NorAm Asset Management Market Update June 7, 2010

Over the weekend, the G-20 Nations got together to discuss the world financial situation. All the European Union countries made 180 degree about face! They said they were all going to collectively start cutting drastically implementing austerity plans.

Among the 4 disagreeing were the United States and Great Britain. This really flushes us out in the open and shows our true colors. We do not want to cause pain and make the tough decisions needed for our future generations and our economy as a whole over the next decade.

However, this is not a political tirade, this is about how to make money or avoid losing it. What does this mean for Europe and her companies. Well, all this cutting will slow their growth significantly. Also, their cutting spending should be bullish for the Euro, which will make their exports more expensive. This is also a bearish sign for her stocks.

Therefore, due to the increased risk over in Europe, I would stay away completely away from investing in Europe at all, unless your short, I am. I believe the risk of deflation has just increase some, especially in the shorter term.

For those of you who love technical analysis and graph, I have attached a chart of the EuroStocks 50 Index, a large cap group of big European companies.

As you can see, it broke through a trend line around 1/22/10 and had a significant pullback. It rallied back to its former 2010 highs and peaked out and closed just below 2950 on 4/16/2010. You can see it made a double top, then quickly sold off and is currently breaking through a support line. If it breaks through support, all bets are off.

Therefore, from a fundamental analysis, Europe is slowing already and is now going to have drastic cuts to further slow their growth. In fact, they are heading for a double dip recession quickly.

From a technical standpoint, it doesn't look good either. In fact, I could have added another long term bear trendline from the top left from the May 08 top down toward today and you could argue that this was an intense rally in a secular long term bear market.

I do not know which way exactly it will play out. I just know when I measure what is happening while it is happening, and get confirmation, then make adjustments accordingly, I am much better off. I will not be right on every trade/investment, but from a risk/reward profile, I am way ahead of the game. It is also a lot less painful not having these wild, wild swings in your portfolio.

In short, for Europe, the risk don't merit possible gains you might get. My advice, hold a lot of cash, bonds, and a few American stocks till we get some more clarity, or get a significant selloff that makes prices much more attractive and the risk profile more palatable.

These are my thoughts for the day. Let me know yours.

Keep studying,
Dan Stewart CFA®

Dan Stewart CFA®
President
NorAm Asset Management, Inc.
15303 Dallas Parkway suite 1030
Addison, TX 75001
888-886-6726 (888-88NorAm)
214-708-4555 Cell
214-242-4100 Fax
E-Mail: dstewart@noramassetmanagement.com
Website: www.thewallstreetshuffle.com

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