And with some justification, for China and the two Asian “tigers” share some alluring characteristics like:

• A highly competitive and innovative manufacturing industry.
• Excellent government and workforce discipline.
• Modest fiscal and monetary stimulus (or, like China, they started from a position of budget surplus).
• And an export orientation that seems likely to benefit quickly as order is restored in the global trading economy.

But there’s another country that shares those characteristics. It’s nowhere near East Asia. But investors can expect this particular economy to also bounce back from this recession with considerable vigor.

I’m talking about the center of supposedly sclerotic Old Europe itself: Germany.

Germany lacks the huge financial sector that has been the bane of the United States and British economies, but it has manufacturing industry that is the envy of the world. Its balance of payments surplus was $205.8 billion in the 12 months through April, and is expected to be 4.4% of gross domestic product (GDP) for all of 2009.

The German government resisted the urge to splurge on “stimulus” packages, and consequently is expected to run a budget deficit of only 4.4% of GDP in 2009 – a ratio that’s far smaller than those of other “advanced” economies, and one that should be easy to finance. Furthermore, the European Central Bank (ECB) has been the most conservative of all major central banks outside Brazil, and German Chancellor Angela Merkel has indicated pretty strongly that it had better stay that way, as she is worried about inflation.

German labor discipline is world-famous, partly because of its sophisticated system of “mitbestimmung” (co-determination) between industry and labor unions. Thus, Germany loses only four days to strikes per 1,000 employees in an average year, an average that’s well below the same statistic for each of its European neighbors. Skill levels are also excellent, because of the superior German education system, much of which is run in partnership with industry.

Because of its more conservative fiscal stance – with less stimulus – Germany has suffered through a much-deeper recession than many other countries, with first-quarter GDP down 6.9% from the previous year.

By comparison, economic output declined 2.5% in the United States and 4.2% in Korea, but 8.8% in Japan and 10.2% in Taiwan.  However, manufacturing orders stabilized in April and it seems likely that Germany will experience a return to growth in the second half of 2009. The ZEW indicator of German economic sentiment for June came in at 44.8 – up more than 13 points from the previous month, and a three-year high. When Germany starts to recover, its economic rebound is likely to be healthy, without resurgent inflation or bond market turmoil, because of Germany’s cautious fiscal and monetary policies.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (NYSE:EWG). At $489 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 12 and a yield of 6.4%, meaning it provides shareholders with a decent income. It also provides a much-broader exposure to the German market than do the American Depository Receipt (ADR) shares, which relate only to very large companies, and not to the highly successful “mittelstand” medium-sized enterprises.

There are eight German companies whose ADRs have a sponsored full listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance). Of these, Infineon Technologies AG (OTC ADR: IFNNY), a semiconductor manufacturer, is making a loss, while Qimonda AG (OTC ADR: QMNDQ), a maker of computer memory devices, is in bankruptcy.
That leaves six possible profit plays:

• Allianz SE: (NYSE ADR: AZ): This huge insurance company sold its shares in Dresdner Bank AG and is now a shareholder in Commerzbank AG (OTC ADR: CRZBY). Allianz lost money in 2008 because of investment losses, but is trading on only nine times projected 2009 earnings, with a 5% dividend yield.

• Daimler AG (NYSE ADR: DAI): A major automaker, and producer of the upscale Mercedes Benz brand (including the fashionable “Smart” small car), Daimler is now thankfully devoid of Chrysler LLCinvolvement. Daimler gratuitously tossed away a considerable amount of shareholder value with two foolish diversifications – into aerospace in the 1980s and into Chrysler in the 1990s. If management can keep its eyes on the road (stay on the black stuff between the trees), this stock could be quite attractive. Daimler’s shares are trading at 20 times recession-year earnings. The dividend yield is only 1.7%, but overall there’s a lot of upside in an economic recovery.

• Deutsche Bank AG (NYSE ADR: DB): This is Germany’s premier bank and investment bank, but it is currently losing money and the stock yields only 1%. For a play on a German financial sector recovery, I prefer Allianz.

