The Accidental Tourists: Europeans Stay Home, Asians Don't

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The new monied class in Europe isn't European.

I arrived at that conclusion after returning from a two-week driving tour through parts of Germany and Switzerland. I had dozens of conversations with cab drivers, bartenders, maitre d's, shopkeepers, and hotel clerks ( the people who really know what's going on), as well as members of my extended family in southern Germany.

Throughout those discussions, two questions appeared on everyone's mind: 1) what happened to the weather, and 2) what happened to the tourists, specifically the European tourists?

Ask any shopkeeper, "How's business?," and they will stare at you, unsure about how to describe what has been happening. The usual answer is: "We'll, it is July, so we hope business will pick up now."

The weather has been very bad in northern and Central Europe, with a long cold winter followed by an endlessly rainy spring and accompanying flooding.

This has soured the mood of a lot of people in the tourist business. Para gliders at the base of the Swiss alps bitterly complained that the weather had kept them grounded much of the spring; the first few days of July were the first warm days they had seen in weeks.

The lovely Austrian resort town of Bregenz, on the shores of the Bodensee, was oddly deserted on a Saturday night; the famous Swiss resort town of Montreux, on the banks of Lake Geneva, had hotel rooms available, even as the famous Montreux Jazz Festival was beginning; in downtown Zurich, the financial heart of Europe, a taxi driver, the owner of a brand new Mercedes Benz, said business was slow and that if it wasn't for the Russians and Chinese it would be much worse.

That brings up the second issue: there is a new class of wealthy here, and a new breed of tourist — but it isn't the Europeans.

Indeed, in Interlaken, the main starting point for hiking excursions into the Swiss alps, it is more common to see older Indian women in full-length saris, or Muslim women in full length black chadors, or Chinese tourists moving in groups of one to two dozen people, than it is to see Europeans.

This new money is most evident in the many high-end Swiss watch stores that can be found in every town, indeed in every hamlet.

At the famous Bucherer watch store in front of the Victoria Jungfrau Grand Hotel in Interlaken, where you can easily spend $25,000 on an IWC or Jaeger-LeCoultere watch, you won't hear much German or French or even much English. Instead, you'll hear Chinese, Arabic or Hindi.

And they are buying. A woman who worked in a shop on the main street in Interlaken was astonished at the buying power: "It's amazing. They buy four or five watches at a time, and they pay cash."

And the European tourists? Oh sure, there are Americans around, and there are still a smattering of aging Brits with hiking polls staying in low-budget hotels. They've been tramping around this part of Switzerland for 300 years, looking for easy hiking trails and literary landmarks left behind by their ancestors. "Byron swam here" or "Shelley wrote here" is the British equivalent of "Washington slept here" in America.

But as Europe sits in the middle of its fourth year of zero or declining growth, it is painfully obvious that the ongoing recession is taking its toll on European travel.

A least there's the Chinese.


1) sitting in Europe, it was quite the scene to watch U.S. stocks rally almost every single day I was gone, while bond yields continued to back up. But the stock market is not falling apart: as Dan Greenhaus and others have pointed out, the 10-year yield has gone from 1.61 percent to 2.70 percent in the last two months, but the S&P 500 is up 3.1 percent.

And with the bullish June jobs report on Friday, we may finally have enough growth to support the stock market.

2) On the other hand, I keep waiting for some kind of titanic outflows from bond funds. I see outflows, but nowhere near 'titanic." Vanguard Total Bond Market, the largest bond ETF, is down 4.9 percent year to date, most of it in the last two months. Is that enough to precipitate huge outflows?

There are outflows, but they aren't as great as the media seems to be hyping. The Vanguard fund, for example, had $483 million in outflows in the second quarter, and has seen $64 million in outflows in just the first week of the third quarter. That, however, is only about 3 percent of the total value of the fund. That is notable, but I would not call it a tidal wave - at least not yet.

We have seen some rotation down the duration some money is moving out of, say, long term bonds into short-term bond funds. An avalanche out of bonds, though? It doesn't appear that way.

The irony, of course, is that everyone who is yield hungry who has cash on the sidelines has to take a look at current bond prices.

That backup in yields has to be competition for other yield strategies, like dividend stocks. It seems to me that puts something of a floor under the panic trade of selling all bonds.

3) European stocks are up, but Asian stocks are all down on concerns about slowing in China.

4) Earnings: how bad? Perhaps not as bad as everyone is screaming: it's another low-bar quarter. We start second quarter earnings today with the usual negative slant from the Wall Street Journal, Reuters, and others: that EPS gains are again meager (S&P Capital IQ has 2.9 percent), in the low single digits at best, and that top line growth is essentially flat (Cap IQ has minus 0.2 percent). There are the usual dire warnings that this cannot continue (note: it has been continuing, for over a year, but hey why interrupt the narrative?).

And there's a new wrinkle: a high percentage of negative guidance. 111 companies have provided guidance, 78 percent were negative, according to Cap IQ. That is a high percentage.

Yet every quarter, about 65 percent of companies beat the numbers, and by an average of about 3 percent points. There is no reason to believe that this quarter will be any different.

What this means is this: if you accept 2.9 percent bottom line gains and an average beat of 3 percent points, the historical trend is that earnings will rise 5.9 percent of so in the second quarter.

That is more than enough to keep the stock market up. It may not be enough for double digit gains, but it is good enough for modest growth.

In case you are wondering, the 15 year average is 8 percent gains.

By CNBC's Bob Pisani

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.