Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Systemic Risks Continue to Build
Europe’s escalating fiscal problems had stock bulls second-guessing their resolve this week. Italy’s bad debts, as we’ve mentioned here before, are rising fast, and are now up a little over 21.0% on a year-over-year basis. Spain, in an effort to spur growth, announced that it would be “taxing” its bank depositors at a rate of 0.03%, and Portugal’s second largest lender, Banco Espirito Santo SA, “missed a few” of its short-term debt payments. Whether those events were related to the drop in May industrial production numbers in the U.K., Germany, and France, or China’s disappointing export growth for June is not entirely certain. But if growth in Europe is hitting the skids, and bills (debt payments) are not being paid, then one can at least make a loose connection between the two.
Of course stock bulls made every attempt to treat these events as isolated incidents – as they have over the last several months – turning any pricing setback into a buying opportunity. But their efforts were to no avail. US stocks held to their losses this week, favoring the bears as we head into second-quarter earnings season. Safe havens such as Treasuries and precious metals witnessed another round of steady gains.
It’s worth mentioning at this point that the US, though perceived to be immune to the civil and/or financial unrest abroad, is now beginning to witness some not-so-small problems of its own. Bulls beware. I’m referring to what’s commonly called the “repo” market, in which the delivery of Treasury securities, used predominantly as collateral within lending agreements, play a key role. Failures to deliver such securities has accelerated this year to an average rate of $65.6 billion per week (which exceeds all of 2012 and 2013 combined), reaching as high as $197.0 billion for the week ending June 18th. Think Bear Stearns and Lehman Brothers. The same types of issues preceded their meltdowns – except that, in dollar terms, the problems are now infinitely larger in scope.
It will be interesting to see what impact US corporate earnings have on the market next week. Of the 133 companies that have so far preannounced earnings, 97 have been negative and only 24 positive. Banking and retail should be in focus this quarter for obvious reasons. However, if they disappoint, as expected, it would be no surprise to see the results ignored by the leveraged speculators chasing tech names. But at 15.7x expected earnings, the S&P 500 is trading at its highest multiple since just before the 2008 crisis. From a valuation perspective, it may already be a foregone conclusion that we’ve seen the best from stocks.
VP Investment Management