This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

European Stocks Rebound as Stability Returns

I had seen some interpret the rising ECB borrowing from Spanish (and other) banks as an indicator of financial stress, but the simple explanation I received from an accomplished institutional investor seems a lot more plausible: "I would just add that the banks in Europe are making a lot of money borrowing at 1% (3-year loans) from the ECB and then buying Italian and Spanish bonds! So the next couple years look pretty good for this interest rate arbitrage that the ECB is encouraging."

Think of it like Deutsche Bank and BBVA doing the same wildly profitable carry trade -- buying higher-yielding assets with cheap financing -- that got MF Global in trouble, without ever having the chance to end up like MF Global! The key, of course, is the guaranteed 1% cost of ECB funds that was not available to the less fortunate and much smaller American futures broker that tried to mimic an investment bank under Jon Corzine's brief leadership.

Related Article: Does Apple Dividend Signal End of Growth?

European financial stocks are cheap. Based on book value -- a slightly more reliable metric that takes into consideration the banks' earnings power over time -- BBVA trades at 0.86 (discount!) to book while Deutsche Bank trades at even cheaper 0.68 times book. Given the contraction in certain PIIGS' spreads to bunds, it appears that market participants now are willing to differentiate between "good" PIIGS -- Spain, Italy and Ireland -- and the dirty kind like Portugal and Greece. So even a Portuguese default no longer seems as scary at this juncture.

Still, the above are shorter-term tactical considerations for traders trying to make a quick buck. From a longer-term perspective, the problem of the eurozone having one monetary policy and one exchange rate with 17 different finance ministers and 17 different fiscal policies, sometimes in outright friction with the ECB, has not been fixed. A complete fiscal eurozone integration is difficult to imagine, recent statements from eurozone political leaders to the contrary notwithstanding.

Buy-and-hold investors should not overstay their welcome in the current rally in European financials, the length of which will be decided by the direction of the PIIGS' sovereign bond markets. If you are looking for "bombed-out" banks without the macro problems of Europe, consider Argentine financials like BBVA Banco Frances (BFR) and Banco Marco (BMA) that trade at similar book value multiples of 1.22 and 1.17, respectively.

Sure, they have different problems in Argentina, but the actions taken recently by the authorities to reign in inflation are a long-term positive, and the declines of both stocks already reflect many of the risks.

Much has been said about the strong-arm tactics of the Argentine government toward oil giant YPF (YPF) and the directive to cut dividend payments to 57% owner Repsol in order to invest more heavily in oil production (there are plenty of oil deposits in Argentina but not enough investment to extract them). I am not sure this approach will raise oil production in the country. Tax breaks to multinationals and a business-friendly environment, of which the latest governmental actions are anything but, seem like better options.

The above drama has rubbed off negatively on BBVA Banco Frances and Banco Marco, which despite good operational performance in 2011, saw their shares decline and now yield in the high single-digits.

Neither BFR nor BMA are likely to repeat their respective 2011 annual dividends of $1.11 and $2.08 per share in 2012, but given what they have historically paid out on average as dividends, the amount is likely to be high by developed-world standards.

Ivan Martchev is a research consultant with institutional money manager Navellier and Associates. The opinions expressed are his own. This is neither a recommendation to buy nor sell the investments mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell any above mentioned securities.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,098.45 +18.88 0.11%
S&P 500 2,003.37 +6.63 0.33%
NASDAQ 4,580.2710 +22.5760 0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs