Month: December 2012

By www.CentralBankNews.info Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news

By J.W Jones: www.OptionsTradingSignals.com

Entomologists tell us that a group of butterflies can, at the choice of the writer, be termed a lek, a rabble, or a swarm. I was first struck today by the bearish Fibonacci based pattern initially described by Larry Pesavento termed a bearish butterfly which had completed in heavy engine manufacturer Cummins Incorporated (symbol CMI).

As improbable as it might be, I was pleased to find that a high probability option structure that could be used to trade it, the put butterfly. I thought it would be interesting to examine for educational value this rabble.

First, let’s look at the chart pattern. The price pattern termed a butterfly is a high probability reversal pattern that can occur in both bullish and bearish configurations. It is a variant of a two step pattern and also a variant of a more commonly known Fibonacci pattern, the Gartley.

The essential elements of the pattern are an initial impulsive thrust (classically termed the X:A leg), a reversal of 0.618 to 1.00 of the initial thrust (the A:B leg), a second thrust in the direction of the initial leg (the B:C leg), and the final reversal thrust opposite in direction from the initial X:A leg extending from 1.272 to 1.618 of the initial leg.

Verbal descriptions are confusing, but consider the characteristic visual pattern which is easily recognized once the trader is familiar with the pattern.

The pattern completed last Friday as indicated on the graph, and today’s bearish candle constitutes a trigger for the trade. These patterns have approximately a 67% probability of success.

The option position I chose to trade this pattern is that of a classic put butterfly. For those not familiar with this structure it is a three legged structure that is composed of long positions for the wings and a short position for the body.

The classic butterfly is always constructed in the ratio +1/-2/+1 and the long positions are equi-distant from the short position comprising the body. The position is a debit position meaning that money is deducted from the buying power of the account.

An option butterfly can be constructed using either puts or calls. It is important to understand that the maximum profitability of these trade structures occurs when price is at the strike of the body at expiration.  Therefore, if an individual butterfly is constructed to express a directional bias, it can be constructed using either puts or calls since the strike price of the body determines maximum profitability.

As an aside, variations of a classic butterfly do exist. Two commonly encountered variants are an iron butterfly and a broken wing butterfly.  The iron butterfly is a credit trade and is constructed using both puts and calls.

The broken wing butterfly is built by buying the long options at different distances from the central body. We will discuss these less common positions as different trading opportunities are presented to us.

To return to our current situation in CMI, I chose a put butterfly using the 90/100/110 strike prices in the January series. I chose January because December expiration is only a few days away, and butterflies work best when given a bit of duration.

Had weekly options been available for this underlying, I likely would have chosen to use them in order to tailor the time frame a bit shorter to allow a faster response to changes in P&L.

The P&L graph of this put butterfly is presented below.

Pay particular attention to the intermediate time curves indicated by the two broken lines in relation to the expiration curve indicated by the solid blue line. The broken lines represent the P&L today (the lower broken line) and halfway to expiration (the higher broken line). Note that the butterfly only reaches its maximum profitability at expiration.

Another characteristic is the difference in slope of the intermediate and expiration lines. While the intermediate time frames react gently to changes in price, the pace of reaction to price change increases dramatically as expiration approaches.

It is for this reason that many option traders routinely close their butterfly positions ahead of expiration. Most experienced butterfly traders do not allow their positions to go to expiration because of the position risk with adverse price moves.

We welcome you to try our service to learn about more high probability trade set ups and option positions to extract potential profits while defining risk precisely.

Simple ONE Trade Per Week Trading Strategy?
Join www.OptionsTradingSignals.com today with our 14 Day Trial

JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

By www.CentralBankNews.info

By www.CentralBankNews.info     Vietnam’s central bank cut its benchmark refinancing rate by 100 basis points to 9.0 percent, saying inflation is at a low level but production and business conditions are difficult, inventory levels are high and the absorption of corporate bank credit remains limited.
    The State Bank of Vietnam, which has cut rates by 600 basis points this year, said the bank’s rediscount rate would also be cut by 100 basis points to 7.0 percent and overnight rates in the interbank market would be cut to 10 percent from 11 percent.
    The central bank said the consumer price index rose by 0.47 percent in November for an increase of 6.52 percent from the end of 2011 with the 2012 inflation rate expected to be about 7 percent.
    In 2011 Vietnam’s inflation rate was 18.7 percent.
    The bank said the liquidity of the banking system had improved, foreign exchange reserves had increased, interbank market rates had decreased and the exchange rate was stable.

