fighting them.

Sixth, restaurants -- you know what? They are irrepressible. Buffalo Wild Wings (BWLD) put up some darned good numbers. I know Yum! (YUM) has been challenged, and we aren't that happy with Darden (DRI) of late. But I am taking my cue from Domino's (DPZ), which is remarkable. I am going to include Starbucks (SBUX) and Whole Foods (WFM) in this category, and both are at or near highs because they have put through price increases and actually gained customers. That's pretty amazing. No stopping McDonald's (MCD), of course.

Seventh, the autos are doing very well with a 13 million rate, remarkable given that we would have been happy with 11 million units 18 months ago when people talked about autos for 2011. Ford's (F) talking about a dividend. General Motors (GM) is doing fine and Chrysler's terrific. The Japanese and German car companies are selling well too.

Eighth, the utility business, which I monitor very closely, has had a great three months. It is true that the stocks have been very strong in part because of their yield. But I monitor the actual business -- I talk to them all over the country -- and it's terrific nationwide. For the sake of argument, let's include AT&T (T), which talked about how wireline may actually be turning positive along with the booming wireless business.

Ninth, we may not like to think of Clorox (CLX) and Procter (PG) and General Mills (GIS) as companies that matter to the economy. But we're terrific at this stuff and these companies are doing so well, especially now that we have seen a decline in the raw costs of the box, the wrappers and the actual materials that go into their products, whether it be surfactants or wheat or corn or soy.

Finally, oil and gas. I know, I know, Halliburton (HAL) destroyed the drillers and Core Labs (CLB) didn't help. But both have incredibly strong domestic business. In fact, the U.S. is the bright spot of the whole world. Yes, the United States, which was a declining producer, is probably the fastest-growing producer on earth right now. That's what's driving the pipeline business, too.

Yes, it isn't all good. Many of the companies that dig and process commodities are hurting, as we saw from Alcoa and the coal companies. The plastic companies have been clocked here. The ag complex itself is weak, away from smoking red-hot Tractor Supply (TSCO) -- can't believe that stock. Oh, and there's the banks. The big international ones are trading like they are headquartered in France or Germany. The regionals are getting crushed by the Fed's determination to keep rates low to get housing going, an effort that's been in vain because the feds haven't been able to harness Fannie and Freddie to cut interest and principal to make it so people stay in their homes rather than become renters. It is economic to walk away from your home, and that's a disaster for a big part of our economy.

But it's pretty obvious that if you were to somehow separate Europe from our markets, and we traded on earnings and on prospects of our domestic companies and the companies that do the a lot of business away from Europe, we'd be higher. These companies are doing well, way too well for their meager price-to-earnings multiples. They are too cheap just based on the U.S. prospects. They deserve to trade higher.

Alas, though, let's never forget, "deserve" has nothing to do with it as long as we remain hostage to Punch & Judy and Hansel & Gretel and all the rest of them over there. Thanks for nothing, Europe. Thanks for nothing.

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