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Old 04-06-2012, 11:29 AM   #1
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If you have international equity...

Europe is still a worry.

I found this Business Week article to be very readable and informative:Europe's Three-Year Medicine Is Already Wearing Off - Businessweek

Quote:
That’s the problem with trying to fix a solvency problem with liquidity—it doesn’t last. To put it in terms more familiar to a homeowner, it’s like borrowing more money to tide you over when the real problem is you don’t have a job.
...
Spanish banks used the ECB loans to buy the Spanish sovereign debt in each new auction. When there’s no new money, Spain cannot finance Spain.
FWIW our investments in internationals have been moved to US since last fall. Not based on my own views but rather just equity trend analysis -- moving international portion to US based on relative returns.
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Old 04-06-2012, 04:25 PM   #2
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I have no opinion about whether your move to the US is good or bad. Sounds like you had your (good) reasons to do so. My concern about reducing international diversity is that I'm not convinced the US is all that much better a place to invest. Clearly, there are issues in europe (and elsewhere, OUS). But, at least a lot of those issues have been front page news and (if the theory is correct about Mr. Market being rational to an extent) the downsides have already been cooked into the pudding. I happen to think there are a few more shoes to drop here in the US that have been glossed over on the world stage. I do hope I'm wrong, of course.

So, I'm simply defending "diversification" for its own sake, not European or other OUS equities as such. Just my thoughts on the subject and YMMV.
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Old 04-06-2012, 04:40 PM   #3
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Hi Koolau, I mentioned my move but that is really a side issue -- probably should not have mentioned it. I just think the brief article was interesting and worth a read for others.

This will all play out in the currency and equity markets and I have no idea which way things will ultimately go. Eventually the Europeans will work things out.
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Old 04-06-2012, 11:16 PM   #4
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Quote:
Originally Posted by Lsbcal View Post
Europe is still a worry.

I found this Business Week article to be very readable and informative:Europe's Three-Year Medicine Is Already Wearing Off - Businessweek

FWIW our investments in internationals have been moved to US since last fall. Not based on my own views but rather just equity trend analysis -- moving international portion to US based on relative returns.
While your comments may be true, Europe is a very small piece of my international fund. I'm staying in, although I only have 12% in Int'l.
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Old 04-07-2012, 08:20 AM   #5
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While your comments may be true, Europe is a very small piece of my international fund. I'm staying in, although I only have 12% in Int'l.
+1 My international is also ~12%, but slightly underweighted in Europe and slightly overweighted in Asia and Canada.
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Old 04-07-2012, 09:01 AM   #6
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Well, let's all panic! Watch "Doomsday Preppers" for tips, start stockpiling food, ammunition and antipsychotics booze, and convert everything else into gold. I assume the media will alert us as to the appropriate time for the standard Grandma drill (everyone into the cellar!).

Realistically, the ECB consudcted a massive liquidity dump in to give the system time to work through the other issues. Some of the banks will require additional capital (and get it), countries will sort out their deficit issues, if necessary yet another smaller country will go through a prepackaged bankruptcy like Greece. Spain isn't an immediate issue as they have pretty much dealt with their funding needs for the year and they are still relatively modestly leveraged.

This will all get sorted through in good time. Personally, I am a lot more interested in when China starts stimulus in earnest.
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Old 04-07-2012, 09:27 AM   #7
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Well, let's all panic! Watch "Doomsday Preppers" for tips, start stockpiling food, ammunition and antipsychotics booze, and convert everything else into gold. I assume the media will alert us as to the appropriate time for the standard Grandma drill (everyone into the cellar!).
Who's panicking? I'm fully invested in equities. The article did not suggest to run for the hills.
Quote:
Realistically, the ECB consducted a massive liquidity dump in to give the system time to work through the other issues. Some of the banks will require additional capital (and get it), countries will sort out their deficit issues, if necessary yet another smaller country will go through a prepackaged bankruptcy like Greece. Spain isn't an immediate issue as they have pretty much dealt with their funding needs for the year and they are still relatively modestly leveraged.
I agree that in the end Europe will sort things out. Don't know about the currency and equity markets in between.
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Old 04-07-2012, 02:01 PM   #8
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Yes things in Euro-land are beginning to simmer again. But the BW article was a bit too flip, I thought. Here's a more complete description of the problems caused by implementing a currency union without fiscal and labor market integration.

