the Eurozone haggling process

fully discounting the EU crisis?

I’m beginning to think that we’re at, or close to, the worst point for global stock markets in their discounting of the Eurozone financial crisis.  This doesn’t mean that the crisis itself is over, or even close to that.  It doesn’t mean, either, that European stocks will be good performers in absolute terms or relative to their peers listed in other countries from now on.

what this means

Instead, it means two things:

–I think global markets have already assessed and discounted most of the bad consequences that the euro crisis will have for the wold outside the EU.  After all, the crisis has been going on for almost three years, a longer time–as I pointed out yesterday–than it took the world to do the same thing for Japan in the early 1990s.  This means we are at, or close to, the point where future uncertainties can be shrugged off by other markets.  It may even be that future deterioration of the situation in the EU will also have little effect on trading outside Europe.  Certainly, that’s what happened with the Japenese stock market, which in 1992 was still first or second in capitalization in the world.  It declined into its current irrelevance.

I’m not sure this dire fate awaits the EU.  In fact, although, again, I’m not willing to bet on this outcome, I think there’s a good chance the EU will ultimately become a much closer political union.  But I think the EU and the rest of the world will soon “decouple” in stock market terms.

–It also means I think there’s a chance to make money in carefully selected UK or continental European stocks.  (Given the reports that US-based “vulture” investors are moving en masse to the EU, the reality may be somewhat better than this.)

For example, London-based Intercontinental Hotels Group, whose IHG ADR I own (I’ve mentioned several times in previous PSI posts), is up 20% in dollars (25% in £) over the past year.  That compares with a 3.6% gain for the S&P 500 over the same span, and a £ loss of around 4% for the FTSE 100.  I don’t see why outperformance for IHG shouldn’t continue.

I’m not willing to bet the farm on this hypothesis, but I do think it deserves considering.

the current situation??    …haggling about terms

If I’m right about this, how should I interpret the apparent current impasse between Germany, which wants structural reform in Italy, Spain et al. before it will consider sharing the burden of those countries’ excessive debt, and the rest of the EU, which wants debt relief before structural reform?

I think it all comes down to a process of haggling about terms.  It’s sometimes being conducted in private, sometimes in the press.  It’s the Greek bailout process writ large.  Both sides have already decided it’s in their best interest to come to an agreement that will contain both a measure of debt relief and some relinquishment of national sovereignty.  But neither side can be seen as simply rolling over and accepting the terms the other is demanding.  Both must be viewed by their electorates as having fought hard for every inch of ground won or lost.

Two other points:

–I think the EU generally, and Germany in particular, learned a lot from negotiations with Greece.  It came to understand that for a wily haggler like Greece, each apparent agreement only creates a new framework for further negotiation.  The EU also saw that the Greek parliament enacted reform legislation on cost decreases and on taxes–but then never enforced the new laws.  Maybe it’s been ok for Greece to conduct itself like this.  I think, however ,that Germany is determined that nothing similar will happen on the wider Eurozone stage.  Supra-national safeguards must be in place.

Therefore, any definitive agreement may take time–a lot of time.  Germany doesn’t care, because the stakes are so high.  Having gone through its own massive decade-long economic restructuring after the merger of East Germany and West, Germany understands what needs to be done.

–The interests of the EU and the rest of the world may not coincide.


-The EU is currently China’s largest trading partner; privately, China may think that the EU won’t be nearly so important to it ten years from now.  So it’s urging an immediate solution, at least in part because that’s what’s best for China at the moment.

-The US economy is  slowing (to a degree I didn’t foresee), partly because of recession in the EU.  Historically, administrations are reelected when the country is either healthy already or making good progress getting there.  On the other hand, administrations tend to be replaced when the economy is sagging and unemployment is high. There’s no time, nor is there any apparent inclination on either political party’s part, to start the legislative process of helping the US economy evolve.  Therefore, Washington has a strong interest in having a quick solution to the EU crisis, on the idea that this will make the domestic situation look a bit better.

comparing Japan 1992 with the Eurozone 2012

creating an EU timetable

It seems to me that all of the elements of the Eurozone crisis have been out in the open for some time.

The Papandreou government took power in Greece in September 2009 and triggered the crisis by announcing that the national accounts had been falsified for many years by the prior administration.  Greece, as many had already suspected, was in much worse financial shape than the official figures showed.  But that was 33 months ago!