    Earlier this month, Vietnam’s prime minister told a newspaper that there were sufficient reasons to lower interest rates as inflation had been easing in recent months. He also said that full-year inflation would be around 7 percent this year, below the government’s previous estimate of 7.5 percent.
    In the third quarter, Vietnam’s Gross Domestic Product expanded by an annual 4.8 percent, up from 4.45 percent in the second quarter.
    In 2011 Vietnam’s GDP expanded by 5.9 percent and the International Monetary Fund forecast in October that growth would slow to 5.1 percent this year.

    www.CentralBankNews.info

By www.CentralBankNews.info     Colombia’s central bank cut its benchmark intervention rate by 25 basis points to 4.25 percent, giving financial markets their second surprise in as many months, as the country’s economy is growing below its potential and inflation is under the bank’s target with no upward pressure.
    Banco de la Republica Colombia, which has cut rates four times since July to boost sagging economic growth, said fourth quarter data indicate that “growth for the full year could be less than 4 percent” but this forecast rests on a rise in investment in construction and civil works.
    Last month the central bank said it was likely that Colombia’s economy would grow 4.3 percent this year, with forecasts ranging from 3.7-4.9 percent.
    Colombia’s economy expanded by 5.9 percent in 2011 and was forecast by the International Monetary Fund in October to grow by 4.3 percent this year. But in the third quarter, Colombia’s Gross Domestic Product contracted by 0.7 percent from the second for annual growth of 2.1 percent – the slowest since 2008 and below the central bank’s forecast of 3.3-4.8 percent – down from a rate of 4.9 percent in the second quarter.
    “By 2013 it is expected that some of the factors that have slowed investment in 2012 will be reversed, driving domestic demand,” the central bank said, referring to investment projects in mining and energy that have been delayed. Investment in road construction should also pick up.

    In addition, the central bank also said it expects global growth to improve slightly in 2013 with relatively stable terms of trade and abundant international liquidity.
    “Under these conditions, we expect better economic growth in 2013 than we expect for this year,” the central bank said.
    The unexpected economic contraction in the third quarter was due to a slowdown in domestic demand to an annual growth rate of 2.4 percent from 7.1 percent in the second quarter due to a “sharp and unexpected contraction in investment, particularly in the civil works and buildings,” the central bank said in a statement.
    Exports have also been slowing, reflecting the global slowdown, while private and public consumption were a little better than expected in the third quarter, the bank added.
    Inflation was also lower than expected in November, the bank said, adding that it expects inflation to remain below it’s 3.0 percent target for a while. Colombia’s inflation rate tumbled to 2.8 percent in November, a low for the year and the lowest rate since 2010, from 3.1 percent in October.
    “In short, the Colombian economy is growing below its potential, observed and projected inflation is falling below the target of 3%, and no looming upward pressure on it in the future,” the central bank said, adding that the balance of risks assessment pointed toward reducing the interest rate.
     Monetary policy in 2013 will aimed at restoring the economy to close to its productive capacity, without threatening the inflation target and macroeconomic stability, it added.
    At its November policy meeting, Colombia’s central bank surprised markets by cutting rates and earlier this month Colombia’s President Juan Manuel Santos said the central bank’s board would probably be reluctant to cut rates further.
    Economist had expected to the bank to keep rates on hold this month following the November surprise, noting that the board had approved the rate cut by a vote of 4-3, with the finance minister voting for a cut to help curb the appreciation of the peso.

 
    www.CentralBankNews.info

By MoneyMorning.com.au

Bernanke said that to remedy the unemployment problem he will continue the Fed’s program of asset purchases. Specifically, the Fed will continue to buy and hold mortgage-backed securities (yes, they are still sloshing around the banking system) and US Treasury securities – $40 billion-plus per month. Plus, he will keep the federal funds rates at near zero.

The great change, he said, is the intense focus on the policy objective of unemployment. The committee sees no inflation threat, so it might as well turn its attention to the labor markets. The Fed loves the unemployed, you see, and wants to help them.

But here’s the disconnect. What the devil does buying bad debt from zombie banks have to do with getting people jobs? The relationship between assets purchases and policy goals is murky at best.

‘I need a job, so I hope the Fed buys more bad mortgage debt’ – said no unemployed person ever.

