First up was Deutsche Bank (DB), the biggest bank in the biggest European economy. The German institution said late yesterday that it would lose a whopping 6.2 billion euros ($7 billion) in the third quarter after accounting for several large charges.
They include write-downs in its investment banking division and its Postbank retail banking unit, which it wants to sell. It also lowered the carrying value of its 20% stake in a Chinese bank, and added a hefty 1.2 billion euros ($1.4 billion) to its litigation reserves. Finally, DB said it may eliminate its 2015 dividend of 0.75 euros (84 cents) per share.
Then the Financial Times reported that Credit Suisse (CS) will be forced to hit shareholders up for as much as 5 billion Swiss francs ($5.2 billion) in new money. The capital raise would cover restructuring costs, losses in certain business operations, and demands from regulators that the bank increase its financial cushion against risk.
According to the Times, new Chief Executive Officer Tidjane Thiam wants to reduce the company’s focus on volatile investment banking. Instead, he’s looking to expand private banking operations and the bank’s presence in China and other Asian markets. The funds will help cover those strategic shifts and increase the bank’s equity tier one capital ratio from its current 10.3 percent.
|Credit Suisse CEO Tidjane Thiam wants to revamp the Swiss-based bank.|
The U.S. mega-banks haven’t reported quarterly earnings yet. But these early reports out of Europe suggest profit pressures are building.
Everything from increased regulatory scrutiny and lousy capital markets to weak overseas growth and low profit margins in core lending businesses could result in some ugly numbers. That, in turn, likely helps explain why financial stocks continue to trade poorly relative to stocks in other sectors.
My advice: Continue to stay away from most bank, broker and insurance shares. Or better yet, use rallies to add inverse ETFs or put options that target vulnerable financial stocks.
That’s a strategy I’ve been using in my Interest Rate Speculator service, and it paid off in the recent market swoon.
|“Stay away from most bank, broker and insurance shares.”|
So what do you think? Are Deutsche Bank and Credit Suisse two huge canaries in the coal mine for the financial sector? Or are these one-off (two-off?) events? Do you expect to see similar problems when U.S. mega-banks report earnings soon? Are there any stocks in the sector you really like … or hate? Let me know over at the Money and Markets website.
Meanwhile, several of you recently commented on whether earnings warnings in other sectors are a major negative for stocks or a signal about the state of the economy.
Reader Tico C. said the real economy still doesn’t matter to markets in an era of free money: “It’s interesting to list all of the economic reality, but as last Friday proved, the markets love bad news to crush any Fed interest rate hike speculation. Goldman Sachs announcing no rate hikes until 2017 really helped. So recessions/depressions mean little as long as the free money keeps flowing.”
But Reader Vic said the recent weakness in stocks is sending out a warning sign on the economy: “For more than 45 years I have watched the Dow predict six months into the future with pretty good accuracy. I think it has been predicting lower earnings and a weaker economy in late first quarter or early second quarter next year.”
As for how things look on Main Street, two readers offered different takes on the outlook – one bearish, one bullish.
Reader Jay said: “I sell products for several high tech companies and all of them are having a down year. In one product line, sales are off 30 to 35 percent so far this year, and I have heard from the competition that their sales are no better. They are laying off staff and tightening up spending.
“It seems that there are less customers buying this year, so stress in the sales staff is up. Management sees it as a short-term issue. However, I see that next year the economy will be down even more. For years now, China sales have helped management make the numbers for the year, but not this year.”
On the other hand, Reader MJT said: “For the past 25 years, I’ve worked in the manufacturing sector marketing and selling factory automation systems to large manufacturing firms. I weathered the 2008-2010 downturn by the skin of my teeth. Business fell off the edge during those years as everyone pulled back capital spending.
“Currently, however, business is strong. Our order book is in excellent condition and the backlog is growing. Of course, the capital spending faucet can be turned off at any time. But so far, so good. I don’t see the same factors at play here that were creating some of the turmoil in 2008. Overall, I’m cautious, but not in panic mode.”
I really appreciate the on-the-ground insights, and the observations on the market. As I’ve said, I believe we may be at a significant economic and market turning point – from expansion to weakness, and bull to bear. Each new piece of data will help show whether I’m on the right track or not. But the earnings outlooks certainly seem to support the bear case.
Whether you agree or disagree, I’d love to hear from you if you haven’t weighed in already. So go ahead and use this link to comment if you have a minute.
The proxy fight between Russia and the U.S. is continuing in Syria. Russia is openly backing Syrian leader Bashar al-Assad through cruise missile and airplane attacks on rebel forces, including some on the very same anti-ISIS forces the U.S. has been supporting. Will the situation spiral out of control? That remains to be seen.
The computer company Dell and a private equity firm may buy the storage technology and software firm EMC (EMC) for as much as $50 billion. EMC has performed relatively poorly amid stiff competition in the storage industry, and has been under pressure from the activist investment firm Elliott Management to boost shareholder returns.
The FIFA soccer organization has suspended embattled president Sepp Blatter for 90 days amid an ongoing corruption investigation by Swiss officials. A handful of other FIFA executives were also sanctioned.
Lastly, the Chicago Cubs beat the Pittsburgh Pirates 4-0 thanks to strong pitching from Jake Arrieta and a two-run home by the rookie Kyle Schwarber. They will now face the rival St. Louis Cardinals in a five-game series that starts tomorrow.
Will the corruption at FIFA ever end? Do the massive losses at Deutsche Bank prove the European banking sector is sick? What do you think about how Russia is thumbing its nose at the U.S.? Hit up the website and share your thoughts.
Until next time,