It has been clear from the outset that financial contagion could easily spread from one member of a currency union to the others.  The rolling nature of the Asian financial crisis of the late 1990s showed vividly how this could happen, even outside a tight economic linkage of the typce that binds the Eurozone together.

It has also been evident from the beginning that the Eurozone banks were intimately tied to the weaker countries by their large holdings of those countries higher-coupon sovereign debt.  So they were in trouble, no matter what country they were domiciled in.

We’ve also seen the shoes drop, one by one, as market attention has shifted from Greece to Italy to Spain, just like in Asia–and the PIGS countries have revealed the extent of their financial messes.

We’ve recently seen capital flight, as corporate and individual investors have (sensibly) shifted their euros from banks in weaker countries to those in Germany or other stronger ones.

Finally, I think we’ve reached a political tipping point in Germany, where the political cost of not addressing the woes of southern Europe exceeds the cost of taking action.  Hence the recent moves to consider more than austerity as a solution.

for investors, where to from here?   

I’m looking at the situation as a foreign investor, not as a citizen or resident of the EU.  I’m more concerned with the stock market implications of today’s Eurozone situation than the political and economic.

My question, then, is:

when will the EU’s fiscal problems stop being the dominant factor influencing the movements of its stock markets–and the markets of the rest of the world?

looking at Japan in 1989

We do have one example of this kind of situation during my professional lifetime.  It’s the Japan of late 1989.

That’s when the new head of that country’s central bank began to raise interest rates to force the government to bring highly speculative banking and  financial market activity under control.  The subsequent failure of Tokyo to fix its broken economy ushered in the first of Japan’s two (so far, at least) Lost Decades.

To my mind, Japan’s case was at least as bad as the EU’s.  And Japan more or less deliberately–but very clearly–made a bad choice.  It opted to cover up its problems to preserve a traditional way of life and a traditional power structure, rather than to evolve in a way that would gradually fix them.

It’s not a great roadmap, but it’s the best we have.

what happened in the Tokyo stock market?

The main indices peaked in December 1989, as rates began to rise.

They fell until June 1992, 31 months later.

From that point, the Japanese market drifted, with high volatility, for the remainder of the decade.  This ran counter to a rising trend in the equity markets of other industrialized countries.

The most sobering news is that today, twenty years after the initial bottom, the Tokyo market hasn’t recovered an ground.  On the contrary, it’s half its level of June 1992.  Today, it’s an investing backwater, lost in dreams of the 1980s, and with highly restrictive rules against any foreign attempt to change the status quo.

my conclusions

If Japan is any guide, we should be close to the end of the initial downward phase in Europe.  To me, it makes sense to be on the alert for signs of stabilization.

In Japan, the strongest stocks by far after the initial bottom were either multinationals or export-oriented firms.  That is, they were companies headquartered in Japan but with their operations elsewhere.  To the extent the Japanese citizens bought stocks during the first Lost Decade, those are the ones that they–as well as foreigners–favored.  I think the same will be true in the EU.  Companies located in the EU but not in the Eurozone will probably do the best.

The crisis was by no means over in Japan in mid-1992.  In fact, the first inning had barely begun.  But Japan’s problems ceased having a major negative influence on other markets.

Europe is much more entwined in the fabric of world commerce than Japan was in 1992.  The EU may have a tougher time than Japan over the coming years, in the sense that world economic growth will likely not be as strong as it was in the second half of the 1990s.  On the other hand, Japan benefited less from strength elsewhere than the EU is likely to do.  So a general picture for EU stocks–in the absence of a dramatic political evolution of the EU–is probably flattish, with a lot of volatility.

On the crucial question of whether the EU will follow Japan down the same path to economic irrelevance I have no answer.  I didn’t think Japan would be as inflexible as it has been.  But it shows that when a country has deeply ingrained notions of its cultural superiority and the interests of the status quo are very powerful, denial may be the easiest road to follow.

My bottom line:  it’s probably safe to dip a toe in the EU water today, but not much more than that.

A final note:  once Europe leaves center stage, I think market focus returns to economic policy in the US.

a second Greek bailout payment agreed: implications

an agreement

Greece and the IMF/EU have finally agreed on conditions for the latest tranche of bailout money, €170 billion, to be paid to the troubled Mediterranean country.  Greece will now have the funds to redeem €130 billion of its bonds that mature in the next few weeks.

little stock market reaction

Stock market reaction in Europe has been muted–a 2% gain yesterday, a give-back of about half that amount today as I’m writing this.

what went on in the talks?