Yes, I know about ancient Keynesian theories. There is tradeoff between unemployment and inflation. But those theories have not really explained much at all for the last 40 years. In fact, they blew up in the 1970s with the emergence of ‘stagflation’. An affliction where unemployment remains high even as inflation roars ahead.

You might be able to explain Bernanke’s outlook through the normal intuition. Low rates spur growth. Growth leads to new businesses. New businesses hire new people. Problem solved.

But the problem here is that the last five years have provided scant evidence that low and even zero interest rates have actually spurred economic growth. You can point to some measure of improvement in the data. But the cause-and-effect relationship between higher growth rates to zero interest rate policy is… less than persuasive.

And here is where we get to what has long bugged me and others about the Fed’s policies since 2008. These guys are not idiots. They read the same economic reports we do. The history is surely somewhat as plain to them as it is to us. The policy is not working as it should. Bernanke has conceded as much.

So Why Does the Fed Persist With this Policy?

This is where you need to look beneath the surface to find the answer. What is the purpose of the central bank? Looking back historically, the central bank has served one primary purpose and one second purpose that is the source of its power.

It is there to keep the banking industry solvent, providing liquidity when necessary and papering over the errors that are revealed in the course of economic crises. And secondarily, it is there to provide a market for government debt when governments get in trouble.

There is a quid pro quo here. Governments are willing to back the banking cartel with legal status provided the banking cartel serves government when it is needed.

Government is more willing to enter into such a deal with banks, rather than the salt or shoe industry, because, well, banks are where the money is. Government needs that stuff because they typically want more money than taxpayers are willing to cough up.

That’s all you need to know to understand why the Fed is willing to create some $85 billion each month to buy more mortgage-backed securities and more Treasury debt.

The banking industry is still holding the stinking bag of you-know-what that was first exposed in 2007. The mess is still there. The banks are in continuing need of shoring up their balance sheets. Offloading bad assets on the Fed and writing them off the books is the best path from here to there.

That the Fed is still doing this after all these years provides us an indication of just how bad the crisis really was and just how vulnerable the banking system was and is to finding itself completely insolvent.

As for the government’s needs right now, say no more. Our rulers have created a horrible mess of astronomical and unpayable debt, and even rating agencies are taking note. There is the fiscal cliff. There are the unfunded liabilities. There is the unsustainable empire. There is the utter impossibility of a rational political solution to this problem.

Thus does the Fed come to the rescue, guaranteeing a market for government debt and helping its friends in the bond-selling business at the same time.

Now let’s consider the effects. Zero interest rates policies amount to a complete perversion of market signalling. The effect on savers like you and me has been disastrous. Average people in the past depended on the banking system to park their money for eons, but now only chumps do that.

But there is another angle here too. The banks can no longer rely on loan markets to be the main source of their profitability. Since 2008, the main activity of the industry has completely changed in response to zero interest rate policies.

In what we might describe as a ‘lending cliff’ the commercial banking sector has slowed lending, dramatically at first, and then crawling backing more recently and seeming to plateau at a much lower rate of expansion than the historical average.

This represents a change in the way banks work and the way money has traditionally been created in a fractional-reserve lending system. Picking up the slack have been non-bank lending institutions, which are in a boom stage of development right now.

The lending standards in the nonbank sector, stung by 2008, are more strict than in traditional banking. They maintain a level of soundness that banks never have. And they sure as heck don’t go along with the zero interest policy.

The banks themselves have always been the creative engine of new paper money to flood the system. If banks are creeping away from loans markets, effectively outsourcing them to the nonbank sector, this trigger mechanism is no longer in place.

This is why there is a gigantic disconnect between Bernanke’s claim to have a ‘highly accommodative’ policy stance and the monetary reality on the ground.

Close observers have noted this trend for many years. The Fed doesn’t seem to have the level of direct control over money creation that it once had. Here is a chart of ‘Money of Zero Maturity’ that chronicles percentage change from a year ago.

Most notable is that you see a dramatic rise in the early part of the 2008 crisis and then a precipitous fall once the crisis was in full swing. Pumping efforts showed some promise in 2009 but faltered. The subsequent plunge continued through 2010, the very time frame in which the Fed claimed to be pulling out all the stops to flood the economy with money.

What’s up with this? If the Fed is creating massive amounts of money, why are we not seeing it appear very dramatically in money aggregates, and why isn’t this feeding the markets in the conventional way?

