Friday, August 12, 2011

God Bless the U.S. Financial Sector (UYG, XLF, SKF), UYG, FAS

U.S. financial stocks have been taken to the cleaners lately, its why the Masters have had eyes on three of the most popular financial ETFs trading. The weapon of choice this past week has been the bearish ProShares UltraShort Financials (ETF) (NYSE:SKF) made famous during the last market meltdown. However now that everything has been to hell and back the bullish ProShares Ultra Financials (ETF) (NYSE:UYG) and Financial Select Sector SPDR (ETF) (NYSE:XLF) are ticking higher.

Betting on these ETFs is about as stable as the once famous relationship of Bobby Brown and Whitney Houston. However at some point the Powers-that-be are going to say the U.S. financials have hit bottom.


Despite today's 14.5% rally in the ProShares Ultra Financials (ETF) (NYSE:UYG), the fund has lost 29% since July 27th. The UYG has gone from over $60 a share just a few weeks ago to $45 today. The XLF has lost 16% since July 27th, its not as risky as the UYG. The ProShares Ultra Financials (UYG) seeks daily investment results that correspond to twice the daily performance of the Dow Jones U.S. Financials Index. The XLF is less risky as its results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index.

The Masters do not play around with the 3X bullish and bearish financial ETFs such as the Direxion Daily Financials Bull 3X Shs(ETF) (NYSE:FAS). Its crazy to consider you would pour your IRA money into a risky 3X ETF, the swings can wipe out your savings in a matter of days.

Belgium, France, Italy, Spain Overrule European Regulator, To Impose Standalone Short-Selling Bans

Stop the presses. Barely did we have time to report that European regulators failed to impose a coordinated short selling ban, that Bloomberg reports that the countries most impact by the market plunge are about to impose standalone short-selling bans. These are Belgium, Italy, Spain and France. In other words, it really is on and the 2008 Lehman PTSD flashbacks may now resume. Until we get a headline that says it isn't. The rescue of the Borsa Italian is now more schizophrenic than that of Greece. As a reminder, in the previous post the FT quoted Abraham Lioui, a professor at the Edhec business school in France, who said “It is the worst thing to do right now. This would signal to the market there may be something fundamentally bad that is happening." He is correct. Something is fundamentally very wrong and about to break.

From the AP, google translated:

Short selling of financial stocks banned for 15 days in France

(AFP) - There are 13 minutes

PARIS - The Financial Markets Authority (AMF), Constable French stock exchange has banned short selling of financial stocks listed in France for a period of 15 days, told AFP, its president Jean-Pierre Jouyet.

"We have decided to ban short selling (...) on the actions of eleven banks and insurance companies listed on the French market, that for a period of 15 days," said Mr Jouyet.

Study: Majority of Americans Don't Have Funds on Hand for $1000 Emergency

While this is just a sampling size of 2700 for this particular study, an interesting blurb on CNNMoney about the dire straights many Americans are in, in terms of savings. While this is one random study and the actual figure of people who could not come up with $1000 could be 68% or 52%, as easily at 64%, the broader idea is the same. There is very little margin for error for the majority in country - the same as we've seen in previous pieces as the bifurcation of wealth and incomes continues.
  • A majority, or 64%, of Americans don't have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling, or NFCC, released on Wednesday.
  • Only 36% said they would tap their rainy day funds for an emergency. The rest of the 2,700 people polled said that they would have to go to other extremes to cover an unexpected expense, such as borrowing money or taking out a cash advance on a credit card.
  • "It's alarming," said Gail Cunningham, a spokeswoman for the Washington, DC-based non-profit. "For consumers who live paycheck to paycheck -- having spent tomorrow's money -- an unplanned expense can truly put them in financial distress," she noted.
  • Many respondents, 17%, said they would borrow money from friends or family. Another 17% said they would neglect other financial obligations -- like a credit card bill or mortgage payment -- in order to free up some funds.
  • Alternatively, 12% of the respondents said they would have to sell or pawn some assets to come up with $1,000 and 9% said they would need to take out a loan. Another 9% said they would get a cash advance from a credit card, according to the NFCC.
  • Cunningham finds that particularly troubling. Neglecting other debt obligations -- or worse piling on more debt -- "really exacerbates the problem," she said.
  • An earlier study by the same organization found that 30% of Americans have zero dollars in non-retirement savings. A separate study by the National Bureau of Economic Research found that 50% of Americans would struggle to come up with $2,000 in a pinch