I find it hard to interpret with any confidence what has been going on in negotiations between Greece and the EU/IMF.  It’s possible that the brinksmanship displayed in the talks on the question of whether Greece would remain in the Eurozone was all a show, performed for home country voters by politicians eager to minimize the negative consequences of any accord for their future electability.  But that’s not what I think.  My take is that Greece–which hadn’t come close to fulfilling the conditions of its initial bailout payment–figured until recently that the EU was negotiating from a position of extreme weakness.  Until the EU made it clear it was willing to let Greece leave the Eurozone, Greece felt it could extract almost any concession, provided it didn’t do so all at once but rather moved the bar a little bit at a time.  Once the EU began to plan for a Greek exit, Athens was forced to become serious about striking a deal.


It seems to me that at the very least both sides have bought themselves some time.  I’d expect that the core EZ countries will continue to strengthen the capital structure of their domestic banks.  It’s understandable that potential buyers of the public assets Greece supposedly has on sale would be reluctant to bid until they were sure that they weren’t purchasing just before a significant currency devaluation.  So we’ll now have a chance to see how serious Greece is about these divestitures–and how desirable they actually are.

We’ll also have a chance to see whether the EU will retain its hard line that starving yourself through austerity is the best prescription for a return to robust health, or whether the ECB monetary policy will be a bit looser than it has let on to date. My guess is that it will.

Implications for stock market investors?  I think they’re less about a change in strategy than about confidence that the strategy is correct.  I view the EU as a low-growth area for an extended period of time.  And, although fears of a “Lehman moment” are off the table (not that markets ever really factored this possibility into stock prices), Europe will be subject to periodic worries about weaker EZ countries like Greece.

So the appropriate stance remains, I think, to be underweight the area and to concentrate on companies which are listed in the EU but which have the bulk of their operations located in the Americas or in the Pacific.

what’s that about Japan?

Actually, a much newer and more interesting macroeconomic development has been going on half a world away.  It’s quantitative easing in Japan.  More on this tomorrow.


Shaping a portfolio for 2012 (II): Europe

Europe–I’m not an expert…

I’ve been watching European stock markets for over 25 years, but I don’t consider myself an expert on Europe.  There are too many social and political quirks for me to get motivated to master its intricacies, given the relatively small size of each country, and of continental Europe in the aggregate, in stock market terms.  So I’ve taken an “American” approach and tried to just pick stocks.

…but everyone has to have a plan

On the other hand,  most stock market investors have to have a plan for dealing with Europe, since it’s a big trading partner with China and maybe a quarter of the revenues of the S&P 500 come from Europe.

Even a simple plan is almost infinitely better than nothing.  It gives you a baseline to monitor for signs that the reasoning behind your stock selection is wrong.  Rather than simply watch your stocks go down in flames, you can try to fix the budding problem.

Here’s my take on Europe:

There are a number of political groupings in Europe.  The widest is the EU itself.  Then there’s the Eurozone (all the countries which have adopted the common currency, the €) as a subset of the EU.  And there are other things like the Schengen free travel area.

For investors, the Eurozone is the most important of these.

To my mind, the defining characteristic of the Eurozone is that it has a common monetary policy, but fiscal policy that’s determined by each country.  This is what has the EZ in trouble today.

The ECB sets interest rates at a level that’s appropriate for the EZ as a whole.  For traditionally slower growing countries at the core, like France and Germany, that has arguably been too restrictive.  For faster growing, smaller economies on the periphery of the EZ, the rate has been extremely stimulative.

Easy money sloshing around the periphery found its way into massive numbers of speculative real estate deals.  Of course, each country should have recognized this and restrained speculation through cautious fiscal policy.  But what politician is going to take the punch bowl away from the party?  After all, there’s always an election around the corner.

To some degree, real estate speculation also infected the periphery with the “Dutch disease,” meaning that demand for construction workers drove up wages elsewhere–making other, export-oriented manufacturing industries less competitive.  For Americans, it’s like Detroit and the car industry.

If that weren’t bad enough, two countries, Greece and Italy, decided to game the system.

In my experience, Italy has always been the least economically responsible large country in Europe.  Yes, it took heroic measures to restructure itself to qualify to enter the EZ as a charter member.  But then it fell back into its old slovenly ways.