• Deutsche Telekom AG (NYSE ADR: DT): Germany’s traditional fixed-line telephone service, Deutsche Telekom also has mobile-phone operations and has increased its revenue by also offering high-speed Internet access. Currently operating at a loss, DT also cut its dividend. Avoid – there are better telecom plays out there.

• SAP AG (NYSE ADR: SAP):  A globally known provider of so-called “enterprise resource planning” (ERP) software, SAP shares have a dividend yield of only 1.2%, and are trading at 19 times prospective earnings. The stock looks a bit pricey to me: I like the sector, but not SAP’s bureaucracy-friendly product line.

• Siemens AG (NYSE ADR: SI): With its wide array of product offerings, Siemens is operationally akin to General Electric Co. (NYSE: GE). Indeed, with  heavy-equipment offerings that range from locomotives to electric power plants, Siemens is selling the kinds of products that are likely to benefit from heavy “stimulus” spending worldwide. The company has recovered from losses in 2006. But the shares are trading at only 11 times estimated earnings for the 12 months that end in September. That low valuation, coupled with a nice dividend yield of 2.9%, makes the stock appear fairly attractive.

Source: Germany: Emerging Market Profit Potential, With (Only) Developed Market Risk

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

This from Money Morning:

Commentators are tripping over one another to declare this country or that country’s stimulus package as a primary reason to pour money into its stock market. Yet if you look at the highly damaging long-term effects of such loose monetary and fiscal policies, an investor can come to only one conclusion: You should invest in the country with the smallest stimulus package.

Stimulus packages are all the rage right now. President-elect Barack Obama has promised an $800 billion package for the United States, which equates to nearly 7% of U.S. gross domestic product (GDP). And there are plenty of others:

• Japan has a stimulus package of $720 billion – roughly 14% of GDP.
• South Korea plans two stimulus packages – the larger of them “green” – totaling about $50 billion, or about 6% of GDP.
• Great Britain is expected to inject about $177 billion into its economy, the equivalent of 8% of GDP.
• France has a modest $40 billion stimulus package in place but that’s on top of a $300 billion European Union (EU) stimulus package, so the total’s about 3% of GDP.
• China has announced a $586 billion stimulus – almost 20% of GDP – and now appears to have decided even that is too little.

Then there’s Germany. When the British stimulus was announced, Germany’s finance minister, Peer Steinbruck, described it as “crass Keynesianism.” Since then, he’s been forced to back off that stance a bit: On Jan. 12, Germany announced a stimulus plan totaling $70 billion over two years.

Still, even that is only is a relatively modest 2% of GDP, and Germany’s 2009 budget deficit – even with the stimulus – is projected to come in at less than 3% of GDP. That’s far less of a deficit than the country faced during the 2001-2003 recession, and means that Germany enjoys one of the soundest fiscal positions of any country in the world.

Germany’s short-term economic outlook is unexciting, as is currently the case for most countries. According to The Economist, the country’s GDP is forecast to shrink by 1.4% in 2009, after actually advancing 1.0% in 2008. That’s equal to the Euro zone average and equal to Japan, a bit less than the United States (projected at minus 1.2%), but better than Britain (minus 1.7%). But at a projected 1.0%, at least inflation at 1% is expected to be satisfactorily low.

Where Germany stands out, however, is when you look at its balance of payments, which is in surplus by $265 billion in the year to November 2008 – the equivalent of 6.6% of GDP. That immediately distinguishes it from the finance-based economies of the United States and Britain, both of which have perennial balance-of-payment deficits.

The most impressive thing about the German payments surplus is that it is achieved against a background of some of the highest wage rates in the world, very heavy tax and Social Security costs and a strong euro exchange rate. Even though it has among the world’s highest labor costs, Germany also has among the world’s highest labor skill levels, and those are more concentrated in manufacturing than in finance or business services, making the German economy less vulnerable to this finance-based recession or to erosion through globalization.

Like other countries, Germany will see its exports hit by this global recession, but it has the ability to grow domestic demand to compensate without affecting its budget or payments position.

