Problems Create Opportunity

by | Aug 25, 2012 | Archives

Opportunities.  “i problemi sono delle opportunità” as the Italians would say. “Problems are Opportunity”.

General George Patton once declared… “There is no security, only opportunity”.

In these time of rapid change, this is especially true. There is more than a lesson to be gained from the Italians about this fact.

This is one reason why our farmhouse in North Carolina was…


inspired after this…


Italian villa.

We love the look and feel but another reason was to provide Merri and me with a continual reminder…  “Problems are opportunities”.

We can spot great opportunities by looking at the past… exactly 1,602 years and one day ago.  Rome fell on August 24th, 410.

Rome fell 1,602 years ago but Italy has remained a great place to be!

That Italian historical success provides an inspiration.  Italy provides other opportunities and in a moment you’ll see why one of  the shares I hold in my portfolio remains… an Italian bank… Unicredit… despite the fact that this has been the worst investment in my portfolio…. down about 80% in two years.

On February 16, 2010 I invested in Unicredit shares at 1.98 euro.

A look at the chart below from suggests that this was a great deal.

Unicredit stock

Click on chart to enlarge.

What a great investment… the shares dropped from 1.98 to below a euro but then rebounded to now over three euro per share in just 2.5 years.

Ahem… there is one small detail we must not overlook… a 10 for 1 reverse stock split.  In other words one day for every ten shares of Unicredit, I suddenly only had one.  Stated in another way that’s an instant 90%  loss.  The shares invested at 1.98 euro are now worth over 3 euro. Wahoo!   Except I only have a tenth as many shares so overall this position is down about 84%.  Oops!

Let’s review the good and the bad of investing and why I just bought more Unicredit shares.  Understanding losses and what to do about them is as important as understanding winners.

In a moment we’ll look at why we would have lost 84% had we liquidated right now. Then we’ll share the downside of leverage equity investments.

First, let me share the steps in logic behind the Unicredit investment in the first place.

I tend to be a thematic investor taking long term positions that I do not alter unless the theme changes.

Unicredit filled several of the themes I am investing in.

Theme #1:  Investors typically oversell bad news. There has been plenty of bad news in Europe… especially in the financial sector.

Theme #2: Europe and the euro will recover.  When one analysis the fundamentals… the debt… the trade balance… the current account… unemployment… the society and economic system as a whole and its inner workings and connections with the global economy… there are many positives.  There are plenty of problems as well… but I am betting that these problems are opportunities.

Theme #3: Always invest in good value.  We look at Keppler Asset Management’s good value market analysis to examine global market values.

Michael Keppler has continually researched international major stock markets and compared their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return for several decades.

From this Keppler develops his Good Value Stock Market Strategies. His analysis is rational, mathematical and does not worry about short term ups and downs.

He, in my opinion, is one of the best market statisticians in the world. Numerous very large fund managers use his analysis to manage funds such as State Street Global Advisors.

The overall market value is one of many filters we should use when we review value…each leading to specific shares.

At this time Austria, France, Germany and Italy remain four of the best valued major markets in the world and currently offer even better value than emerging markets.

Theme #4:  Look for specific good value shares purchased by State Street Global Advisors that follow Keppler’s advice.   Keppler’s top rated best value markets at that time were Belgium, France, Germany, Italy, the Netherlands, Spain and the United Kingdom at equal weights and the State Street fund had 12.5% of its portfolio in each of these markets and was heavily weighted into  European banks.  One of their major holdings was UniCredito Italiano.

Theme #5:  Be overweight in emerging markets.  They usually offer the best value and the emerging markets grow faster than major markets.   I especially like the idea of European emerging shares because they are oversold due to the European connection.  Unicredit is Italy’s largest bank group but in 1999, it bought Poland’s 2nd largest bank and expanded into Bulgaria, Slovakia, Croatia, Romania, the Czech Republic and Turkey.

