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Tuesday, February 5, 2013

Signal ....and Noise in European Stocks

Monday Feb 4 European stocks represented by FEZ  the EURO Stoxx 50 closed the day down 4.7%. from the close on Friday Feb 1.

This from the marketwatch /WSJ website is typical of the  explanation for the decline yesterday throughout the media and market pundit commentary

"... investors fled the region’s bourses on Monday, as political jitters in Italy and Spain rattled sentiment and stoked new concerns of a euro-zone breakup. 
In Spain, the opposition party called for Prime Minister Mariano Rajoy to resign amid allegations of corruption, fueling fears of a general election that could pave the way for anti-euro parties.
Here are the top 10 holdings of FEZ. There is one Spanish bank and one Italian company ENI which is a global energy company. The list is composed of industry leading multinationals competing with other global giants such as those in the US. 
Top 10 Holdings (39.79% of Total Assets)
CompanySymbol% Assets
Banco Santander SABCDRF.BC3.97
Allianz SEALIZF.DE2.99
According to Yahoo Finance FEZ has a p/e of 10.93 a 21% discount to the S+P 500 at 13.25.
I cannot think of a credible economic reason for the Euro Stoxx 50 to selloff 5% based on the news from Spain and Italy. Stock prices can deviate from value in the short term but seldom in the long term. One needs to distinguish signal (long term moves) from noise (especially daily moves). It seems pretty clear to me that yesterday's move was noise.
Here's bloomberg at the Feb 5 European market close.
Feb. 5 (Bloomberg) -- European stocks climbed the most in almost four weeks as companies from Munich Re to BP Plc beat earnings estimates and a measure of euro-area services output shrank less than forecast
and Reuters recorded this gem from a market participant
"Yesterday's spotlight on Southern Europe was just an excuse to book profits and catch our breath. The trend is still positive, and clients are slowly coming back to equities," said Patrice Peroise, a trader at Kepler Capital Markets.

As of this writing  a little over 2 hours before the market close in the US. FEZ is +1.6% for the day.

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