After our big move in European equities we are asked to update our targets on the spread and outright underlying stocks, after an aggressive call to buy European equities in later December. At that time we noted three primary factors:Image courtesy Vasenka: http://www.everystockphoto.com/photographer.php?photographer_id=69281

 

  1. Europe had underperformed US equities in 2014 by almost 22% or a 2.5 standard deviation move. This was overdone
  2. We said US earnings season would give you the event to see US equities underperform on the basis of FX and growth challenges vs Europe which had priced in flat GDP growth and poor
  3. European earnings comps were LOW and multiples compressed; they offered VALUE
  4. Greece:  a distraction and issue but not a black swan; markets cannot get over the fact that EU regulators have not figured out how to solve problems on the periphery and they won’t go away – BUT they are not taking the Euro down …for now

Updating the Long Germany trade as a proxy for superior relative value and catalysts to owning European upside:

  • The DAX is +11.3% through today YTD as we have seen increased outlook for EU equities, better export markets and recession priced in
  • The DAX is outperforming the SPX in USD terms, so taking into account what has been a big move lower in the Euro, German stocks are still outperforming the SPX by 640 bps in 2015
  • The DAX trades at 16.4X vs 19.1X for SPX on current earnings, with EPS growth pf 8.7% to about 4% for SPX
  • The Euro is a tailwind that has not yet really given the gift of the three month’s move

$31.20 (+7% ) is the target on the EWG which is the DAX in USD terms and takes you only back to levels of mid-June 2014 ; Price right here at $29.25 on the EWG (quote) you have key 6m resistance and we could see a pullback after an 11% move in 20 days

We are watching Daimler, and Heidelberg Cement earnings on Thursday for signs of FX TAIL-Winds and EPS expansion. Next week watch: Commerzbank on December

Chart_ .GDAXI

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