John Embry: Fed & QE to Cause Financial Collapse & Hyperinflation

With gold breaking above the $1,800 level in overnight trading, today King World News interviewed John Embry, Chief Investment Strategist at the now $10 billion strong Sprott Asset Management. When asked about the action in gold Embry stated, “Well I think the action of gold is basically confirming what is happening in the real world. There has been a series of troubling events, beginning with the debt limit settlement, which everybody probably believed would be viewed bullishly and gold and silver would be hammered. When it was looked at closely it was a terrible agreement.

They just kicked the can down the road, they’ve done minimal spending cuts and they have given themselves another 15% on the debt limit, which is allegedly going to carry them through the election. On closer inspection, S&P decided we are going to downgrade the paper. Right there were two events that I would consider very gold friendly.” (more)

Stocks are about to form another ominous "death cross"

Two things should stick out at the reader upon perusing the chart below. First, inversely from top to bottom, what is rather disturbing is that the average trade block size in ES has tumbled over the past week, which we believe is indicative of the massive deleveraging hedge funds have been forced to undergo in order to not be torn to shreds by the massive volatility in the markets in the past 10 days. It also means that the marginal impact of a far smaller trade is proportionally higher than it would have been back in May when the average block size was at the highest for 2011, concurrent with NYSE margin debt and net leverage hitting fresh post-Lehman highs. As such it means that we should expect to see a 50 S&P point yoyo market for quite a bit or until such time as hedge funds relever once again, and take the marginal pressure off the momentum creating and chasing HFT machines. Another notable observation: the 50 DMA is about to drop below the 200 DMA. Another name for this phenomenon? The Death Cross. The last time this happened was back in July 2010, just weeks before the first occurrence of the Hindenburg Omen back in August 2010 which pushed the market to its lows for the year, which, among many other factors forced Bernanke to launch QE3 two weeks later. Is the Death Cross the precursor to a comparable chain of events this time around? We shall see as soon as August 26th.

In the meantime, for those wondering about the predictive power of the Death Cross, we refer to MarketWatch's Mark Hulbert who compiled the following table of market performance following the appearance of the technical formation:

His follow up commentary:

The market does tend to turn in below-average performances following death crosses; indeed, the differences in the table are significant at the 95% level that statisticians often use to determine if a pattern is genuine.

If I ended my analysis at this point, the data would point strongly in favor of interpreting the stock market's recent death cross as another strike against an already beleaguered market.

But, as Paul Harvey used to say, there's the rest of the story.

It turns out that the death cross has had a mediocre track record at best over the last two decades. To be sure, it's had some great recent successes -- such as the one that occurred in December 2007, very early in the 2007-2009 bear market. But there have been a number of other failures -- such as one that occurred in October 2005, in the middle of the 2002-2007 bull market.

Overall, in fact, there has been no statistically significant difference since 1990 between the average performance following death crosses and all other market sessions.

What has changed since 1990 to make this indicator less "predictive"?

LeBaron speculates that moving averages might have been sabotaged by too many investors trying to follow then.

Ownership of personal computers skyrocketed in the late 1980s and early 1990s, and coupled with cheap online databases, those PCs enabled a much larger group of investors than ever before to discover and quickly exploit the moving average. A dramatic lowering in transaction costs at about the same time made it much easier for investors to trade on signals generated by moving averages.

The bottom line? The weight you put on the stock market's recent death cross depends on whether you think the last two decades are a mere exception to the long-term rule -- or if, instead, you believe that something indeed has permanently changed.

Or, another way of saying it is that in the past 20 years, courtesy of the great moderation, none of the traditional indicators have worked as the one and only primary driver of market performance has been central planning in the form of cheap and relentless market liquidity.

