Why the Market is Really Down - European Troubles

The Dow closed down over 500 points yesterday and I’m getting lots of questions about it. There are several factors at work. But the most important is the dollar going up.

As the dollar goes up, other currencies go down (that’s right if one currency goes up something else must come down).

A company that has profits overseas, like almost every stock in the Dow Jones index, is hurt when the dollar value of those profits decline. 

Confused? I look forward to your questions.

So, what am I doing?

I can’t tell you what to do with your money because I don’t know your specific financial situation but I can tell you what I am doing with mine.

First, my friends at Kapitall Wire sent out their weekly newsletter yesterday. Technically, I am a user just like you. I just happen to also be a co-founder of Kapitall. Since my personal positions exactly contradict the article I feel I have to let you know about them.
 
Kapitall Wire talks about companies with more cash on hand than the U.S. treasury. Since the U.S. has trillions in unused capacity to borrow it is actually much better off than the companies listed. While the article does not specifically recommend stocks it does mention them in a positive light because they have enormous amounts of cash on their balance sheet.

Specifically they are the Spanish Banks, Banco Bilbao Vizcaya (BBVA) and Banco Santander (STD). I am short both these banks for the last few weeks.  (A short is a speculative bet on the decline of a company).

If you read my last mail you will realize how negative I am on European Banks. You think the U.S. government debt situation is in trouble. Europe has it much worse with Italy, Portugal and Spain all considered in danger of some kind of partial default. (See my last mail here)

The list includes two other European Banks, UBS (UBS) and Barclays (BCS).  I don’t know enough about the specific valuations of these banks to either short them or buy them but they are in Europe so I’m staying away. I did recently buy some U.S. banks though.
 
The only company I own in the list is General Electric (GE). GE is a diversified conglomerate with manufacturing exposure all over the world and they have lots of cash on their balance sheet. While it will move around a lot with the rest of the stock market and will fall in price if the dollar goes up, I like it as a solid backbone of my portfolio.
 
The good news? Stocks are getting cheaper and people are scared. That’s usually a good time to buy. While I still own stocks I’m not selling right now. However, I’m not buying more just yet.

Remember my favorite market axiom: nothing is ever as bad as it seems nor is it as good as it seems.

DISCLOSURE:

I own GE. I am short STD and BBVA. I own some bonds issued by Barclays Bank.