European Zombie Banks ?
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The LTRO success in calming the markets has, at least for now, vaned. While European banks benefitted from the easy carry trade in accumulating Sovereign Bonds they have also tied their destiny to their Governments debt.

The problem is that European banks are not lending enough to businesses to foster growth and have not taken the necessary recapitalization and restructuring. This has make many European banks dependent on the LTRO without a long term solution.

There will not be enough growth in Europe unless banks start lending again to business and not just to their home Governments.

Perhaps the ECBE intervention as a lender of last resort should have been stronger from the beginning and not channeled in the forms of loans to banks. Another weakness of European banks is their very limited growth prospectives for years to come. More downgrades are also possible as early of May.

The performance difference between the German and Spanish market since the beginning of the year highlight an even bigger gap between European countries.

European Competitiveness
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Austerity measures do not usually leave much space for growth. In this case these heavy austerity measures will impact the creation of new businesses and, due to the high taxes, push several European companies to move their production or all their business elsewhere.

With low growth expected in Europe one good strategy is to invest in even boring, established consumer brands that will benefit from the emerging markets consumer middle class. I would therefore avoid European financials and difficult to understand business models for either strong consumer brands or even luxury brands.

This is well highlighted in the example of Swiss exports that had 7 out of 10 sectors falling in February but swiss watch, exports increase by 20% despite the strong franc. Even in Italy with all the difficulties of 2011, companies like Prada experienced an impressive 72% net income increase in 2011.

In Short: Strategy Play
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a) Avoid European Financials but still opportunities in boring but stable European companies.
b) Include real asset in your portfolio not just Gold but commodities in general including agriculture, energy and industrial commodities through a broad commodity index/ETF.
c) Bet on the U.S. recovery by investing in U.S. companies with a strong brand and consumer appeal but avoid the Internet 2.0 Bubble.

The European Recipe for Recession
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The drop in the PMI to 48.7% in March is just a signal of a bigger European issue. While the LTRO has worked in attracting banks to the irresistible carry trade with some Sovereigns and has eliminated uncertainties on bank re-financing it has, up to now, failed to increase lending from banks to businesses.

Banks in Italy, Portugal and Spain have increased mortgage rates between 1 and 2%. Interbank lending has not increased and this creates further uncertainties for mortgages as the LTRO is limited to 3 years. This situation is particularly worrying for Spain where housing prices fell 11.2% and yet mortgage rate is growing.

In Portugal new house loans are down 75% from last year. Funding issues are spreading to the UK too.

With austerity programmes throughout Europe and increasing rates the consumer will certainly not be the engine for growth. Similarly, small and midsize companies have insofar not benefitted from the ECB "largesse" that seems to be used by banks to delevearage and not to increase loans.

In summary what we have at the moment is high unemployment, austerity measures, limited lending between banks and to new businesses. This might well become the European recipe for recession.

This might be the prelude to more intervention and rate cuts. The biggest European issue is also represented by Spain that is too bit to fail and might still ignite contagion.

Did Gold lose its Glitter ?
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Doubling important duties in India and an overall negative sentiment on Gold (also pushed by the US Recovery) might leave investors wonder if Gold has indeed lost its glitter. While UBS analysts predict that Gold can reach 1550$ by next month I feel that this would be a buying opportunity. This because central banks are still buyers of Gold and that the overall reasons for higher prices in Gold, like money printed which might occur in bigger quantities in Europe, remain intact.

In Short: Strategy Play
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a) European stocks still present some compelling opportunities but be very selective in these solid companies that can thrive despite a possible European recession and a low/no growth environment for the years to come;

b) Include real asset in your portfolio not just Gold but commodities in general including agriculture, energy and industrial commodities through a broad commodity index/ETF.

c) Bet on the U.S. recovery by investing in U.S. companies with a strong brand and consumer appeal.

Investors that think that the whole of Europe is becoming uncompetitive and low growth are not entirely right. Yes some areas of Europe are facing difficulties but the innovative countries are finding ways to grow by creating the ideal environment for innovative companies to thrive. For example both Ireland and Iceland have seen growth in the IT sector, particularly data and support centers. Amazon and Microsoft have established their base for the European cloud operations in Ireland. Similarly Advania has recently opened in Iceland the greenest data centers in the world with zero carbon footprint and that benefits from hydro and geo-thermical power.

