Early this morning an announcement of an European debt deal was announced which instantly lifted markets across the globe.  I have said over and over that until we have some clarity out of the European region, markets cannot trade on fundamentals.  Now I finally feel that with this European debt deal which is slashing Greece’s debt to only paying 50 cents on the dollar for the refinance, that stocks will not be so volatile.  Over the last couple months, I have said that I did not feel the market could go below the 1050 level on the S&P based on my 2012 earnings pricing in a recession which I never thought was coming.  Today on the same day that the European debt deal was announced, we had a US GDP growth rate of 2.5% for the last quarter.  That was ahead of the Q2 numbers meaning we are not slowing we are actually slightly growing.  This in itself should be fact enough to show we are not going into recession domestically.  This double shot of adrenaline catapulted the averages higher by 3%!  I had many of my followers tell me I was crazy when not that long ago the S&P was 180 points lower and I still said we would end the year at 1350.  Now I hope those doubters believe me.

European debt deal

Now with this European debt deal being announced, we need to take a step back and look at it.  In 2008 when we announced TARP we got a big bounce in the markets, only to have another leg downward coming in the future.  Will that pattern happen again after this announcement of the European debt deal which is similar to TARP.  This is the million dollar question.  French banks are still going to take a hit on their sovereign debt, but 50 cents on a dollar are better than zero.  I feel we are going to have stagnant growth in the region for years to come similar to what we saw in the US.  However, I feel fundamentally, global multinational companies are positioned very well.  The US market is doing better than expected in my opinion as I travel to see different cities.  Asia is on fire still, no matter what the bears say and we have pockets of extreme growth across the globe.

In the US GDP report, we saw an increase of IT spending by over 17% in the quarter, that is absolutely phenomenal!  This is a double edged sword as this is great for Enterprise software companies that are excelling in this market.  Names like Oracle, SAP, Salesforce.com, Successfactors and Taleo are all names that have shown solid earnings growth and should continue to do so with numbers like this being posted in our GDP.

Opportunities after European debt deal announcement

Now how do we start to look for places to put our money after this big run up in the markets since the beginning of the fourth quarter?  This European debt deal allows fundamentals to come back into play and there are many areas that I feel are still grossly undervalued.  Technology is a great place especially in Q4.  Last night I wrote about the long term thesis of Internet traffic (http://www.vinnystocktips.com/2011/10/26/technology-bull-market/).  Google, Baidu, Akamai, and F5 are still going to be great long term plays. 

Another place that has been crushed due to the recession fears are the commodities, in particular coal and copper.  Freeport McMorran and Southern Peru Copper are both dirt cheap on a valuation basis and both have a solid dividend!  SCCO dividend is massive, this is actually my favorite play out of the two.  In coal, I would still look to metallurgical coal names like Walter Energy since I think China is still going to import a whole bunch of this stuff to produce steel for its near double digit growing economy.

Natural gas names, especially those that are highly levered to the US shale production will start to do really well in the next couple years.  This is another one of my long term thesis based on the adoption of natural gas becoming a fuel to run our vehicles in the future as we are sitting on decades of supply on our own soil.  You know it is a good thesis when foreign major oil players like Total and Statoil start to look at acquiring acreage in the region.  Many names come to mind in this space such as Chesapeake Energy, EOG Resources, Southwestern Energy, and others.  I also like the technology names that make these operations profitable.  My favorite that I have talked about is Core Labs which does the vertical drilling for the wells.

No matter how you decide to play it, there are many bargains out there now that investors can actually trade on fundamentals.  This is what happened after the European debt deal was announced today and we got proof that the US markets are not going into recession.  I am now wondering if my 1350 end of year target is too low now as we are only a few percentage points away from that number!  But I am going to stick with that target for now, as we have had a big run up in the last couple of weeks.  The markets taking a breather would actually be healthy after this European debt deal announcement allowing for some consolidation before our next move higher!

Cheers,

Vinny

 

 

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