Ten OTC-Traded German Stocks to Consider

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The export-oriented German economy at about $3.5 Trillion is the largest in Europe. Unlike other European countries Germany is unique in that the economy is composed of thousands of family-owned small to mid-size companies. In fact, thousands of such Mittelstand firms employ millions of workers in the private sector. These companies are highly successful and supply components and products not just to other larger German firms but also export them to other countries.

In addition to the Mittelstand  firms, hundreds of large German companies operate globally and are leaders in their respective fields. BASF AG(BASFY) is the largest chemical maker in the world and holds the leadership position in the industry for decades.These global German companies employ thousands of workers in the countries they operate.For example, the top 50 German multinationals in the US alone employ over 461,000 workers in the U.S. as of 2011, according to a special report by the German American Chamber of Commerce.

While most investors avoid Europe due to ongoing crisis there, smart investors may want to add some of the top companies at the current levels.With a strong economy and solid fundamentals Germany should be the first choice for investors looking to invest in Europe.As many German companies have strong exposure to overseas markets especially the emerging markets they offer better opportunities than companies that mainly focus on Europe.

Compared to other European indices, the German DAX index has performed very well this year with an year-to-date of change of 18.18% as of August 31.

Due to expensive listing fees of the New York Stock Exchange (NYSE) and high regulatory requirements, only about seven German companies trade on the NYSE. So investors looking to invest directly in German firms have to beyond the NYSE  such as the OTC markets.

Ten German ADRs trading on the OTC market are listed below for further research:

1.Company: Addidas AG (ADDYY)
Current Dividend Yield: 1.65%
Sector: Footwear

2.Company: BASF SE (BASFY)
Current Dividend Yield: 4.26%
Sector:Chemical Manufacturing

3.Company: Continental AG (CTTAY)
Current Dividend Yield: 2.01%
Sector:Auto & Truck Parts

4.Company: E.ON AG (EONGY)
Current Dividend Yield: Utilities
Sector: 5.73%

5.Company: RWE AG(RWEOY)
Current Dividend Yield: Utilities
Sector: 6.32%

6.Company: Allianz (AZSEY)
Current Dividend Yield: 5.35%
Sector:Nonlife Insurance

7.Company: Linde AG (LNEGY)
Current Dividend Yield:2.08%
Sector:Chemical Manufacturing

8.Company: Deutsche Telekom (DTEGY)
Current Dividend Yield: 7.37%
Sector:Mobile Telecom

9.Company: Henkel AG (HENKY)
Current Dividend Yield:1.64%
Sector:Household Goods

10.Company: Fresenius SE & Co KGaA (FSNUY)
Current Dividend Yield: 1.15%
Sector: Pharma & Biotech

Another simple and easy way to invest in Germany is via the iShares Germany ETF (EWG).The fund has net assets of over $2.7 billion and an yield of 2.87%. The fund’s portfolio includes many of the companies listed above.

Disclosure: Long EONGY, HENKY and RWEOY

Why U.S. Runs Chronic Budget Deficits

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The U.S. Federal government runs large deficits year after year. This is because total government expenditures far exceed total revenues. For example, under the Obama administration the Federal deficit was $1,293 billion and $1,300 billion for the fiscal years 2010 and 2011 respectively. For the fiscal year 2012 it is projected to reach $1,327 billion.

Federal government expenditures rose from 18.5% of GDP in mid-2008 to 23.5% from mid-2009 to late 2010 due to the recession. This ratio has since fallen to 22% and should decrease further in the near term. However according to the Congressional Budget Office, expenditures will continue to remain high due to rising mandatory spending on social entitlement programs. As millions of baby boomers retire and health care costs skyrocket on a yearly basis, the Federal spending on Medicare, Medicaid and Social Security will increase. In addition to these entitlement programs, the interest on the outstanding national debt also will consume a larger portion of the national income. The Treasury Department estimates the U.S. interest expense on debt outstanding to be an astonishing $323,050,646,977.43 or $3.23 Trillion for the fiscal year 2012. The interest expense is so high because the current total public debt outstanding is $15.9 Trillion.

Currently the U.S. outlays for the entitlement programs noted above and interest payments stands at 10.4% of GDP . This is projected to rise to 12.6% in 2022 and 14.8% in 2032.

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High government expenditures is not necessarily bad if they are matched with adequate revenues.However this is not the case in the US. The current trend of deficit spending is a major concern because unlike other developed countries, the U.S. has one of the lowest rates of tax collection according to the OECD. The general U.S. tax revenues consisting of federal, state, and local levels at about 32% of GDP is one of the lowest rates of collection of the 31 developed countries in the OECD as shown in the chart below:

Last year,  the federal government revenues reached a historical low of  just 15.4% of GDP compared with the historical average of 18.2%. As Americans are traditionally averse to paying higher taxes but expect more and more payments from Uncle Sam in the form of social safety net programs such as Medicare, Medicaid, Social Security and many others, we can expect deficits to remain high at least for the foreseeable future.

Source: Not So Fast: U.S. Recovery Falters as Fiscal Cliff Looms, By Alan Levenson, T. Rowe Price Chief Economist, T.Rowe Price Report, Summer 2012

Chart: Commodity Prices Since 1800

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The following chart shows the price of an index of commodity prices from 1800:

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Source:  Quarterly Commentary 2, Allan Gray Investment Management, South Africa

Despite the rise in commodity prices in the past two decades the long-term trend is still down. According to the author of the report, over the past two centuries human ingenuity has found new and efficient ways to produce and use commodities. A more recent example is the development of technology to extract America’s shale gas reserves.

Related ETFs:

iShares GSCI Commodity-Indexed Trust (GSG)
United States Commodity Index Fund (USCI)
PowerShares DB Commodity Index Tracking Fund (DBC)

Disclosure; No Positions