Want to know what the market does tomorrow? Ask the Chairman (if you have access of course).

Everyone else may just take their yoyo odds to Vegas. The scenery is far better.

Value To Be Had In Europe: DEO, DFE, EPOL, EUFN, EWG, EWN, IEV, PLND, UL, VGK

While the United States debt downgrade certainly played a part in the recent market rout, the real culprit remains Europe's debt woes. Slowing growth, exploding public debts and austerity measures continue to put pressure on the already fragile economic situation there. Possible sovereign debt defaults from Portugal, Ireland, Italy, Greece and Spain are still a real threat plaguing the Eurozone. With that in mind, many investors have chosen to steer clear of the continent all together. However, accounting for more than a quarter of the world's market cap, investors shouldn't count Europe out completely. Long term bargains are beginning to emerge and skipping the continent completely ignores some of the planet's largest multinationals.

A Back-Stop for Bonds
Investors may not want to give up on European stocks. They may even want to add the region to a portfolio, given the recent weakness. The latest bailout package for Greece includes the 109 billion euros it needs to cover its fiscal deficit as well as extend the maturities on Greek debt from the average 7 ½ years to between 15 and 30. The plan essentially provides a way for Greece to restructure its debt and takes one PIIGS concern off the table. In addition, The European Financial Stability Facility has started its own QE program to buy the bonds of other troubled nations and extend credit to Italy, Portugal and Spain. The ECB also began an Irish consolidation program which accepts debt instruments backed by the Irish government as collateral against ECB loans.

Overall, European stocks have done pretty well this year, despite the debt problems. From the start of 2011 to the end of the second quarter, the broad-based the Vanguard MSCI Europe index (NYSE:VGK) has returned around 6%, beating the 4% return of the S&P 500. European stocks are cheaper too, with the MSCI Europe Index trading at just 11 times earnings. This is well below the historical P/E average of the low 20s. This is on top of European stocks trading below their historic price-to-book ratios. Finally, the VGK is still about 40% below its all time high reached in 2007, compared to about 10% for the S&P.

Finding This Value
About 23% of Europe's market cap lies within the financial sector or firms directly in the line of fire with regards to European sovereign debt and defaults. While Europe may not be completely out of the woods just yet, ignoring the region outright doesn't make sense. Pairing the iShares S&P Europe 350 Index (NYSE:IEV) and shorting iShares MSCI Europe Financials Index (Nasdaq:EUFN) could give a portfolio a net effect. However, there are ways to get more tactical with ones European exposure.

Poland offers investors a chance to participate in the future of Europe. The emerging nation has benefited from its strong consumer base and ties with Germany. In addition, Poland is not burdened by the euro currency and can adjust its monetary policies at will. Both the iShares MSCI Poland Index (Nasdaq:EPOL) and Market Vectors Poland ETF (Nasdaq:PLND) allow investors to tap into this dynamic nation.

The Currency Angle
Despite rising in recent months, the weak euro has benefited the region. Major exporting European nations such as Germany and the Netherlands have profited from the weaker currency. By focusing on these export-based economies, investors can tap into that growth. The iShares MSCI Netherlands (NYSE:EWN) and iShares MSCI Germany (NYSE:EWG) can provide access to this theme.

Finally, with the potential of slow growth ahead, dividends in Europe matter just as much as they do in the United States. Strong multinational dividend payers such as spirits maker Diageo (NYSE:DEO) or consumer products firm Unilever (NYSE:UL) could be exactly what a portfolio needs. The dividend focused WisdomTree Europe Small Cap Dividend (NYSE:DFE) can also be used as a leveraged play on Europe's recovery.

The Bottom Line
While the debt crisis in Europe continues play on, many investors are missing some of the real long term values within the European economy. The recent market rout has giving investors a chance to purchase some of these values at cheaper prices. Adding a dose of the stronger European countries or multinational firms could do a portfolio a world of good.

