Europe's Big Bailout Has Consequences

By Sham Gad | May 12, 2010 AAA

Considering the highly volatile and rapidly declining markets last week, it should come as no surprise that Europe had to act quickly and meaningfully over the weekend. Markets all around the world were heading into a free fall reminiscent of the U.S. in the fall of 2008. Without a massive injection of liquidity to Greece, things could have gotten very messy very quickly in financial markets all over the world.

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Shock and Awe
Members of the European Union came together and agreed to a nearly $1 trillion stimulus package in order to prop Greece and save any other EU members from succumbing to the same fate. With the euro collapsing versus the dollar, EU members saw the writing on the wall: step in or watch your common currency crumble each day.

However, it looked like a few billion dollars from Germany was not going to be enough. According to one analyst, this aid package provided the "shock and awe" the markets were looking for. Overnight markets across Europe and Asia were up strongly. (For more, see Greece: The Worst Case Scenario.)

Coming Home to Roost
Like the U.S. stimulus package program, the EU had no choice. But also like the U.S. stimulus package program, these actions will have future consequences that will have to be dealt with one day. The financial markets have an unprecedented level of money sloshing around in the system and that will expand as a result of this EU deal. Investors looking at stocks should tread carefully in the months and years ahead.

Dominant franchise type businesses like Deere (NYSE:DE) should do relatively well. The agricultural equipment company sells and services its equipment via a network of thousands of locations worldwide. Slow sales are buffeted somewhat by a recurring revenue service stream. On the other side of the pond, global food giant Nestle (Nasdaq:NSRGY) looks attractive. Food businesses do very well in periods of inflation as price increases are easier to accept from consumers. In addition, Nestle has very strong operations in rapidly growing emerging nation like India.

Vodafone (NYSE:VOD) is another European company that looks compelling. The shares now yield over 6% after the 15% price decline in the past week. The company has a growing mobile telecommunications business in emerging markets where wireless penetration remains relatively low. In addition, the company owns a lucrative 45% interest in Verizon Wireless, the largest mobile company in the United States. Vodafone currently sees no dividends from Verizon Wireless. Majority owner Verizon Communications (NYSE:VZ) owns the other 55% and currently uses the cash flows from VW to pay down debt. Once that debt is repaid later this year, the cash should start finding its way to Vodafone.

Looking Ahead
To say that the next couple of years will be interesting is an understatement. Global balance sheets are at all-time highs and the ultimate effects are almost certain to create an inflationary future environment. Such an atmosphere may not be favorable to equities and investors should keep this in mind as they navigate these unchartered waters. (For more, see Coping With Inflation Risk.)

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