Katz: Lessons of the European Fiscal Crisis

Volatility has been the only given in a stock market that has provided more than its share of turn-on-a-dime changes lately. For investors, the comparisons that come to mind are whitewater rafting or riding a world-class roller coaster.

Much of the reason for the current whipsaw movement is attributable to the start/stop, forward/back, and reward/punishment machinations of the eurozone's political, fiscal and monetary leaders. We have lived through a possible fracturing of the eurozone, skyrocketing sovereign debt levels, and worrisome implications to the European financial system that has underwritten this debt.

The result has been a nail-biting ride driven by news and data, creating a market psychology that has subordinated most everything to the obsessive focus on what the Europeans are doing.

Last week's announcement of a bailout deal was significant both for its content and for the larger implications of what it means for investors. The first lesson is in the content, as two important and somewhat unexpected agreements were reached. The first agreement was the authorization to inject funds directly from the 500 billion euro-denominated European Financial Stabilization Fund into European banks. Previously, money was to be loaned from the Fund to individual countries. However, these loans actually contributed to market anxiety, since member countries such as Spain saw a dramatic increase in their national debt and interest rates. Direct financial injections into the banks actually experiencing problems will not add to the sovereign debt crisis.

The second agreement was to lay the foundation for a full-fledged banking union by the end of 2012. In the long run, most financial experts believe Europe will need a single financial authority to guarantee deposits and oversee the entire European banking system. If implemented, this banking union should smooth out many rough spots and greatly reduce the pressures on the eurozone as a functioning, unified fiscal entity. It should also calm markets materially.

The second lesson comes from the underlying assumption (or bet) that all my investments are based on a belief in the future viability of the U.S. economy. I would add, as a corollary assumption, that global political, fiscal and financial leaders have highly honed self-preservation instincts.

What we are seeing in Europe are increasingly flexible, results-oriented solutions, as problems that carry increasingly severe implications can no longer be kicked down the road. While a number of situations have brought Europe to the brink of disaster, in each case, sound minds have prevailed. Unfortunately, the fear of the impending disaster has caused the powers that be to engage in uncomfortable, but essential, fixes.

Why is this such an important lesson for investors and investing? Because it allows us to put overarching macro issues into context. It enables us to say that, yes, there are serious problems, but the consequences of failure are so dire that fixes are eventually put in place.

With that as backdrop, investors can retain a focus and perspective that has more than a 48-hour lifespan. For value investors, that means keeping an eye on fundamentals rather than solely worrying about things that are only tangentially related to the attractiveness of a company's stock.

It may turn out that last week's announcements will enable the market to return to the more normative focus of the first quarter. While such a change is welcome, we know that even without it, maintaining a fundamental focus will ultimately make the most sense as the way to both navigate in the near term and to invest in the intermediate and longer term.

When investors have the opportunity to buy high-quality growth businesses at high single-digit/low double-digit price-to-earnings multiples, there is a greater likelihood that the stocks will be meaningfully higher 12 and 18 months down the road.

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