The Eurozone Debt Crisis

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Simply put, Europe’s current institutions are unworkable. The aim of kicking the can down the road must be to create better ones. Before the crisis, capital flowed from Germany (and to an extent small countries such as Austria, Finland, and the Netherlands) into the so-called “peripheral” countries. By importing capital, the peripheral countries were able to import more than they exported, and their citizens consumed more than they saved. In Greece and Portugal, this entailed a great deal of government borrowing, but in Spain and Ireland, the borrowing was largely in the private sector. Then came a loss of confidence in the soundness of this lending, and the capital stopped flowing in.

This kind of “sudden stop” of external financing is sadly common in the annals of international finance. What normally happens is the indebted country finds the value of its currency plummeting. Real wages tumble, and workers can buy less as the value of the currency falls. Eyeball deep in debt, the country’s citizens find themselves working longer for less. Perhaps politicians are inspired by the suffering to enact smart policy reforms that speed the recovery of pre-crisis living standards or perhaps not.


But Spain and Italy and Greece don’t have an independent currency to collapse. In this, they’re hardly unique. In a large country like the United States, sometimes investment flows in to a given area and then halts, damaging the local budget and employment situation. But in the U.S., a jurisdiction facing a sudden investment decline—think of Florida or Arizona today—still benefits from a continued stream of Social Security and Medicare checks. What’s more, unemployment insurance, food stamps, and Medicaid ensures that the worse you get hit, the more federal assistance you get. Last but by no means least, when the local economy collapses, you can always move to another state. And indeed, leaving has long been an important part of America’s adjustment process. Regions whose industries are in decline lose people, regions that prosper gain people, and a desire to not see the entire population flee acts as something of a check on malgovernment.



Europe has none of these protections. Not only are Europeans habitually less mobile than Americans, they have the unfortunate habit of speaking different languages. A person from Lisbon or Seville or Naples is going to have a tough time getting a decent job in Amsterdam or Munich or Helsinki, since few Europeans speak German and nobody speaks the other Northern European languages.


Europe is trapped in a vise between currency values that can’t adjust, populations that can’t move, and regions that don’t support each other financially. This vise has led to, among other things, extremely challenging sovereign debt loads. But rounds of budget cuts treat the symptoms without doing anything to facilitate the underlying adjustments that need to happen. Nor are the linguistic and cultural barriers to intra-European migration going to vanish any time for the foreseeable future.
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Old 04-07-2012, 06:03 PM   #9
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Yes things in Euro-land are beginning to simmer again. But the BW article was a bit too flip, I thought. Here's a more complete description of the problems caused by implementing a currency union without fiscal and labor market integration.

The Eurozone Debt Crisis
Well, this write up is compelling and certainly makes sense. So, if the Euro unravels and the Europeans are forced by events to re institute individual country currencies is this the end of the world as we know it? What are some of the expected consequences (Other than the usual panic for a while until everybody realizes that the sun is still magically appearing every morning)
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Old 04-07-2012, 07:19 PM   #10
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Originally Posted by Lsbcal View Post
FWIW our investments in internationals have been moved to US since last fall. Not based on my own views but rather just equity trend analysis -- moving international portion to US based on relative returns.
Do any of your "US" stocks do business internationally?

Or are you "chasing performance"?
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Old 04-08-2012, 06:17 AM   #11
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If I recall correctly, some advocates of indexing believe that the total US market includes plenty of foreign exposure since many US companies have a significant foreign presence.
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Old 04-08-2012, 11:06 AM   #12
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Do any of your "US" stocks do business internationally?

Or are you "chasing performance"?
Nords, I've adopted a pure returns based system. "Performance chasing" might be a bit pejorative. It's based on many decades of positive backtested results and it uses monthly data not daily switching. The prime reason why a US-international switch strategy "might" work would be long term currency trends. Still there are never guarantees going forward and I'm not recommending any such actions to others. I should have just stuck to the interesting Europe stories as my investment ideas are not general ones. So try to forget you read those sentences you mentioned.

