Luskin Bullish on Spain, Italy; Says U.S. Economy Could Ignite

February 03, 2014

ETF.com: What is the one area of the market you find most attractive right now?
LUSKIN: Peripheral Europe. These countries had a huge fall from grace. But unlike, say, Japan, they have been forced by the cool hand of necessity to implement significant supply side reforms. Spain has transformed itself into something like the Tennessee of Europe. It's a right to work state. If you wanted to build a new auto factory somewhere in the world, for instance, you would either put it in Tennessee or in Spain.

Yes, they have a 25% unemployment rate. But you're talking about a country that has washed away decades-old labor laws that were literally put in place under the fascist regime of General Franco. You turn that loose and now a 25% unemployment rates is pure opportunity, because now you've got a lot of hungry people who would be very happy to build cars.

In fact, they're so good at building cars, so cheap, that French automakers --- which are in part state owned --- have been firing workers in France and building new factories in Spain for these low-wage, desperate-to-work, free-to-work Spanish workers. And now they're making French cars on Spanish soil so cheaply that they export them to China. Is that a story or is that a story?

ETF.com: It's certainly a story. But is that story already priced in?
LUSKIN: We don't think so. The nice thing about these so-called peripheral European countries is that unlike some of the more mainstream developed markets they're not at all-time highs. They had just horrible falls from grace during the Euro currency crisis of the last three or four years [and they haven't fully recovered.]

So, we are very, very bullish on Spain, and also on the other peripheral European countries: Italy, Portugal, Ireland.

ETF.com: What about Japan?
LUSKIN: We were mega Japan bulls in 2013. That was just by far the right thing to be. Japan was the best performing eq­uity market in the world like by a factor of two, if you hedged the currency.

But for that to be sustainable and for Japan to have a second act and a third act they're going to have really implement Abe­nomics. If you go back a year ago and read the speeches that [Japanese Prime Minister] Shinzo Abe was making, you would have thought that you were in a time machine reading speech­es by Ronald Reagan and Margaret Thatcher. They were all about deregulation and tax cutting and restructuring and tear­ing up social safety nets so people have to work for a living. It was dynamic supply-side stuff, and the problem is he has implemented approximately none of it. It's very, very hard to do those things. It takes an extraordinary person. So far Abe just really hasn't been able to draw blood.

We're still bullish on Japan, but we are not pounding the table like we were.

ETF.com: Let's talk about the U.S. We've got mid-term elections coming up, and one of your ar­eas of expertise is the intersection of politics and investing. Are there any specific areas of the market investors should be looking out for in 2014? What's your view on U.S. equities overall?
LUSKIN: The historical record of midterm elections is one of the strongest results in American politi­cal history. It is essentially never the case that the party that controls the White House makes gains in both the Senate and the House in a midterm… The will probably just barely take over the Senate in 2014, so it's going to be a very frustrating two years for Obama.

What that means, of course, is that if he wants to create any kind of legacy he's going to have to find something that he can agree with Republicans about. There's probably not much, but there is one area that investors should be looking for: Obama has said many times that he understands the job creating power of the energy revolution that has happened in the United States. It's entirely possible that a Republican Congress and a Democratic President Barack Obama could agree on opening up more federal lands for exploration or making uniform 50-state regulations for fracking. He'd be serving both energy security … and energy abundance.

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