Be Bold! Buy These Bank Stocks Now - Investment Ideas: RY, TD, UMBF

Bank stocks around the globe have taken a dive in the last 2 weeks as gloom and doom dominates the headlines.

But instead of cowering in fear, it's time to take action.

Not all banks are created the same. It's time to look beyond the headlines to find the hidden gems.

2011 = 2008?

Just like in 2008, there are rumors going around the globe that certain large international banks may need capital and/or be close to going under. Whether or not these rumors are true is not really relevant, because true or not, it is putting the "fear" trade back into the financial sector. And fear is what is moving the bank stocks right now.

As European banking stocks get hit especially hard, we're again hearing talk of a ban on short selling of the financial stocks. The "too big to fail" large cap banks in the United States, like Bank of America and Citigroup, have also seen their shares hit new 52-week lows in recent sessions. A lot of this sounds like 2008 all over again.

But before you dismiss the banking stocks as too much of a mess to touch, remember that there are a whole host of banks that survived the 2008 financial crisis relatively unscathed and are likely to do so again in 2011.

These banks are being lumped in with all the others. It's guilt by association. But smart investors know to dig deeper to discover those companies that are being sold off for the wrong reasons.

The bank stocks are part of the emotional sell-off but investors should really take another look.

3 Banks to Buy Right Now

1. Royal Bank of Canada
2. Toronto Dominion
3. UMB Financial

All 3 of these banks have seen their share prices hit hard. That has created a buying opportunity.

In the last 3 months, shares have fallen by the double digits- with most of the decline occurring in the last 2 weeks.

1. Royal Bank of Canada down 14.3%
2. Toronto Dominion down 10.4%
3. UMB Financial down 11.6%

They Never Drastically Cut Their Dividends in 2008/2009

If you're still a little queasy about jumping in given the volatility (and with memories of Bear Stearns and Wachovia in your head), keep in mind that not only did these three banks survive 2008, they thrived.

Only Royal Bank of Canada cut its dividend during the financial crisis but it was not by a large percentage. The dividend payment has since resumed its upward trajectory and has easily surpassed the 2008-2009 levels. Neither Toronto Dominion or UMB Financial cut their dividend at all during the crisis.

That is impressive because many of their peers either cut the dividend to the bone or eliminated it altogether. Many have not even resumed paying a dividend.

Their current dividend yields are also very attractive:

1. Royal Bank of Canada: yield of 4.4%
2. Toronto Dominion: yield of 3.6%
3. UMB Financial: yield of 2.0%

Double Digit Earnings Growth Expected

While some banks are struggling, these three are not. All three have low P/Es and analysts expect double digit earnings growth in 2011.

1. Royal Bank of Canada (RY) is Canada's largest bank as measured by assets and market cap. It provides both personal and commercial banking, wealth management and investment banking services in 58 countries.

It reported record net income in the first quarter of 2011 and will report second quarter results on Aug 26.

Forward P/E: 10.5
Expected fiscal 2011 Earnings Growth: 32.5%
Zacks #3 Rank (hold)

2. Toronto-Dominion Bank (TD) is the 6th largest bank in North America. It provides Canadian and U.S. personal and commercial banking, wealth management, and wholesale banking.

Net income rose 18% year over year in the fiscal second quarter. The bank will report third quarter results on Sep 1.

Forward P/E: 10.4
Expected fiscal 2011 Earnings Growth: 22%
Zacks #2 Rank (buy)

3. UMB Financial (UMBF) is a financial services company headquartered in Kansas City. It operates in 7 states and offers banking and asset management services, such as mutual funds.

The company saw record total revenue in its second quarter due to strength in its fee business. It also saw average total deposits rise 14.9% year over year.

Forward P/E: 12.9
Expected 2011 Earnings Growth: 22%
Zacks #3 Rank (hold)

Be Bold!

Not every bank is scary but stock investors are acting like they are as they sell the sector off en mass. Use this sell off as a buying opportunity to pick up high quality names on the cheap. And you'll even get some great dividend yields too.

This time, US fears a financial crisis from abroad

Three years ago, a financial crisis triggered by bad mortgage investments spread from U.S. banks to Europe. Panicky financial markets tanked.