If I could edit that out of the original post I would. I'm not trying to diss buy-hold of a particular US/international equity allocation or convince people they are on the wrong investment path.
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Old 04-08-2012, 11:40 AM   #13
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Since correlation among global markets are high, problems in other parts of the world becomes our problems and vice versa. The excessive debts and deficits of the U.S. over extended periods eventually will weaken the economy and impact the equity market. Reallocating assets from international to US may not make any difference.
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Old 04-08-2012, 12:07 PM   #14
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The US is not the only game in town, but Europe is not the only alternative, either.

I am still ~100% equities, 50/50 US/foreign. Foreign includes 10% emerging markets + 10% total international, 8% Matthews Asian Growth & Income. The balance of non-US is in oil companies.

Asset allocation keeps me 50/50. I have no interest in European companies specifically, but I am sure they are in there. Their mess is nowhere near sorted out yet. CNN, BBC and the Euro channels here give almost no coverage to the US and what they say about Europe does not fill me with enthusiasm. There may be a buying opportunity in there somewhere, but I am not chasing it yet. Europe is run by hippies.
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Old 04-08-2012, 12:12 PM   #15
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Since correlation among global markets are high, problems in other parts of the world becomes our problems and vice versa. The excessive debts and deficits of the U.S. over extended periods eventually will weaken the economy and impact the equity market. Reallocating assets from international to US may not make any difference.
Maybe, maybe not. I for one do not believe that. Different parts of the world have different proportions of economic criminals at different times.
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Old 04-08-2012, 12:14 PM   #16
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Incidentally, I just changed my pay from GB pounds to USD. I figure I have got the best of the currency ride and I found out that they were charging me a lot to convert GBP to USD.
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Old 04-08-2012, 03:12 PM   #17
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My foreign equities have certainly been a drag on my portfolio recently, so correlation has not been that close. Prior to that I was enjoying a nice boost, so overall it's probably been a wash for now. But in the meantime I've been able to rebalance and gain a little extra as they have swung around. That means I've acutally added a bit to my foreign equity recently to keep it in line with my AA. Probably way early yet, but you never know. I've got cash ready if things really blow up.
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Old 04-08-2012, 04:53 PM   #18
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I like international stocks and can't imagine not having a healthy percentage of them in my portfolio, but have stayed clear of the Euro zone for the past couple of years. The Nordic countries have seemed a better bet in that area.
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Old 04-11-2012, 09:55 AM   #19
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I tend to stick to my asset allocation, but two things stick out to me:

a) Jeremy Seigel in "Stocks for the Long Term" showed (historically) that economies with slower growth have better long term stock returns than economies with strong growth. This is mainly due to rosy future expectations being built into the stock price.

b) This is the performance of a European ETF (ifeu) a S&P500 & an emerging market ETF (VWO). No dividends, but the message is clear. European stocks have already been beaten down considerably when compared to US or emerging markets.
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Old 04-11-2012, 01:41 PM   #20
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It has been a good time to invest in European stocks if you are a long term investor. In my non-retirement taxable brokerage account I started putting money into Vanguard's European index about 2 years ago and just today put in a final $2k to bring it to $100k invested. That's a lot of money for me.

I'm done investing in European stocks for now and will start working on US stocks, primarily using Vanguard's High Dividend Yield index. However, I think Europe is an even better bargain today than when I started. If I didn't try to keep my stocks 50/50 in US/Foreign then I would keep putting even more money into Europe.

I've also been building up my cash reserves and have one year's living expenses in cash again. Better safe than sorry...

As someone in the "accumulation phase", time is on my side in more ways than one. I don't think the massive wave of Baby Boomer retirements has begun to hit yet (due to delayed retirements), but it will. Almost all of my income is from working and I think there will be skilled labor shortages starting sometime soon. I'm looking forward to seeing what kind of opportunities start opening up.
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