Unibank also bought the German group HVB and Bank Austria to become 3rd largest in Germany and 1st in Austria. From there they entered Bosnia, Hungary, Slovenia, Serbia, Russia and the Baltic countries.

In 2007 Unicredit expanded into the Ukraine, Kazakhstan, Tajikistan and Kyrgyzstan and was present in 23 countries Europe and Central Asia.

Unicredit was the European leader with 5000 branches and 40 million clients.

This meant that share represented an investment into the emerging European markets as well as the good value European markets.

All this was in my analysis so when my London broker recommended Unicredit shares I took a position.

Then the “there is always something you don’t know” factor kicked in.  Unicredit had huge positions in Spanish, Italian and Greek bonds.  This created a 285 million-euro trading loss.

This along with the bad timing of expansion in a collapsing global economy led UniCredit to post record losses and write downs.

In November 2011 Unicredit took a 10.6 billion-euro ($14.5 billion) third- quarter loss after writing down years of acquisitions.

The bank took a charge of 8.7 billion euros, including goodwill write downs on its investment bank, the purchase of Germany’s HVB Group and businesses in Ukraine and Kazakhstan.

This is when the bank did a 10 to 1 reverse stock split and then issued sold 7.5 billion euros of additional stock to plug the biggest capital shortfall among Italy’s lenders.

A lot of damage was done but the bank also reacted by closing its western European brokerage (but keeping the Eastern European), stopping dividends, dividend and starting a layoff of 7,400 job cuts in Europe.

Now the share price and earnings at the bank are rising.  Plus we are somewhere near the end of the latest 15 year downward cycle.

Unicredit remains a good bet in my opinion because it is a major force in three of the top value European major markets (Austria, Germany and Italy) plus in large segments of emerging Europe.

Another way to take advantage of this opportunity is with ETFs.  A look at the chart of iShares MSCI Europe Financials Index (EUFN) traded Nasdaqshows how volatile this sector has been… how hard hit it was earlier this year and how it is now in an upwards trend.

ishares Euro financial etf

Click on photo to enlarge graph

Learn more about ETFs from Morgan Hatfield at Ruggie Wealth.

15 Year Cycle

If the 15 year bull – bear cycle is correct, then we’ll start to see a recovery in the next year or two.   The build up may be sudden or slow. This is hard to tell but as the chart of the DJA from 1980 to 1990 shows there was a lot of scary volatility from 1982  to 1990.  In retrospect the climb looks strong and sharp but those who held positions then had their breath taken away numerous times. dow chart

There is an emotional element as well as mathematical aspect to the volatile start.  It takes seven years for most people to change their attitude.  After the 15 year down turn from 1967 to 1982, most investors still felt there would be more disaster.  Though the market was rising sharply… each cutting edge downturn frightened investment sentiment into thinking that the next disaster had arrived.

Finally around 1990 everyone  looked at what had actually happened and turned bullish. then the steam really began to build in the market.

This means that Unicredit looks even better to me so I doubled my position.

I am becoming more aggressive in my equity positions in anticipation of a nice long upwards move…. even looking at leverage again.

Leverage Bad News

Long term readers know that we had great results with leverage in the early 2000s. Some of our model portfolios rose as much as 260% in a year.  In 2007 I covered all my loans and recommended readers turn down the fire as well.

The bad news in leverage is that it magnifies volatility on the downside as well as profits.

Had I leveraged my Unicredit investment I would have had to put up additional funds much earlier at a time when the shares were not so well positioned and the major losses had not been written down.

Leverage can force you to take losses or defend you position at inopportune times… which is why the advice “never speculate and never leverage more than you can afford to lose”.

I expect the the 15 year cycle to shift in a year… or two.  If too heavily leveraged… downturns in this period can throw your investments and savings out of your control.

Expect markets to become stronger.  Look for value.  Consider leverage.  Be willing to invest in problems and bad news… but protect yourself with leverage and an investment adviser  who helps you create your portfolio so it suits YOUR financial position and needs.