For a decade and a half, the German economy and its budget were bedeviled by the huge costs of integrating the former communist East Germany into the West. However, that was a one-off cost; anyone who graduated high school in East Germany under Communism before 1989 is now nearing 40, so younger workers have been given the education and training common to their splendidly productive West German counterparts. From about 2005 on, the drag on the budget and on productivity from East German integration costs has begun to decline, and it will continue declining in the years ahead.

With its low budget deficit and large payments surplus, Germany is the strongest economy in the EU. It is potentially the strongest economy in the world; while the United States, Japan and Britain will struggle for years with the nasty side-effects of their massive government-stimulus spending, Germany will remain in sound shape.

It is thus likely that over the next few years, the huge flows of “safe haven” money that for decades helped prop up the U.S. Treasuries market will flow instead into the German bund and equities markets: After all, where the hell else is there? That will reduce German interest rates and increase multiples on German stocks. For an international investor, it thus becomes essential to have a significant part of your portfolio in German stocks.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (NYSE:EWG). At $334 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 9.6, and a yield of 6.6%, so this ETF provides decent income as well as a broad exposure to the German market.

There are eight German companies whose American Depository Receipts (ADRs) have a full sponsored listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance).

Of these, Allianz SE (ADR:AZ) and Deutsche Bank AG (DB) are both caught up in the travails of the global financial-services sector, while financial services industry’s travails, while Daimler AG (DAI) offers the limited prospects of the automotive industry (though Daimler’s a good bet once economic recovery is clearly in sight). Infineon Technologies AG (ADR: IFX), a semiconductor manufacturer, and Qimonda AG (ADR: QI), a maker of computer memory devices, are each currently making losses.

That means there are only three other possible recommendations, which is why, if you want a broad exposure to the German market, you should also consider a mutual fund or an ETF like EWG.

Deutsche Telekom AG (ADR:DT) is Germany’s traditional fixed-line telephone service, which has mobile operations and that also has increased revenue by providing high-speed Internet access services. Based on both 2008 and 2009 earnings, the P/E ratio of its shares is a somewhat high 15. On the other hand, however, the stock’s dividend yield is better than 8%. A dividend cut must be possible, but the company in general seems fairly recession-proof.

SAP AG (ADR:SAP), the well-known international maker and marketer of enterprise software, has a lower dividend yield of only 2.1%, but much better earnings-growth prospects: 2009 is currently projected ahead of 2008. At 14 times earnings, the stock currently looks cheap for this sector.

Siemens AG (ADR:SI) is active in a broad range of heavy equipment, including items such as locomotives and electric power plants – the very kinds of businesses that are likely to benefit from heavy “stimulus” spending worldwide, especially infusions aimed at infrastructure development, which is very much the case in China.

With Siemens having recovered from losses in 2006, the company’s shares are now trading on only 8 times estimated earnings for the year to September 2009, with a dividend yield of 3.7%. They seem attractively priced.

Source: Four Ways to Profit From the Country With the Smallest Stimulus Package

This from the Smart Profits Report:

I believe there are opportunities to buy technology stocks if you have a long-term outlook.

In the current climate, however, the best strategy to use is to buy the shares, then buy a put (known as a “married put”) as a hedge against the stock position.

You can also buy technology sector-specific ETFs, or a market index like the PowerShares QQQ Trust (NASDAQ:QQQQ), which eliminates the risk from a specific company.

As the market indexes eventually find a bottom and rebound, tech company shares — and indeed shares of other companies — will also stabilize over the next 12 months.

However, if a highly influential heavyweight company like General Motors (NYSE:GM), which plunged 33% to its lowest level since 1950 on Thursday, or Morgan Stanley (NYSE:MS), is forced into bankruptcy (despite GM defiantly stating that this won’t happen), there’s a real possibility that we could see a four-digit decline for the Dow Industrials index.

In sum, the longer-term trend is up but the path to stability may hide some sizeable potholes.

That’s why it’s essential you give yourself the best chance to emerge from this mess with as few bruises as possible.

