Wednesday, July 20, 2016

Market Conundrum

The US stock market just broke new all-time highs in the Dow and S&Ps, however in this age of globalization, European banks are falling to all-time lows. Dear reader, it is not just Europe. The Japanese Nikkei 225 is down 15% and Japan's third largest bank, Mitsubishi UFJ financial Group(MTU) is threading water. It is down 38%. What gives?
In Europe
The Swiss banking giant, Credit Suisse(CS) is crashing. It is down 57% and that is no typo. Ouch! Not only did the IMF say that Germany's largest bank is the world's most riskiest, but Deutsche Bank(DB) has already dropped 59% of its value. Double ouch!! England has problems, but its worse up in Scotland. The Royal Bank of Scotland(RBS) is stumbling. It is down 52%.
Even in the US, Citigroup(C) is off by 24%. All these examples are deep in bear territory and it tells me something is seriously wrong, but we don't know what it is until it hits the fan. By the way, according to Dow Theory, the market needs the transports to go along with the Dow if the market is truly showing financial strength. The transports are a long way from a new high. Anyway, I looked deeper and my pisans are in trouble.
Italian Banks
are one reason for caution. Italy's third largest bank, Monte dei Paschi has lost 83% of its stock valuation. That is not an ouch, but closer to suicide. The government will add money to capitalize their banking system, but as it stands the outlook is terrible. The number of loans that are considered so bad equates to one-fifth of the total economy. No amount of stimulus will make sour loans turn good. Here is an insight from an official of Deutsche Bank. David Folkerts-Landau says, "European banks are sick. I'm no doomsday prophet. I am a realist." He believes the EU should recapitalize the whole system.
As things stand with Brexit, I think the EU will let the printing press work overtime. They have a real fear of contagion. This will be another devaluation for the euro. This tells me that the best investment is precious metals, especially since corporate earnings, the true driver of the markets, has been down for five straight quarters. It does appear that earnings in this quarter will not be as bad as the last quarter, yet they still will be down. Although the market may have you scratching your head, it leads me to this analogy. Baseball had its Home Run Derby last week and this year the long ball in the markets is gold and silver.