Will Europe’s Stress Tests Boost Confidence?
Before European regulators released the results of the
banking "stress tests", which were designed to test whether Euro-zone banks
were healthy enough to withstand economic shocks, Goldman Sachs (NYSE:GS)
estimated that European banks probably needed to raise somewhere in the
neighborhood of 38 billion euros to shore up their balance sheets and offset
non-performing loans.
Barclay's went for a much more expensive neighborhood, at 85
billion euros.
So it might have seemed like good news when European bank
regulators announced that only 7 of the 98 banks that received stress tests
came up with failing grades. What's more, it would only take 3.5 billion
euros to change those "Fs" to "Ds" or "Cs".
It sure looks as though European banks were not as bad off
as we thought...
As I wroteon
Friday, the stress tests that the U.S. Treasury conducted last year was more
about giving investors confidence than truly exposing any vulnerabilities. No
big U.S. banks failed. But
still, Geithner forced U.S. banks to raise
$75 billion to improve their balance sheets. You know, just in case…
It should be noted that the U.S. stress tests used benchmarks of 6%
and 4% Tier 1 capital under a variety of scenarios. In other words, the
Treasury asked "will U.S. banks be able
to maintain 4% Tier 1 capital if mortgage defaults rise?" (Please note:
That's just an example, not meant to reveal actual stress test question.)
In the U.S., at 6% Tier 1 Capital, no banks
failed. At 4%, 10 of the 19 banks tested failed. That's why Geithner made
them raise cash.
The European stress tests used no such Tier 1 capital
requirements. Many analysts are saying the tests were too
soft.
But the ultimate question now is: will the European bank
stress tests give investors confidence that those banks are in good shape?
Fortunately, we don't have to conduct a poll to find out the
answer. We can simply consult the ultimate barometer of investor sentiment:
the stock price.
This morning, most European banks are higher, with the
notable exception of Deutsche Bank (NYSE:DB).
Will the Euro-zone banks continue to rally? Let's hope
so…
My favoriteeconomist, Morgan Stanley's Stephen Roach, says global growth will
average 3.25%-3.5% for the next 3-5 years. I expect most investors would take
that level of growth.
BP (NYSE:BP)has
apparently capped the leaking oil well in the Gulf of Mexico and Tropical Storm Bonnie has deteriorated into a strong wind. And yet
oil prices are off only slightly in the pre-market.
You know what I think: oil is becoming increasingly
impervious to downside catalysts and increasingly sensitive to upside
catalysts. Short of a serious downturn for the global economy, oil prices are
headed higher.
We get Big Oil earnings this week. But I'm looking forward
to next week, when the smaller oil E&Ps working the Bakken oil pool
report.
My favorite Bakken play has had earnings estimates raised
three times in the last month. And the stock price has barely budged. I think
earnings estimates are still too low.
This company has greatly accelerated its drilling program.
That's lifted production from previous estimates of 6,500 boepd (barrels of
oil equivalent per day) to 7,000 to 7,5000 boepd.
Given that this company has some of the highest production
rates of any company operating in the Bakken, I'm expecting an earnings
blowout.
And with a forward P/E of 16, I think a big move is
coming.
For more on my top Bakken stocks, click
HERE.
Daily Profitreaders
should also note that shipping rates are improving as steel and iron ore
prices are moving up in anticipation of renewed demand for steel from
China.
We've already watched copper prices rally on expectations of
demand from China.
I'm starting to see signs that Chinese stocks listed
on U.S. exchanges are
starting to move. Chinese stocks will be a big winner if the nascent
earnings-based rally picks up steam.
The IPOmarket has
been heating up this year, even with stock market volatility lately
resurfacing after a nice ride up last year. During the first two quarters of
2010 already 66 companies have gone public compared to only 14 in the first
two quarters of 2009.
Take a good look at the graphic below. The IPO market in
late 2008 and early 2009 was dismal. Little surprise there. But then notice
the nice uptick since then. It's not the hey-day of the dot.com boom or even
just a few years ago, but there's life in the IPO market these days. And that
probably has you asking whether you should take a crack at
it.
Chart link: http://img.bfpublishing.com/sci7.6.PNG
After all, who can forget the excitement around Visa's
(NYSE:V) IPO back in early 2008? Or Google (Nasdaq:GOOG) or MasterCard
(NYSE:MA)? And of course for those of us investing back during the 1990's
dot.com boom it seemed like you couldn't pick up the business section of the
newspaper (we read those back then) and not come across another 20-something
who's company just IPO'd and investors were driving the stock's price higher.
It's tempting to want to get in on the action before the
crowd. And IPOs have that allure that you're there before everyone else. Well
almost everyone, after the founders, the employees, the underwriting banks,
the counter parties, and the litany of others all holding claim to a set
strike price for that stock.
For my Small Cap Investor Daily
readers I recently wrote a couple articles on how to avoid the pitfalls
naturally inherent with IPO investing. After a few requests from readers,
I've put them together into a new special report for Daily Profit readers, cleverly called, "Dos and Don'ts of
IPO Investing". It's completely free.
As always, thanks
for all of your comments, and please keep them coming:dailyprofit@wyattresearch.com