How Bernanke Distorts Banking and Finance

To ask the question a different way, even if price inflation is higher than the government admits, why have we not yet seen signs of Weimar Germany or Zimbabwe? The clue comes from looking at the reserve balances at Federal Reserve banks themselves, where the commercial banking sector is actually parking its new-found fake wealth.

They are doing this because the Fed has made it possible for the banks to earn interest from their deposits. Leaving money in the vaults make a lot more sense than trying to navigate Dodd-Frank regulations and risk violating Basel III capital requirements.

Putting all of this together, we can see that what Bernanke has done is fundamentally changed the function of banks and the role of the Federal Reserve.

In seeking to save the banks, he has essentially nationalized them, disabling their lending function relative to the past and turning the Fed from being a clearinghouse to being a holding tank for newly created money. This is why he can stand up there at press conferences and so confidently claim that inflation represents no great threat right now.

To be sure, Bernanke’s policies are not harmless. They represent a massive distribution of wealth from the productive sector to the banking system and the financial sector, solely for the purpose of keeping the Fed’s clients solvent.

Another danger comes from the many creative ways that banks have learned to make money in the age of Bernanke by playing recklessly in the derivatives market, holding on to infinitely guaranteed demand deposits, and manipulating every marginal opportunity for speculative trading that comes along.

This could be the banking bomb that will blow up in the years to come. But this explosion is going to take a new and unpredictable form from any that has come before. A bubble pops first at the weakest part of the balloon. Where that is precisely is known through experience.

The end of banking as we’ve known it is probably good news, and, in bringing this about, Bernanke has probably done the world a favor. Finding the right path forward is the great challenge that every holder of dollars will face in the years ahead.

Jeffrey Tucker,
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in Laissez Faire Today

From the Archives…

Why Small-Cap Stocks Could Be Your Best Investment in 2013
14-12-2012 – Kris Sayce

How the Global Oil Grab Affects You…
13-12-2012 – Byron King

The Price of Risk in the Stock Market
12-12-2012 – Murray Dawes

Why Silver Could Be the Best Investment in 2013
11-12-2012 – Dr. Alex Cowie

The Long, Drawn Out Retreat in Australian House Prices
10-12-2012 – Dr. Alex Cowie

By MoneyMorning.com.au

If the world economy collapses anytime soon, at least one thing is certain: governments will have a hard time pinning the blame on ‘unfettered’ capitalism or free markets. There’s barely a week without a bureaucrat or politician meddling somewhere and distorting the true picture.

Lately, it’s Shinzo Abe and his grand plan for Japan. And now Wayne Swan and his budget deficit. All this is going to impact on the Australian dollar.

In today’s Money Weekend we’ll expand on an idea we briefly covered in the Daily Reckoning during the week. If you didn’t catch it, here’s the gist of what we wrote on Tuesday…

‘The Next Shot in the Currency War

‘Shinzo Abe is back in control of Japan.

‘The ‘new’ prime minister has made no secret of the fact that he wants the Bank of Japan to up the stakes in the currency war. The Bank of Japan has a 1% inflation target. Abe wants them to double it to 2%.

‘Currency wars are about devaluation to encourage exports. The idea in Japan is to weaken the yen and kick-start the moribund economy. Although that’s been the plan for about 20 years now, to no avail.

‘Not to worry, the currency markets took notice! On news of Abe’s election, the yen dropped to the weakest level against the US dollar since 2001, according to Bloomberg.

‘Following his victory, Abe grabbed the nearest mike on Monday and told the Bank of Japan that the people had spoken and they should look to fire up inflation when they meet on Wednesday to discuss policy.

‘No doubt Abe was quick to move because time is something Japanese Prime Ministers have been notoriously short of. This is Abe’s second crack at the helm, and he’s Japan’s fifth Prime Minister since 2007.

”Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence,’ wrote Ambrose Evans-Pritchard in the Telegraph.’

Happy New Year from Japan

Looks like January will be the month the big guns roll out in Tokyo. The Bank of Japan will ‘officially adopt an inflation target, as demanded by presumptive Prime Minister Shinzo Abe, next month,’ and the new Liberal Democratic Party will have its economic stimulus package in the pipeline before the start of February.

Japan is the third biggest economy in the world. That’s a lot of spending power. Very soon a lot of yen is going to be sloshing around looking for a home, especially yield. You’d think some of that is going to find its way to Australia.

That’s why Slipstream Trader Murray Dawes speculated on Tuesday that the yen carry trade could make a big surge next year and could boost Australian stocks.

