In an article on European banks last month I suggested that it was not clear if rising stock prices of financials was an indicator of a bull market for the overall equity market. This post is an update to that discussion.

According to a recent article in Bloomberg BusinessWeek, European banks have borrowed only a quarter of the $6.6 Trillion allocated in state rescue aid by the European Commission. UK, Germany and Ireland received the bulk of the funds.

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Source: Europe’s Bank Rescue Tally, Bloomberg BusinessWeek

From a  news report in the weekend Journal:

Hundreds of European banks are rushing to repay cheap loans they borrowed from the European Central Bank a year ago, in a show of confidence that financial markets are returning to health three years into the region’s debt crisis.

The ECB will get back €137 billion ($182.2 billion) from 278 banks on Jan. 30, the first day that the three-year loans can be repaid—and nearly two years before they are due—the European Central Bank said Friday.

That represents more than one-quarter of the €489 billion that banks tapped from the ECB in December 2011. Banks borrowed an additional €530 billion in a second installment of three-year loans last February, bringing the total to more than €1 trillion.

The ECB didn’t provide a breakdown in loan repayment by bank or country. Roughly one third of the money that was repaid came from Spanish banks, according to a person familiar with the matter.

Flexible liquidity requirements and rising earnings seem to be the driver behind the rally in European bank stocks for the past few months. In one year European financials have increased by 20% in Euro terms as represented by the benchmark STOXX® Europe 600 Banks index. The six months return is more spectacular with gains of about 47%.

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Source: STOXX

All the exchange-listed European bank ADRs with the exception of National Bank of Greece (NBG) are in the positive territory year-to-date with some banks up by double digit percentages. Bank of Ireland (IRE) and Credit Suisse (CS) have shot by more than 38% and 20% respectively.

The early payment of state aid and strong performance of their stocks indicate that the worst is over for European banks. They may indeed continue to rally this year although at a slower pace. If some of the banks that suspended dividend payments after the financial crisis resumed dividends then it will give an additional boost to the sector.Though unemployment and other issues continue to plague Europe,  the dooms-day predictions of the complete collapse of the Euro and the EU are not going to occur, at least for the foreseeable future. Hence investors may further bid up European financials on any new positive developments.

Disclosure: No Positions

Nick Ford, head of US equities at Miton of UK recently wrote an interesting article in Trustnet outlining his thesis for finding investment opportunities in the U.S. market regardless of the state of the direction of the U.S. market. From the article:

Despite valid concerns about the ongoing resolution to the “fiscal cliff” and the issue of the debt ceiling, there are some very encouraging data points for the US economy, including improving consumer confidence, a recovery in the housing market, better employment statistics and a far healthier banking sector, which will be good for companies needing finance to invest for growth.

The share price action of companies whose prospects are highly sensitive to economic activity is also very revealing.

Source:  Bull or bear: Finding opportunities in the US market, Trustnet

The four stocks he suggested are the following:

1.Company: Brunswick Corp (BC)
Current Dividend Yield: 0.14%
Sector: Recreational Products

2.Company: Lithia Motors Inc (LAD)
Current Dividend Yield: 0.96%
Sector: Retail (Specialty)

3.Company: American Public Education Inc (APEI)
Current Dividend Yield: No dividends paid
Sector: Schools

4.Company: Concur Technologies Inc (CQNR)
Current Dividend Yield: No dividends paid
Sector: Software & Programming

Note: Dividend yields noted are as of Jan 25, 2013

Disclosure: No Positions

Brunswick Corporation is a designer, manufacturer and marketer of recreation products, including marine engines, boats, fitness equipment and bowling and billiards equipment. The company also owns and operates bowling centers in the U.S. As this is a recreational products company, its fortunes are directly tied to the performance of the economy. Lithia Motors is a car dealer selling new and used cars in 86 stores in the Western and Midwestern regions of the country. From about $25.00 in July, the stock has risen to about $42.00 with the economic recovery.

APEI is a provider of  online higher education focused on serving the military and government workers.Concur Technologies sells software to businesses for tracking and processing travel and entertainment expense reports. Its software helps companies save on these expenses.

Overall all four of the stocks noted above are interesting stocks worth further research.

Many U.S. companies are increasing share buybacks to goose up earnings. Buybacks of own shares is the preferred method for some companies to put unused cash to work. While theoretically  buying back shares should reduce the number of outstanding shares and increase earnings per share it is not happening in the real world, according to an article the Journal. This is because, according to the article, companies issues new shares to employees thereby increasing the share count and effectively canceling the benefit of share buybacks. Buybacks is the worst form of strategy any company can follow. Some of the reasons for this conclusion include:

• Share buybacks is unproductive use of cash
• Buybacks are mainly financial engineering to raise share prices
• Companies tend to buy their shares when prices are high or at peaks
• Unlike paying back earnings to investors in the form of dividends, buybacks is not beneficial to outside shareholders. However it benefits insiders to manipulate stock prices to cash in on their options.
• Buying back own stock does not require any intelligent corporate strategy and gives an “easy way” out for overpaid executives to waste shareholders’ equity.
• Buyback is a short-term strategy that hurts long-term investors more and rewards insiders and traders who can take advantage of rise in share prices.

From “Investors See a Way Forward: Buybacks“:

In the 18 months between April 2011 and October 2012, the most recent period for which data is available, companies in the S&P 500 retired a net eight billion shares through buybacks, according to FactSet. At the end of the third quarter last year, about 300 billion shares were outstanding for S&P 500 companies, the lowest quarter-end total since the middle of 2009.

Many investors expect buybacks to continue in 2013, with companies finding fewer productive uses for their excess cash.

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Source: Investors See a Way Forward: Buybacks, The Wall Street Journal

In recent years, US firms have spent more on share buybacks than they paid out in dividends to shareholders. Investors may want to avoid firms that tend be big proponents of this strategy. Some of the companies mentioned in the article that are big spenders on share buybacks are Assurant(AIZ), bottler Coca-Cola Enterprises(CCE) and hotel operator Wyndham Worldwide(WYN).

Disclosure: No Positions