A Bet on European Recovery — and a New Chinese Option Play

Stock markets continued their upward trajectory last week, with the Dow Jones jumping 1.20% and the S&P 500 ending the week 0.95% higher. The MCSI Emerging Markets Index also rose 0.70%.

Big gainers in your Bull Market Alert portfolio included Bank of Ireland (IRE) soaring yet another 8.98%. It’s now up a whopping 40% year to date. The ProShares Ultra FTSE China 25 (XPP) jumped 3.35%. Michael Kors Holdings Ltd. (KORS) broke out 2.91%. And last week’s bet, Plum Creek Timber Co. Inc. (PCL), started on a positive note, rising 2.00%.

With Qihoo 360 Technology (QIHU) down 3.24% last week, it’s a good time to place an options bet on this high flyer with a great future. I recommend that you buy the June $34 call option (QIHU130622C00034000) on this Chinese high flyer.

Howard Gold, of Marketwatch, interviewed me last week on my 2013 outlook for global markets. I pointed out to him some of the remarkable gains I’ve seen so far this year in the “PIIGS” markets of Europe — Portugal, Ireland, Italy, Greece and Spain.

This week’s Bull Market Alert recommendation — Banco Santander, S.A. (SAN) — is a way to profit from the recovery in European stock markets. It’s essentially a toned version of the same theme that has given you the 40% gains so far this year in Bank of Ireland (IRE).

Banco Santander is one of the world’s largest banks. With a market cap of just over $80 billion, it is smaller than a retail bank like Bank of America (BAC), but larger than, say, investment banks like Goldman Sachs Group (GS) or Morgan Stanley (MS).

Banco Santander is a relatively low-risk way to profit from the rebound in the Spanish, and more broadly, the European economy.

Here’s why…

The European crisis that has dominated the headlines over the last two years has clearly abated. Fitch Ratings now thinks it’s “very unlikely” that the European Union will be broken up. Earlier last week, the euro surged to an 11-month high against the dollar as European Central Bank President Mario Draghi stated that a combination of an accommodative monetary policy stance, together with significantly improved financial market confidence, should support a recovery in European markets in 2013.

In addition, Banco Santander has a much broader footprint than just Spain or Europe, with stakes in a bevy of Latin American subsidiaries — Grupo Financiero Santander Mexico (BSMX), Banco Santander-Chile (BSAC) and Banco Santander Brasil (BSBR).

Importantly, Banco Santander is both on firm footing and cheap. With earnings expected to grow by 145.9% in the coming year, it is currently trading at a single-digit price/earnings ratio — only 9.41 for 2013. The stock also yields 7.1%, making it a terrific income play as well.

With the Spanish stock market one of the top-performing ones of 2013, Banco Santander has the wind at its back. It’s no surprise that the stock has attracted an unusual amount of call option activity. A lot of smart money is betting on a big upside in Banco Santander in the months ahead.

So buy Banco Santander, S.A. (SAN) and place your stop at $7.75. If you want to join the big option buyers, I recommend the June $8.00 call options (SAN130622C00008000).

Portfolio Update

Bank of Ireland (IRE) closed its third winning week in a row, jumping another 8.98%. IRE has been the proverbial “Christmas gift that keeps on giving,” rising 40% since New Year’s Day alone. Last week was no different as European Central Bank President Mario Draghi remarked that 2013 is the year that the European recovery will really begin. I’d say things are certainly off to a smashing start, Mario… IRE is a BUY.

National Bank of Greece SA (NBG) fell 10.86% over the past five trading days. Although NBG had a tough week, an unnamed European Union official disclosed positive news last Friday saying that Greece’s next 3.2-billion euro aid payment will be approved today. This may bring greater stability to NBG’s chart. NBG is a HOLD.

Michael Kors Holdings Ltd. (KORS) added another 2.91%. KORS has a whopping 45.8% trailing 12-month return on equity (ROE). Compare this to KORS’ peer group average of 13.5%, and it becomes clear why KORS commands a price premium over its competitors. KORS remains a BUY.

PowerShares Listed Private Equity (PSP) gained 0.47%. Since your purchase of PSP back in early November 2012, PSP’s gains have doubled those of the S&P 500 and the Dow Jones. PSP is a BUY.

Discover Financial Services (DFS) lost 4.56% last week. Discover entered the home mortgage business in June 2012 and now boasts over $2 billion in closed loans to date. A clever new cash-back promotion allows cardholders to save on their loan origination fees based upon card usage. This not only pushes customers towards new loans, but encourages them to use their Discover cards as well. DFS is now a HOLD.

HollyFrontier Corp. (HFC) dipped 0.92%. Credit Suisse raised its price target on HFC last week to $54.00 — 22% above Friday’s closing price. HFC is a HOLD.

ProShares Ultra MSCI Emerging Markets (EET) added 1.28%. An analyst report from Danske Bank on the prospects for emerging markets in 2013 sees headwinds from fiscal tightening easing and a tailwind pushing the recovery — thanks to a gradual resurgence in global growth. EET is a BUY.

ProShares Ultra FTSE China 25 (XPP) gained 3.35%. There is increasing optimism surrounding a Chinese recovery. XPP is very near its recent $67.00 high, and a break above is a likely signal of the next sustained move upwards. XPP is a BUY.

ProShares Ultra MSCI Japan (EZJ) closed the week flat. The Japanese yen hit a new low this morning as investors awaited news from the Bank of Japan (BOJ). Policy makers are currently in a two-day meeting and will likely release news of further aggressive monetary policy this week. Investors are hopeful for further quantitative easing and a 2% inflation target, which should light a fire under your bet on Japan. EZJ is a BUY.

Qihoo 360 Technology (QIHU) gave back 3.24% over the past five trading days. Jefferies & Company reiterated its ‘Buy’ rating on QIHU last Friday and raised its price target to $38.00 — 19% above Friday’s close. Jefferies’ note confirmed Qihoo’s cooperation with Google in building out a sales network, as well as development of a new mobile app store and gaming platform. QIHU is a BUY.

Plum Creek Timber Co. Inc. (PCL) continued its steady rise last week, moving up 2.00% for its first week in your portfolio. With one of PCL’s major catalysts being the housing recovery, a bevy of housing-related reports due out this week should shed a bit of light on PCL’s future price performance. Look for December Existing Home Sales on Tuesday, the December Home Builders Index on Wednesday, December Housing Starts on Thursday and December New Home Sales on Friday. PCL is a BUY.

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