Reuters spelled out the effects for countries in the yen/USD crossfire, like developing economies. We’d add Australia too. ‘As newly minted cash pours into their economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies.’

Enter Wayne Swan. The decision to let go of the surplus means that the government will have to issue more bonds to get the financing. Our take is that means even more foreign money coming into Australia to buy government bonds and holding up the Aussie dollar.

So it’s hard to see the Aussie dollar offering any relief anytime soon to the industries that suffer with a high exchange rate. You can see below the Aussie dollar hit a high against the yen this week.

One Way to Play the High Aussie Dollar

You could argue, like our own Kris Sayce, that the Aussie dollar is due for a correction. Maybe. We don’t know. But there’s no doubt the high Aussie dollar is something you can take advantage of as an investor.

Australia is a small, open economy. That’s why large capital flows coming from countries like Japan have such a big impact here. Remember, the Australian economy is only 2% of worldwide GDP.

So now looks like a great chance to use the strength in the Aussie dollar to buy assets overseas. You can easily do this by adding exposure to foreign markets to your portfolio.

The Aussie stock market is dominated by resources and banks. The ASX index moves when these two sectors move. So if you want a truly diversified portfolio, that’s not great.

That’s why it makes sense to diversify the industries and markets you’re exposed to via shares in other countries. But what’s the best approach? Which overseas markets do you look at?

That’s a tricky question. But one way is to look at large multinational corporations with exposure to many countries rather than just one.

This has been a theme used by our colleague Dan Denning this year in his Denning Report. His position is big global blue chips are the best way to give your portfolio international diversification.

Global blue chips have proven and durable business models. They’re not usually correlated to one economy because they operate in so many different markets worldwide. Companies like these can also tap into the growth offered by emerging economies.

Australia has very few non-mining globally competitive companies. News Corporation and CSL are two that spring to mind. But it’s a short list.

Long term, if you’re worried about having too much exposure to one economy, it makes sense to look at the bigger picture. Right now with the Aussie dollar near a multi-year high, there are worse things you can do than picking up a few of the world’s diversified big name stocks.

Callum Newman
Editor, Money Weekend

The Most Important Story this Week

You could say there’s two ways to approach the volatility in the share market today. One is to get out of stocks all together and not deal with it. That’s not very helpful when it comes to building your wealth. The second is to turn the volatility to your advantage. Kris Sayce explains how in Australian Stocks: Still the Best Wealth Builder in Town

Highlights in Money Morning This Week…

Murray Dawes on Why You Should Watch the Japanese Yen: ‘So after two decades of printing money and spending it without successfully reviving the Japanese economy, they’ve decided to give it another go. Japan really is the poster child for failed Keynesian stimulus policies.’

Shah Gilani on Why We Should Abolish the Fed: ‘The Federal Reserve System is a government-sanctioned private enterprise that functions as a socialist tool…These days the Fed doesn’t just backstop America’s too-big-to-fail banks. It has expanded its doctrine of socializing banking losses globally.’

John Stepek on Is China’s Rebound for Real? Don’t Bet on It: ‘Suddenly all those people who briefly turned bearish earlier in the year are now declaring that there will be no ‘hard landing’ for China. We’re not convinced. The business model that got China to where it is today is irretrievably broken.’

Dr. Alex Cowie on Why Uranium Stocks Could be Worth Another Look: ‘This week’s Japanese election win for the nuclear-friendly LDP has been the trigger to set off this rally…But there is more to the rally than meets the eye. There is something else in the wind.’

By www.CentralBankNews.info     The Central Bank of Trinidad and Tobago kept its benchmark repurchase rate unchanged at 2.75 percent, saying it was maintaining an accommodative policy stance to support economic growth while inflationary pressures were under control.
    The central bank, which cut rates by 25 basis points in September, said economic activity was likely to remain subdued in the third quarter and the slow pace of growth in “consumer and business credit suggests that demand has not picked up sufficiently to create the momentum for a sustained economic recovery.”
    Trinidad & Tobago’s first quarter Gross Domestic Product fell by an annual 0.35 percent, down from an annual expansion of 0.34 percent in the fourth quarter of last year.
    The headline annual inflation rate slowed to 8.1 percent in November from October’s 9.4 percent due to a decline in the growth of food prices, the bank said.
    “With underlying inflationary pressures in check, the Bank continues to adopt an accommodative monetary stance to support the resurgence of economic activity, especially in the non-energy sector,” the central bank said in a statement.
    The central bank said food price inflation slowed to 14.9 percent from 18.2 percent in October.
    Core inflation, which strips out food prices, was 3.1 percent in November, steady from October. 
    Private sector credit rose slightly in October but remains unresponsive to financial conditions, the bank said, adding that real estate mortgage lending continued to expand a robust 11 percent in October. In October private sector credit rose 3.7 percent on an annual basis, up from 3.2 percent in September.
    Liquidity in the financial system remains high with commercial banks’ holdings of excess reserves at the central bank rising to a daily average of $4,075 million in the period of Dec. 1-18, up from $3,342 million in the previous month, due to substantial fiscal injections in November and early December.
    Trinidad & Tobago’s statistics office is currently updating its method for compiling retail prices to reflect current spending patterns and the rebasing exercise is expected to be completed in early 2013, the central bank said.
  