I’ll confess that I know next to nothing about Greece.  My impression is that it thinks membership in the EZ was a fabulous chance to scam the rest of Europe.  My impression is that it will happily default on its sovereign debt and leave the EU as soon as it gets a chance–sort of like skipping out on a restaurant check.  Luckily, its small size makes it a rounding error for Europe as a whole.

That’s the problem.  But where are we now?

I think we’re past the worst and on the way to fixing the current EZ problems.  I don’t mean the structural flaws in the EZ, but just today’s crisis.

We’re already seeing serious reform out of Ireland and Spain.  Greece and Portugal (another country where I have no clue) are too small to matter.   The real EZ economic uncertainty comes down to what happens in Italy.

Italy went through another painful wholesale economic reform process to enter the EZ and it has appointed economist Mario Monti as premier with a mandate for reform.  I think these are good signs that Italy is wiling to make the necessary changes to its economy once again.

One other point to mention:  a much simpler fix to problems in Italy and Greece would be to have the ECB loosen money policy by, for example, buying up Italian government bonds.  Doing so removes any incentive for Italy to reform, however–so it just kicks the can down the road.  More than that, money policy that’s inappropriately loose for Germany creates the need to use restrictive fiscal policy to offset it.  Angela Merkel certainly doesn’t want to have to do that.

my bottom line


Politicians in any area of the world only seem to me to act when the situation has deteriorated so far that the painful measures they need to implement are greeted with relief by the electorate as a “rescue” from a worse fate.

I think we’re at, or past, that point in the EZ and that the essential measures are already agreed to, through changes in government, that will end the current EZ crisis.

The main means of change will be austerity.  Once the ECB is convinced that Italy is sincere in its reform efforts it may provide some monetary assistance.  But cutting government spending and enforcing tax laws will be the order of the day.

For the European periphery, this spells recession today and low growth for a while after.

stock markets

The bigger question for equity investors is often not so much what the economic reality is likely to be as, rather, what economic scenario is currently being discounted in today’s stock prices.

I have four conclusions:

1.  I think today’s European stock prices discount a more pessimistic outcome than I see as probable.

2. I don’t think that attitude will change, however, until we see changes in EZ laws that are slated for March plus further concrete developments from Rome.

3.  I don’t want to bet the farm on my analysis.

4.  No matter what the precise outcome, Europe is likely to be the slowest growing area of the world in 2012.


I’m substantially underweight Europe.   I hold small positions in a couple of equity mutual funds, and one stock, through its ADR, IHG.  I would prefer Europe-listed companies that have most of their business in other parts of the world over primarily domestic-oriented firms.  I’d also prefer to reach into Europe through multi-nationals listed elsewhere that have some European exposure.

another week, another crisis: life in the EU


The Maastricht Treaty (or Treaty on European Union), signed in 1992, laid down the minimum economic requirements for entering, and remaining in, the EU.  It specified, among other things, that any member country’s budget deficit should be no more than 3% of GDP and its outstanding government borrowings should be below 60% of GDP.

Members would be entitled to use the common currency, the euro–thus becoming part of the Eurozone.

One quirk of the arrangement was that the economic rules could be enforced only at the point of initially applying for membership–by denying entry to the EU to countries that didn’t qualify.  After that, there was nothing.  Why not?  No country wanted to give up sovereignty.

Italy, for reasons of bella figura, underwent an heroic restructuring of its economy so it could be among the charter members–and began backsliding almost immediately.  Greece probably never qualified for membership, but the EU overlooked its well-cooked books to advance its pan-European reach.

One other thing:  most EU members adopted the euro.  A few, notably the UK and Sweden, did not.  The latter are in the EU but not in the Eurozone.

the crisis

Trouble had been brewing for years. Even less creditworthy countries could borrow large amounts of money at favorable rates by issuing sovereign debt in euros, on the idea it would be guaranteed by the full Eurozone.  The situation reached a boiling point in 2010 when Greece announced it had been falsifying its national accounts for years.  Belatedly, lenders began to worry that the Eurozone would not stand behind all euro-denominated debt.  Worries soon expanded to include Berlusconi-led Italy.

the problem

Moral hazard.  Germany balked at stepping in to bail out Greece–and potentially Italy–without a way of enforcing the Maastricht economic criteria.  Otherwise, it risked throwing good money after bad.

where we are now

At the latest in a series of “summits,” the Eurozone countries agreed last week to amend the Treaty on European Union to give EU institutions the power to enforce the Maastricht economic criteria.  That was the final condition Germany wanted before it would be willing to stand behind Italian debt.


