Lets “lance the boil” of Greece and move on!

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There was some respite in the stock market falls on Wall Street last night with the US indices coming back from their lows late in the session. The Dow Industrials fell 76 points to 12,932 after dropping close to 200 points at one stage on fears about the exit of Greece from the Eurozone. The FTSE 100 fell to 5,555, a low for 2012. Oil continues to fall and trades currently at $112, dropping from over $117 since last Thursday. Gold has also suffered heavy falls, largely as a result of a strengthening of the US dollar, trading at $1592 last look. FTSE futures are up 5 points this morning.

Greece continues to dominate sentiment. But maybe this weekend’s election result if the best thing that could have happened to the global economy. The unraveling of the Eurozone with the potential exit of Greece from the euro back to the Drachma may be bad news for Greeks, but potentially good news for investors. The banks have already taken a 50 percent hair cut on their Greek bonds as part of the last bail out which leaves only the European Central Bank and IMF heavily on the hook should an exit from the euro occur and which would trigger a debt default scenario. Greece has a relatively small economy, and so what would be more disturbing would be further issues within Spain or Italy due to their much larger debt and GDP profiles. The Greek situation is an opportunity to “lance the boil” once and for all, the bail out’s were a temporary plaster on their problems but the IMF/ECB assumptions behind the last bail out deal were optimistic at best and likely to have resulted in yet another cash infusion in years to come.

It is easy to focus on all the negative news at the moment as markets are pummelled but lets face it, we knew that a pull back after the huge gains in quarter one was overdue. This is a natural correction and Greece is the excuse for it.

Company valuations remain cheap and have become a lot cheaper this week. For example, with earnings of around $100 per share, the S&P 500 trades at the same Price/Earnings multiple that existed in November 2008 during the peak of the financial crisis. The P/E of the S&P has averaged 15.2 in the last 30 years and, during that period, the yield on the 10-year U.S. treasury bond averaged 6.67%. Yesterday the US Treasury Department sold $32 billion in 3-year notes at a yield of 0.362%, the lowest level since February. The all-time low was 0.334%, set in September 2011. Today the 10-year bond yield is 1.83%, and stocks trade at 13-14 times earings.  Over 70 percent of companies in the US reporting season have beaten estimates.

The only question mark over earnings is the impact of a weakening in the euro against the dollar which will make life easier for European exporters and harder for US exporters.

For those able to take the stress, many companies are looking good value at the moment. Of course the volatility will continue, but this is an opportunity to tuck away good quality companies and ride out the storm. Picking away at positions is key, not going all in on any one day. As I mentioned yesterday, AIM commodity stocks are looking mighty cheap. It will be fascinating to see where the likes of Xcite, Gulf Keystone, Rockhopper move today after the steep falls of the last week. They are all trading at laround $3 a barrel based on proven resources or even reserves. For example, at Xcite Energy’s current market cap, $379 million, 1p proven reserves of 96 mm barrels (auditors state 90 percent chance of extraction at least) are valued at $3.94 per barrel. Brent heavy crude is $102 a barrel, an opportunity for a predator you might think?!

Contrarian Investor UK

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