    www.CentralBankNews.info

By www.CentralBankNews.info     The Central Bank of Armenia (CBA) held its benchmark refinancing rate steady at 8.0 percent in light of a weak inflationary environment with the annual inflation rate expected to approach the bank’s 4 percent target and remain around that level over the three-year forecast horizon.
    CBA, which has held its refinancing rate steady since September 2011, said inflation rose by 1.4 percent in November for an annual increase of 3.6 percent, close to its confidence band. In October the annual rate was 3.4 percent.
    Armenia’s economy has developed largely in line with the central bank’s policy program which forecasts weak global demand yet a fundamental tightness in world food markets. This will have a minor inflationary impact on domestic prices, the CBA said.
    “In view of the actual 12-month inflation behavior as well as persisting weak inflationary environment in the prospect of developments in external sector and the domestic economy, the board finds it reasonable to further withhold from changing the refinancing rate in December,” the CBA said in a statement following a meeting of its board on Dec. 11.

    In the October-November period, the bank said private spending was strong, non-commercial transfers by individuals were high while the impact of fiscal policy on demand was contractionary.
    Armenia’s Gross Domestic Product rose by an annual rate of 6.6 percent in the second quarter.
    In its monetary policy program, the central bank said there was a high probability that 2012 economic growth would be 7-7.4 percent, driven by higher value-added in services, industry and agriculture.
    Over the next two years, the bank forecasts growth stabilizing at 5-6 percent annually with 2013 real domestic demand up by 4.8 percent and public spending up by a real 7.4 percent.
   

    www.CentralBankNews.info

By The Sizemore Letter

The country has a socialist president, one of the most overbearing state sectors of any developed country, some of the highest taxes in the world, and its concept of democratic government seems to require frequent rioting in the streets by its citizens.

Vive la France!

France is a country that often seems to prosper in spite of itself, but it is also home to some of the world’s finest companies–including oil major Total (NYSE:$TOT), fashion and luxury goods powerhouse LVMH (Pink:LVMUY) and pharma giant Sanofi (NYSE: $SNY) to name a few.  Think about it.  Only the crème de la crème could survive and thrive in a place as hostile to business as France.

In the Sizemore Investment Letter, Europe has been one of my favorite hunting grounds for my “emerging markets lite” strategy.  Due to the small size of most European domestic markets and due to their old imperial legacies, European firms tend to be more globally focused.  This is an investable theme; one of my best trades in 2012 was in the shares of a French logistics company with a large and growing presence in Africa. (Due to its limited trading volume in the United States, I can’t mention it here.)

I can, however, recommend that investors take a look at the French market as a whole via the iShares  MSCI France ETF (NYSE:$EWQ).

France is cheap right now, for reasons you might expect.  Investors have placed a “Europe discount” on the entire EU as fears linger about its continued viability.  The French ETF trades for just 12 times earnings and yields 3.0% in dividends.

But as the fears of a Eurozone breakup recede with each passing day, I expect investors to warm to French stocks over the course of 2013.

I also like the fact that EWQ is weighted heavily in industrials and consumer cyclicals (17% and 15% of the portfolio, respectively).  This fits a broader theme I’ve been following of allocating to more aggressive sectors (see “Warren Buffett is Rotating into Riskier Sectors”).

Action to take: Buy shares of EWQ at market and plan to hold for 6-12 months.  Use a 15% trailing loss.

Disclosures: Sizemore Capital is long LVMH.   This article first appeared on TraderPlanet.

The post Ooh la la! The Bullish Case For French Stocks appeared first on Sizemore Insights.