If you leverage, be sure to calculate your draw down before you borrow.

Our report Borrow Low-Deposit High explains all about hedged and non hedged leverage and why it is now time to once again consider this tactic.

You can order the report here. “Borrow Low Deposit High – How to Use the Multi Currency Investment Sandwich” $79.

Enroll in our October Super Thinking + International Investing and Business, I’ll send it to you FREE. You save $79.

Let’s go back to Rome… 1,602 years ago.  There is so much unimportant bad news thrown at us every day that often it is hard to remember the big picture.

On August 24, 410  the city was attacked by the Visigoths, led by Alaric I.  Slaves opened Rome’s Salarian Gate and the Visigoths poured in. They looted for three days.

St. Jerome, a citizen in Rome at the time, wrote “The city which had conquered the whole world was itself conquered.”

What does Rome’s fall 1600 years ago have to do with our investing and business… with our lives today?

There are two important lessons we can gain from Rome.   First, the reasons why Rome fell. There are innumerable theories about which cultural, political and economic trends caused the fall.   Some say it was the decline in the Roman martial vigor. The state hired too many mercenaries and lost military control.

Other theories say that major factors in the fall were deforestation and soil erosion.

Global climate changes caused by by volcanic eruptions are suggested.

Destabilizing drop in the working population are also cited.

Others blame the Roman obsession for “bread and circuses” and that Roman rulers were seeking only to gratify these obsessions.

The fact that it was slaves who let the Visigoths enter the city suggests that in Rome menial… though obviously important jobs were done by immigrants.  The Romans themselves would no longer work at difficult jobs.

Sound familiar… these problems… this rapid change?

The second more important lesson from ancient Rome is reflected in what the smart Italians did  to survive and prosper during that huge shift.

Because the Visigoths had converted to the Christian sect Arianism, the looting was not particularly violent. There was relatively little rape, murder and damage to buildings.   Yet there was a profound effect on the city. This was the first time the city had been breached in 800 years, and its citizens were devastated.

Many believed this could never happen (it did).  Others buried their heads in the sand (leaving their rear ends exposed).  Some were sure that the barbarians would soon be overthrown and the old ways would return… (they did not)!

The smart ones invested wisely… outside of Rome.  Many started businesses serving the new era.  Tens of thousands of Romans fled the economically ruined city and moved into the countryside.  Others moved to better places to live and some sought refuge in Africa.

Talk about stress… being a Roman and going through that incredible change. Yet Italy has been a great place to live for these past 1,600 years for those who learned what to do and were able to act.

You’ll want to join our international investments – business and quantum wealth seminar… because we could be in an era of similar change… the increasingly chaotic transition of a great civilization when the same problems that caused Rome’s fall are with us.

There is decline in the martial vigor… growing numbers of mercenaries… deforestation and soil erosion…global climate change…destabilizing working population decreases and the headlong pursuit by voters and leaders for only the good life.

All these events have come together and create new opportunities you can enjoy as the old ways fall.

Many of Rome’s faults are striking the Western world.  Economic stress grows…debt…rising cost of insurance, increased liability…inflation lurks everywhere. More crowds… increase change… added push.  The falling dollar and economic hard times are shredding purchasing power.  Jobs are hard to find. Pensions are at risk.  Banks fall.  Even borders lose their protective power.

Choices seem to diminish…. but actually opportunities are growing.

We can join the rat race trying to survive in the old ways or… find enjoyable new ways to live, invest and earn that will prosper in the upcoming era.

This is why Merri and I have enhanced the focus of super thinking in our seminars on international investments and business so it will become easier to think clearly and faster as events rapidly unfold.

We hope you’ll join us in North Carolina this October 5-6-7.  You’ll save $79 and I’ll send you the $79 report  “Borrow Low Deposit High – How to Use the Multi Currency Investment Sandwich” FREE.