…the UK vetoed the idea of using EU government institutions to police Eurozone member countries.  Why?  It wants concessions that will preserve its position as the premiere financial market in the EU.   (This, even though the UK’s “regulation light” philosophy nearly brought the country to its knees, gave protection to the perpetrators of the US sub-prime mortgage debacle, and resulted in sketchy ex-Soviet bloc mining companies becoming major forces on the stock exchange).

So the Eurozone countries say they’ll develop an alternative enforcement mechanism by Christmas.  But until they do, the securities markets will continue about the survival of the Eurozone.

my thoughts

It seems to me that a necessary condition for politicians to back any measure that will bring pain to their constituents is that the alternative appear worse, so that they can cast themselves as heroes for having “rescued” voters from a worse fate–even if they themselves have created the worse alternative by their inaction.  That’s just life.

The Eurozone countries are making progress, though.

Either the Eurozone will cobble together a new enforcement mechanism or–more likely, I think–it will grant some concessions to the UK in return for permission to have Brussels enforce the new Eurozone economic rules.  After all, I don’t think the UK wants to be left completely on the outside of Europe, looking in.

In any event, ratification of the new rules won’t be completed until next March.  Until then, I don’t expect to see significant Eurozone action to support the bonds issued by Italy.

My guess is that support will come, but not until Spring.

For equity investors like us, I think two factors are important:

–Europe will be in recession in 2012.  The question is only how deep it will be.  This is a time to think through how well our holdings of global companies are insulated from European demand weakness, with an eye to emphasizing those with the least EU exposure.

–it’s still too early, in my opinion, to be bottom-fishing in the EU.  There’ll be time enough for that in, say, February.

brain drain in 2012

what it is

“Brain drain” is a term coined in the UK after WWII to describe the outflow of human intellectual/scientific/economic talent from a country.  Motivation for the outflow can sometimes be religious or ethnic persecution in the home country.  More benignly, brain drain is more likely motivated by economic prospects that are perceived to be significantly better away from the home country.  According to Wikipedia, the term may have been initially used to describe the movement of British citizens to the US, or to the inflow into the UK of citizens of India.

where is it happening today?

What forms of brain drain can be seen in today’s world?

the Eurozone

–I think we should watch the EU carefully, especially southern Europe.  On the one hand, government finances in Italy, Greece… can’t be fixed by raising taxes.  People will move into other parts of the Eurozone, for one thing,  History also shows that higher tax rates invariably trigger increased tax evasion.  So higher rates can end up generating lower revenue.  (This isn’t just a European phenomenon:  New Jersey has just released an economic study showing the state is suffering a net loss of $150 million in annual tax revenues as a consequence of two income tax rate hikes early in the last decade).

Even though cost-cutting will be the main tool European governments will use to balance heir budgets, the economic stagnation that austerity measures will produce may cause an outflow of intellectual talent from southern Europe to France or Germany, or outside the Eurozone to the UK.

the US

–Anecdotal evidence suggests there’s a budding trend toward emigration from the US to China, because of the latter’s superior economic prospects.  There’s also a movement on the Northeast to create publicly funded schools that emphasize Asian culture and history–and where instruction might be in Mandarin.

–a combination of high taxes, lack of home-grown engineering graduates and immigration restrictions that severely limit the number of Indian and Chinese engineers able to work in the US has meant a continual outflow of technology manufacturing away from the US.


–To my mind, the most curious case of potential brain drain is that recently reported by the Wall Street Journal It’s the potential outflow of wealthy Chinese from the mainland.  They’re not seeking political or economic freedom, or at least not simply that.  What’s prompting them to consider emigration–overwhelmingly to either the US or Canada–are social concerns, including:

–poor schools

–bad medical treatment


in that order.  Also:

–unsafe food (local municipal authorities sometimes offer industrial waste disposal sites for lease as agricultural land), and

–the one-child policy.

investment implications

At this point, these developments are more curiosities than anything else.  But events in southern Europe bear close watching.  That’s the place where emigration has the most potential for economic disruption, in my opinion.

thinking out loud about Euroland (III)

It’s possible that we’ll see prolonged economic and political stagnation in Europe of the type we’ve experienced in Japan since 1990 as the continent tries to decide whether the EU project will survive.