Source: 3 Safe Ways to Invest In Technology… Despite the US Economy and Fuzzy Math

It seems that European stocks are at their cheapest levels in six years and the French and German stocks top the list of bargains on the continent.

According to Bloomberg, the XETRA DAX and France’s CAC 40 are the least expensive of the world’s 10 biggest markets. But let’s not get carried away just yet… markets are often said to be cheap when stocks have fallen, rather than the preferential scenario where huge profit growth has been missed by the market. We’re seeing the prior here, falls in earnings and a bearish turn in sentiment.

First-quarter corporate profits in Western Europe dropped 25%, even worse than US firms! “The U.S. has been at the epicentre of the problems, but the shockwaves are more felt here in the euro zone. Cheap valuations are a direct result,” said fund manager Franz Wenzel.

Despite this, the contrarian club is unshaken… is it time to buy?

Well, according to Anthony Bolton, the negativity can act as a cloak to sneak in and pick up the real pearls. It is always difficult to buy recovery stocks, but it’s when stocks are at their most unloved is where the biggest rewards can be had. Do your buying in a bear run, and superior returns can be yours.

It’s this belief that propelled Warren Buffett onto a shopping tour of Europe in recent weeks, with a focus on Germany.

“We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway,” said Buffett.

“We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar,” added the world’s most successful investor.

And he might be onto something… Ben Traynor at the Fleet Street Letter tells me that companies in the French and German markets are trading at a 40% discount to those in the American S&P 500. It’s a market packed with right bobby dazzlers.

So, why the weakness?

Profit warnings left-right-and-centre is why. Not just in banking, neither. Nokia, SAP, InBev, Roche are all firms that have fallen short of expectations through the tumultuous earnings season. It’s not just poor headline figures, but weak outlooks that really put the fear of god into investors. Commodity prices and inflation is soaring, knocking input costs while demand is set for a tumble as buyers grapple with the increasingly pricey Euro.

Though it could have been a lot worse. Earnings in the first quarter fell 18% but were odds-on to fall 23%. And, if you strip out the performance of financial firms like UBS and Deutsche Bank, the first quarter would have actually been in-the-money.

Big banks still see Europe slightly higher for the year, and back in double-digit growth for 2009. Too optimistic? Reasons to be cautious? Probably, but given the discount that shares on the continent trade at, it looks to be worth the risk.

We tend to find more value opportunities in a bearish market, and this is no exception. Whilst it can be emotionally difficult to pick up companies that have been receiving a bad press, if you can justify the purchase in value and growth then you go with your convictions.

Deutsche Bahn steams into the picture

And here’s the newest stock on offer… Deutsche Bahn, Europe’s biggest rail group, is en route to be one of the biggest stock market listings of the year, set for a £6.4 billion initial public offering (IPO).

The German rail operator is set to list on the DAX with Deutsche Bahn itself to control most of the consideration with a 25% stake selling in the IPO. The launch is set for the end of the year and should reassure investors that there is still a market, and hopefully an appetite for new listings amid the credit crunch.

Nonetheless, I’m not a fan of IPOs. I subscribe to the Ken Fisher school of thought that IPO should stand for ‘It’s Probably Overpriced.’ This is based on the frequent share price capitulations that follow the initial ‘stabilisation’ or honeymoon period &mdahs; where newly listed companies shares are bought by investment banks to prop up the price in the early days. When this support subsides, the shares invariably take a tumble.

More important than the investment case of Deutsche Bahn is that, like Visa in the US, the gesture will give heart to the investment community. It serves as evidence of life after the credit crunch. When shares are trading as cheaply as they are now, it may be the best time to stock-up on shares across the border.

The sharp cookies over at The Fleet Street Letter have not been MIA on European opportunities… our portfolio includes a Paris-listed gem that has outperformed the market by nearly 30% since our tip in 2007. With property rights in the South of France, it has profited from high-net-worth individuals and looks set to continue…

Theo Casey Source: The Value Investor’s Stock Market

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

“We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

The Seeds of a German Economic Rebound

Germany’s problems of that period were largely due to the 1990 German reunification, which German Chancellor Helmut Kohl foolishly carried out by equalizing the West and East German currencies and making East German labor hopelessly uncompetitive in the process. The net result was 15 years of huge subsidies from West to East and a series of real estate disasters as Western construction companies overbuilt in the East.