In summary, even in a difficult situation, innovative European countries will find ways to thrive through a number of pro-innovation and pro-growh measures that will make them more competitive and create new jobs.

Hunting for Growth in the Cloud
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Following innovation as a key differentiator among the interesting opportunities for investors I see cloud computing and software as a service as one of the high growth area that will change the way both consumers and companies use computers. Companies like Amazon, IBM, Apple and Microsoft have the lead in this sector that is expected to grow very fast in the upcoming years. An IDC report commissioned by Microsoft and released this month forecasts that cloud computing will create 14 million jobs globally by 2015.

European Craftsmanship: Growth in Luxury
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The uniqueness of European Craftsmanship is another competitive factor that investors should take into account. Since my recommendation last November European luxury companies have continued to produce excellent results. The raise of "new middle class" in Emerging markets will fuel continuous growth in this sector that has very unique barriersof entry and where, creating a new brand, is extremely difficult. For example Salvatore Ferragamo (that I recommended immediately after the IPO) returned 50% in less than a year and was practically immune from the Sovereign debt crisis.

Is the European Crisis Really over ?
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As per my previous optimistic assessment Greece has avoided a catastrophic default and will soon receive the 130 billion second aid tomorrow.

But is it really the end of the European crisis ? We can only answer with both a yes and a no. Yes because the risk of the Euro disappearance is now minimal. As the crisis started as a banking crisis but well linked to a Sovereign Debt one it has also ended with the unlimited injection of funds from the ECB that, as I said in December, would make the sovereign debt carry trade simply too irresistible to pass on.

No in the sense that implementation risk exists not only in Greece but in bigger European economies like in the case of Spain that recently announced their new deficit target of 5.8% vs. the previously announced 4.4%. This is the result of economies struggling to grow within the austerity. High unemployment in several European economies remains another major issue.

So in short for investors the risk of a disintegration of the Euro is now highly reduced and all should be back to normal or, until the next round of European summits !

Hunting for Growth in the Cloud
====================

Among the interesting opportunities for investors I see cloud computing and software as a service as one of the high growth area that will change the way both consumers and companies use computers. Companies like Amazon, IBM, Apple and Microsoft have the lead in this sector that is expected to grow very fast in the upcoming years. An IDC report commissioned by Microsoft and released this month forecasts that cloud computing will create 14 million jobs globally by 2015.

Growth in Luxury
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Another high growth sector where European companies have a strong position is luxury. Since my recommendation last November European luxury companies have continued to produce excellent results. The raise of "new middle class" in Emerging markets will fuel continuous growth in this sector that has very unique barriersof entry and where, creating a new brand, is extremely difficult. For example Salvatore Ferragamo (that I recommended immediately after the IPO) returned 50% in less than a year and was practically immune from the Sovereign debt crisis.

Greek plan was the best solution
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With the Euro-zone financial minister agreement for a 130 billion Euro plan for Greece a long awaited solution to this European problem has been found. Despite the natural pessimism about the implementation risk or even the future renegotiation of the agreement after the elections I am convinced that this plan will have a very positive impact on European markets and was not just the best solution but the only one for both Greece and Europe.

The reality is that while Greece outside the eurozone could have benefitted from currency devaluation, in practice, a return to the drachma and/or a default would have been catastrophic for both Europe and Greece.

I feel to give it for now the benefits of the doubt and to think that the plan, which requires so many sacrifices, can in fact work.

Market angst to disappear
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With this puzzle no longer on the table much of the market anxiety about Europe and a possible contagious default will, gradually, disappear. European markets have been largely penalized by the uncertainty surrounding the future of the Euro and have now a potential for further rallies.

Even the higher shortcut applied (53% vs the agreed 50%) provides with more certainty of the loss that banks and other financial institutions will have to accept. This will create clarity with and dissipate the uncertainties that have sent European financial at historically low valuations.

No Global recession
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With no global recession to materialize commodities will continue to bounce back for this reason I recommend commodities (broad basket) but also gold and other precious metals like Platinum and Palladium.