My conclusion, based on the prior two posts on this topic, is that–like Japan–Europe by itself is too small in the global terms for its problems to derail economic progress elsewhere.  Market volatility, yes; global recession, no.

In a nutshell, that’s my base case.


Nevertheless, even an investor who is not directly involved in Europe nor compelled by customer mandate to invest there faces two issues:

–the fact of continuing European selling of equities, both in Europe and abroad, as EU investors rebalance their portfolios and make themselves more liquid in response to developments there, and

–the possibility that the European financial situation is much more dire than we now suspect and/or the global banking system will transmit part of that damage to the rest of the world.

what to do?

I’m writing under the assumption that we’re not yet anywhere near either the end of the EU crisis, even though it has been dragging on for more than a year.  Nor am I willing to bet that we’re at or near the low point in stock market terms.

These are very important assumptions.   As a result of them, I want to protect myself from bad news coming out of Europe  I don’t think we’re at the equivalent of late-March 2009 for Europe.  So I don’t want to bet against the prevailing sentiment and hold already severely beaten-down beneficiaries of the dissipation of storm clouds.  But–as with everything in the stock market–I could easily be wrong.  So I’ve got to keep these assumptions in the forefront of my mind.

Three cases:

–a professional equity investor with a US-style mandate from institutional clients to remain fully invested.  Here the portfolio composition is straightforward.

One choice is to “neutralize” the EU by looking exactly like the index and trying to achieve outperformance elsewhere.

That’s the conservative choice.  My personal preference would be to underweight Europe, avoid the banks and choose stocks that are listed in the EU but which have the largest part of their operations in other parts of the world.  I’d look for growth names and avoid companies that depend on a robust worldwide economy.

–an EU-based balanced (i.e., a portfolio of stocks +bonds) investor, maybe with predominantly high net worth individual clients.  This investor will have a strongly European focus.

He is probably being required by the rules set up in his contracts to sell stocks because his bond losses have made his equity allocation too big.  He’s probably also being bombarded by negative news–and by customer inquiries about whether his strategy (no matter what it is) is too aggressive.  So he’s feeling the need to become increasingly more defensive.

He is probably selling stocks in peripheral markets, especially if they have done well; selling smaller capitalization stocks to buy larger; selling growth names to buy defensives like utilities and consumer staples. He is probably heavily tilted toward large cap names in northern European markets.  He probably has raised some cash (this may give him emotional satisfaction, but won’t affect his returns unless he’s raised a huge amount).

I think much of the selling in places like Hong Kong, and even the US, is emanating from Europe, and from the kind of professionals I’ve just described.  I think such selling will prove to have been the wrong move, but I suspect that I would be doing some of the same if I were in the position of this investor.  Ideally, I’d have the same strategy here as in my first case.

The world may also have to wait for this guy to run out of stuff to sell before markets take on a healthier tone.

–you and me.  …or rather, what I’m thinking/doing now in my own portfoli0.

The sound bite form of my central case is, as I wrote above, that Europe is the new Japan. That’s probably too pessimistic, but it’s going in the right direction.  Once the market settles down, there’ll be the opportunity to pick stocks (I do own one individual stock in Europe now through an ADR–IHG).  But there’s no rush.  In the meantime, I’m content to watch from the sidelines.

My guess is that worries about contagion through greater exposure by US banks to Europe than we now know about–or that bank hedging won’t work at all–is wildly overblown.  But I’ve never been a fan of banks in any case–and I know very little about financials, so I’m happy to continue to avoid them.

I’ve begun to take some profits on big multi-year winners and reinvest the proceeds into semi-defensive stocks.  DeNA (2432:JP) and WYNN are examples of the former; INTC and (believe it or not) LVS are instances of the latter. Part of this is pure tactics, not strategy.  Part of this is that the slow growth emphasis I’ve had for a couple of years has worked too well for too long, so I should probably reduce my heavy emphasis.

These are only changes on the margin, however.  I still think that we’re in a slow-growth world where there isn’t enough demand to satisfy all the firms in a given industry.  This means the important distinctions to make are between best of breed vs. the rest, and between niche players that serve hot spots of demand vs. everybody else.

I think continuing troubles in Europe will offset the good news coming from the US economy, at least until the situation in Italy and Greece develops further.  Therefore, the overall environment hasn’t changed much, in my opinion, other than short-term volatility is increased.  And, unless there’s a very compelling counterargument, everything in Europe is now in the minus column.  But most of it was already there, anyway.