Below 6/16 inter day low: DJIA -3.4%, NASDAQ -4.12%, S&P 500 -3.6%
Deutsche Bank -17.5%, Credit Suisse Bank – 16.16%, BNP.PA -17.4%
NEW LOW: 10 year T-bond 1.57%
Japan -7.9%, China -3%, DAX -6.8%, Russia -5.1% Emerging Markets-5.8%, Oil-2.9%
Gold $1,321 +58.10
Pound -11% lowest level in 35 years
To blame: Brexit? WRONG! Read below:
There appears to be a dichotomy between US stock markets and world markets, as US markets are close to a new high, while foreign markets are closer to new lows. Also, US Treasury bond yields are at new lows. What does this mean? Trouble! Investors are leaving stock markets worldwide and buying US treasuries as fast as they can. Also troubling markets is a recently US jobs report and 38,000 which is the lowest since 2010 and a possible exit of Britain from the common market to be voted on June 23. Our Federal Reserve will probably not raise interest rates this week because of worries in China, Europe, and Japan. Most troubling to me, are European banks. Most Bears think next problem that will sink the markets will be China and its precarious situation with dubious loans. However, I believe the problem that will finally sinks the markets, may come out of European banks. Once again as in 2008, the problem may lie with too many derivatives. It is estimated Deutsches Bank alone has $75 trillion in potential derivative exposure. That is 20 times larger than the GDP of the entire German economy. HSBC bank is not far behind with large derivative exposure. Too big to fail is now called Strategically Important Financial Institutions, (or SIFI’s). A recent article from INVESTOPEDIA, it is estimated that European SIFI’s banks have more derivatives than the GDP of the entire world economy.
Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid to allow the banks to own $500 trillion in derivatives, let six banks control 70% of the US assets (too big to fail) and allow all the economic growth to go to the 1%, while eighty people own 50% of the world’s wealth? NAH!
We are not done dodging bullets! As reported by Reuters news, the judge refused to throw out a private lawsuit accusing the 14 banks of rigging an interest rate benchmark (ISDAfix) used in the $553 trillion derivatives markets. That’s right folks, I said the $553 trillion derivative markets. That dwarfs the problem of derivatives 2008, which almost brought the banks to their demise. The Credit Suisse bank has announced a 6000 employee layoff. J.P. Morgan is doubling its reserve oil loan losses $1.3 billion. I do not believe this is nearly enough. However it does give an indication of the changing landscape of the way the public is looking at loan losses from energy-related companies. The news is out. The banks the United States, China and in Europe are holding billions of dollars of loans that will probably default. US Banks have built up their assets due to differential between low interest rates and the rates they can charge the public. As I have said in previous market letters, “Banks have built up their assets on the backs of the middle class. In cooperation with the Federal Reserve, Interest rates are at virtually at zero, penalizing savers and retirees and weakening the middle class as banks make huge profits from consumers who pay high rates on credit cards and small businesses on loans. Because banks can borrow at almost nothing, whatever they charge above zero is pure profit. Auto and mortgage rates are 3% or 4%,( there are $1 trillion of subprime auto loans), industrial loans are between eight and 12% (growth down 11% this year ) and credit cards are anywhere from 15% to 29%.This is high-way robbery and this is weakening middle-class consumers, small businesses and retirees, with the result, as I have said many times, ‘All boats will sink!” This loan reevaluation by J.P. Morgan is just the tip of the iceberg. World wide, Russia is bailing out its national banks as it severely reduces it reserves and Brazil and Venezuelan are facing financial collapse!
My ‘canary in the mine’ In my opinion remains Deutsches Bank at $14.43 today (52 week low 14.78), down from a recent high of $19.50 per share in April, (down 70% in the last 2 years). The Wall Street Journal has reported that “When Donald Trump needs a loan, he chooses Deutsches Bank.” While most big banks have shunned Donald Trump the Deutsches Bank has been a steadfast financial backer of the Republican presidential candidate. Just one more reason to mistrust their judgment. In addition to the above Deutsches Bank is facing a class action lawsuit. There shares are now selling below BOOK VALUE! Watch out below!
STILL Problems still in China. The Federal Reserve chair Yellen, has called for a more cautious forecast for the economy and therefore it appears that any additional interest rate increase will be delayed. The markets loved it, as treasury yields dropped and stocks rose. Yellen appears to be worried about the world economies especially China, where debt has gotten out of hand at 2.5% of GDP. Of course, China’s premier Lie Kegiaing has said publicly that China’s growth rate is secure. In reaction, Pen Am securities announced that the government is relaxing its decree against short selling. Since then, the, Chinese stocks have fallen. The continued weakness of China is the unknown factor. China is a controlled society, socially and economically. One third of its industry’s is directly government controlled, with the rest under the threat of the direct control. For instance, the person in charge of regulating the Chinese stock market Xiao Ganghas, has just been fired. He is being blamed for the 40% drop in the Chinese stock market and criticized the People’s Bank of China when they said that they would let banks sell trouble loans to investors. Moody’s and S&P have cut China’s credit rating to negative over debt concerns. The People’s Bank of China has warned that lending to corporations is on the high side, compared with the overall size of the Chinese economy. China’s corporate debt has been on a spending binge. I believe this is unsustainable and the reported growth of China is unreliable.
China’s total debt now stands at 2.5 years of GDP. As stated above, Moody’s and now S&P have changed the ratings on Chinese government bonds from neutral to negative. In addition there is a warning about the viability of China’s credit rating. China has been decreasing its bank reserve requirements five times in a row. Government debt is now 40% of GDP up from 32% and foretasted to rise to 43% of GDP. (as above total China’s total debt now stands at 2.5 years of GDP.) Foreign-exchange reserves are down $1 billion. Cash outflows are estimated to be about $1 trillion as Chinese investors scurry away from their homeland. China continues to be a continued problem in world markets. Their growth rate of 6% is being questioned. China’s three largest state banks reported no earnings growth and big jumps of 40% in nonperforming loans. this has the potential for a full blown world wide crisis. Is the breakdown of their economy, an indication that the worldwide economy will start to break down?
My forecasts for 2016 call for the Dow Jones Industrial average to be as low as 14,688 to 12,000, the NASDAQ to be as low as 4,000 to 3,000 and the S&P 500 to be as low as 1,560 to 1,400 because (See previous market letters)
| Current 6/24/16
1:00 PM EST
|Foretasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market||Bear Market||Bear Market|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||18,028||5,156||2,110|
|Short Term Down (Support)||16,865/15,845/15,484||4,468/4,267/ 4,209||1,978/1850/1829|
|Int. Term Up (Resistance)||18,352||5,231||2,131|
|Int. Term Down (Support)||/15,370 /14,688/ 13,377||3,986/3294||1,560|
|Long Term Up (Resistance)||18,352||5,231||2,134|
|Long Term Down Fibonacci Support||50%12,000
2008 LOW 6,627
2008 LOW 1,204
2008 LOW 666
|10 Treasury NEW LOWNow1.53%||Gold 1,316||Oil 26.59 low Now 46.56|
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Carl does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Carl , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com