| Monday, August 19th, 2013 | | | | |  | | | Europe Puts on Its Rally Cap | | | - Stocks and the greenback struggle while silver and gold shine... what you should watch for in the face of rising rates...
- Chris Mayer to Fox Business: Don't let second-quarter earnings reports fool you...
- Plus, Frank Holmes on the recovering health of a once-sickly market, and plenty more...
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We're asking readers of Lifetime Income Report, Outstanding Investments, Penny Stock Fortunes, Addison Wiggin's Apogee Advisory and Capital & Crisis... to cancel their subscriptions. Click here to find out why he's making this odd request. >> CANCELLATION REQUEST << | | | | | | | | Peter Coyne, with a riddle: How many Harvard economists does it take to locate Mont Blanc on a map?
 | | Peter Coyne | Once upon a time, the Harvard economics department planned a team-building trip to the French-Italian border. They decided they would help out the local economies by going on a climbing expedition in the Alps to the top of the tallest mountain, Mont Blanc.
So they rented their gear, suited up and started their ascent. Several hours passed as they climbed higher and higher, until they became hopelessly lost. The department chair stopped, took out his map of the topography and studied it for a while.
After some time turning the map upside down and right side up, looking at distant landmarks, licking his finger and checking the wind, saying "hmmm" while scratching his chin, double-checking his compass and, lastly, looking at the sun, he nodded confidently.
Looking convinced, he finally turned around to the group and said:
"OK... See that huge mountain over there?"
"Yes," the other economists answered in anticipation...
"Well, as far as I can tell by this map," the economist said, "we're standing on top of it."
Badump... pah!
The markets opened this morning right where they left off on Friday -- on their back. Traders await the Fed's release of the latest FOMC minutes on Wednesday.
Stocks are flat after the S&P 500 dropped 2% last week. The dollar is still down against most major currencies. Long-term bonds didn't fare much better. The iShares 20+ Year Treasury Bond ETF (NYSE:TLT) fell 3.6% last week. And this morning, a 10-year Treasury note yields 2.85%. Compared with historical yields, that's low but still, it's a two-year high as rates continue to climb...
More on that this week...
Meanwhile, gold and silver are coming off a headlining week. The yellow metal shed some of last week's 3% gains -- at the moment, it's trading at $1,364. Silver shined even brighter -- up 10% last week. At last check, the poor man's metal was trading at $23.50. Oil's been on the rise too -- up 2.5% this month alone.
The big story this week: second-quarter earnings. The big winner once again... (gasp!)... financials!
"Overall, earnings rose about 2% for the quarter," Chris Mayer told Stuart Varney last Friday on Fox Business. "But if you take out the financials (banks, insurers), earnings actually fell by 3%. If earnings fall -- or if people start to think earnings will fall -- the stock market also tends to fall."
At the same time, Europe's rallying. "Europe has low valuations compared with the rest of the world." writes U.S. Global's Frank Holmes. He points to Europe's near-record low valuation...
Who knew?
In today's episode of The Daily Reckoning, Frank Holmes brushes the dust and cobwebs off of the Old World to present you the investment potential everyone else is ignoring -- especially in emerging European countries like Russia, the Czech Republic, Hungary and Poland. More on that below...
Then, in today's DR PRO, our own Ryan O'Connor outlines two plays that let PRO subscribers tap into the European rally. "Safety assets here in the states -- i.e., utilities, REITs, consumer staples, etc. -- stand to fall pretty hard when interest rates eventually rise," writes Ryan. With one eye on the rising yields and the other on the European rally, Ryan pinpoints two little-known value plays in the eurozone and emerging markets.
(If you haven't upgraded your free Daily Reckoning account to the DR PRO, click here. After you make the jump, you'll start receiving actionable investment advice right after our featured essay. Simply click here to "go PRO" now.)
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| | | | Europe Puts on Its Rally Cap | | | | by Frank Holmes | | | U.S. Global's portfolio manager Tim Steinle is usually soft-spoken and mild mannered, so our ears perked up when he recently belted out, "Europe is rocking!"
After a lengthy period of stagnant growth and lackluster results, the gradual crescendo of improving economic data that have been coming out of Europe lately certainly command attention.
As our resident expert on the European economy, Tim has been listing several economic indicators that were turning positive during the investment team's morning meetings. While our entire team keeps track of the economic data and political policies of all the developed G-7 and emerging E-7 countries in the world, Tim keeps his finger on the pulse of European countries at all times in his hunt for outsized opportunities for the Emerging Europe Fund (EUROX).
I previously shared how economic releases have been beating expectations, as shown in the eurozone's spiking Citigroup Economic Surprise Index. GDP is recovering too, with expectations that the year-over-year growth rate will significantly improve over the next year and a half.
Positive surprises and improving economic growth aren't the only indications that the region's economy is becoming healthier. Manufacturing appears to be on the mend. The latest reading of the purchasing manager's index (PMI) was at a two-year high and topped the 50 mark. This indication of expansion hasn't happened since July 2011. And the PMI in Europe expanded at a faster pace than estimated.
Economic confidence in the region has also been rising. In July, it reached a 15-month high. Generally, when sentiment turns positive, businesses invest more and consumers spend more. We believe this improving confidence will potentially spur positive third-quarter economic growth and help the eurozone to exit its recession.
The area's fiscal situation isn't in the dire straits it has been. According to BCA Research, structural deficits peaked four years ago. As a result, during the 2009-2012 period, the biggest fiscal drags as a percent of potential GDP were concentrated in Europe, namely in Greece, Portugal, Spain and Ireland, four of the five members of the group formerly known as the PIIGS. Fiscal drag happens when a government's net fiscal position doesn't cover the desired net savings of the private economy.
Looking ahead at the 2012-15 period, the largest fiscal drags are expected to be in other areas of the world. Based on data from the European Central Bank, "The government credit impulse is improving, which should help to lift the euro-area economy out of its 'endless recession,'" says BCA.
It's no wonder Tim is cheering Europe on, as these economic data points have important implications for global investors.
| | | | | | | "The Anguish on Bill Bonner's Face When I Told Him Was Horrifying…"
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Consider the area's PMI, which Morgan Stanley Research found to be a six-month leading indicator of earnings per share (EPS). While the EPS for European stocks has remained relatively flat over recent months, it's expected to follow PMI and move up.
Here's another reason to look at the area: Europe has low valuations compared with the rest of the world. Take a look at the normalized price-earnings (P/E) ratio, which is trading at "close to a record valuation low," according to Morgan Stanley Research. Compared with U.S. stocks and world equities, European stocks are trading at a significant discount.
So as countries including Germany, France and Italy recover, we have solid reasons to believe their eastern counterparts will enjoy a boost as well.
Take the CE3, which are the Czech Republic, Hungary and Poland. These countries are integral to the supply chain in Europe and dependent on domestic demand as well as its export growth.
We aren't the only ones pounding the table for emerging European countries. Credit Suisse came out with a report recently with a bold headline, "Going Overweight Europe = Bullish CE3." The report makes a case for the Czech Republic, Hungary and Poland as the countries that have "cheap markets, cheap currencies, which are commodity importers and are not overheating," says Credit Suisse.
The firm cites numerous positive data, including the CE3s' lead indicators moving together with Germany, an improving outlook for employment, recovering real retail sales, wage growth and regional credit growth.
Stay tuned for Europe's much anticipated return to the limelight. But before Europe plays before a sold-out crowd, you might want to get your portfolio a front-row seat.
Regards,
Frank Holmes
for The Daily Reckoning
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| | | | | | |  Frank Holmes is chief executive officer and chief investment officer of U.S. Global Investors Inc. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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