Now, fear is running in the opposite direction. Worries about toxic government debt held by European banks have hammered U.S. stocks and threaten to freeze credit on both sides of the Atlantic.

And traders are wondering: Could Europe's government-debt crisis spread through the U.S. financial system?

No one's sure because no one knows how much toxic debt European banks hold -- or how much risk that debt poses to U.S. banks. But investors are worried.

The 2008 financial crisis left countries like Greece, Ireland and Portugal holding huge debts. The three have required bailouts from the European Union and the International Monetary Fund totaling $520 billion. Italy and Spain, which are much bigger economies, might need bailouts, too.

As the crisis has intensified, Spanish and Italian interest rates have surged. Escalating rates could throw their economies back into recession -- which would worsen their debt loads. This week, the European Central Bank started buying Italian and Spanish debt to try to drive rates back down.

Should Italy or Spain default, European banks that hold their bonds would suffer. Wall Street's fear is that the contagion would imperil U.S. banks that do business with those European banks.

French banks, with huge amounts of Italian and Greek government debt, are especially vulnerable. Shares in Societe Generale, France's No. 2 bank, plunged nearly 15 percent Wednesday on rumors it was teetering under the weight of debts tied to troubled Eurozone economies. The bank rejected the rumors as unfounded.

French regulators on Thursday banned short-selling of bank and insurance company stocks, preventing speculators from betting against them and driving their prices down when rumors flare. Societe Generale's stock recovered 3.7 percent Thursday. But most other European banks fell sharply. (more)

Certificates of Confiscation; Japanese Bonds vs. U.S. Treasuries

In response to US Treasury Bull Market Not Over; Record Low Yields; Shades of Japan; Why QE3 Totally Useless my friend "BC" has some opinions I would like to share.

Japanese Bonds vs. U.S. Treasuries

click on chart for sharper image

The self-similar secular pattern implies the 10-yr. yield well below 2%, and perhaps below 1.5% along the way, which would imply a trend nominal GDP in the 1% range and core CPI falling to around 0% or negative during a global deflationary contraction.

Further, this implies that corporate top line revenue growth will be virtually non-existent and not even as fast as depreciation, discouraging growth of investment and payrolls, and encouraging further large-scale firings and mass consolidation of capacity across sectors.

The flattening of the yield curve will squeeze further the net margins of banks and ROA and ROI of insurers and non-bank financial firms, discouraging lending and risk taking. Banks could see their net margin fall from 3% to 1%, which will be below what is likely to be the charge-offs against loans.

With the yield curve so flat, low net margin, and high charge-offs, banks will benefit very little, if at all, from further Fed printing with little or no net capital gain margins left to capture from selling assets to the Fed. This is among several factors that will result in bank loans converging with the monetary base over time, and banks' cash and securities holdings converging with loans during the period, which is what should occur in any event, were fractional reserving not to exist and banks be required to lend "their own money" (or that of their shareholders).

However, once this next cycle for yields resolves, despite the prospects for the 10-yr. yield to average in the 2% area for the most of the decade, US government debt will effectively become "certificates of confiscation".
"BC" is essentially discussing the likelihood for another "lost decade" just as Japan experienced.

If so, expect low interest rates and poor economic growth for close to another decade. Also expect the US will flirt with recession and deflation on and off during the same period. Most do not give credence to deflation at all, even though the US is clearly back in it.

“The Euro is Going to Fall Fast” – Lindsey Williams

“The Euro is going to fall first. I was told that it will be one European country after the other will default until the Euro and the European Union are in such a collapsed position that they’ll have no choice but to render the Euro worthless. At that point you have some where in the matter of days, not months, maybe weeks, but not months. You have only a matter of days to get out of every piece of paper you’ve got. I’m talking about Federal Reserve notes, I’m talking about Treasury Bills, I’m speaking of your retirement, your 401K, your IRA. But of course you can’t get out that quickly so you’re going to lose it, and they know this, you have a matter of days.”
– Pastor Lindsey Williams