Since about 2005, however, the costs of reunification have begun to decline – they were always likely to be a finite problem, as the Eastern education system was reformed and produced more productive workers – and the German growth rate has begun to increase.

Indeed, over the near-decade since the introduction of the euro, German labor competitiveness has increased by about 20% against its fellow European Union members, a very good performance. German companies have a healthy position in Eastern Europe, too, where economic growth has been rapid and wage rates remain far lower than in the West.

Germany has a substantial balance of payments surplus – about 5.5% of GDP in 2007, slightly larger than the United States’ deficit – and a budget deficit of only 0.4% of GDP. The Economist estimates that Germany will grow at 1.7% in 2008 and 1.6% in 2009 – not stellar, but still faster than the United States, which will be lucky to eek out 1% GDP growth this year (and much faster per capita if you discount for the 1% annual U.S. population growth).

Unlike some of its EU neighbors, German industry has suffered only moderately because of the euro’s strength. It helps that many German companies have substantial manufacturing operations in central Europe, which has become a haven of German-style (and mostly German-speaking) labor practices and engineering skill, but where labor costs remain low. Add in German companies’ reputations for superb organization and quality control, and you have an industrial machine that is fairly immune to exchange rate fluctuations and even to cheaper emerging market competition.

Even inflation at 2.4% is not much of a problem in Germany, and the strong euro should hold German inflation down by suppressing rises in dollar-denominated energy and commodity prices, while not doing much damage to Germany’s healthy balance of payments surplus.

Profit Plays to Call Now

So, what to buy? Well, be careful with the banks. There are too many banks in Germany, most of them propped up by their local governments, and the banking system’s lack of good ideas for making money has recently been shown by two banks, IKB Deutsche Industriebank AG and Sachsen LB, getting in serious trouble for overexposure to U.S. subprime mortgages. However, most German banks do have an advantage over U.S. banks in their limited exposure to non-mortgage U.S. debt.

Nevertheless, if you want a German financial services play, I would avoid even the mighty Deutsche Bank AG (DB) and go for the banking/insurance conglomerate Allianz AG (ADR: AZ). While Allianz does own Dresdner Bank, which has had its own problems and write-offs, it is also Germany’s largest property, casualty and health insurance company, making it one of the world’s leading insurers. And Allianz is trading at a slightly lower price/earnings (P/E) ratio than Deutsche at about 7, has a nice dividend yield of 4% and is selling at less than 1.2 times book value, a key metric for financial services companies, which tend to sell at 2 or 3 times book.

You should also look at Germany’s great engineering companies. The largest, Siemens AG (ADR: SI), has recovered from its losses of a couple of years ago and is now selling at a P/E ratio of about 8, although its dividend yield is still only 1.6%. Still, Siemens’ powerful worldwide position should allow it to continue its recovery, and there is a good chance of dividend increases – a return to Germany’s traditional conservative 50% dividend payout rate would cause its dividend to treble.

A third possibility is Fresenius Medical Care AG & Co. (ADR: FMS), the world’s largest manufacturer of kidney-dialysis machines, again a global player. This firm has a somewhat higher Price/Earnings ratio, currently about 19 on projected 2008 earnings, but its technological capability and strong market position give it attractive growth potential.

Finally, in the tech sector you might look at the business-software provider, SAP AG (ADR: SAP), whose shares carry a P/E of about 18 on estimated 2008 earnings, though they yield only 1%. SAP is the leading manufacturer and installer of so-called “enterprise resource planning,” or ERP, software, a business whose usefulness to companies has greatly increased as its products have matured and the firm’s earlier installation problems have largely been overcome.

Unlike Buffett, most individual U.S. investors don’t have the opportunity to buy the German mittelstand directly, but even large German companies can offer attractive values.

Source: Germany, Warren Buffett Likes It, and So Do We