July 26th, 2010 
Category: 
European Union stress test results came out positive last week. Only 7 out of 91 banks tested need to raise 3.5 billion Euros of new capital. The threshold used was 6% of tier1 capital ratio in the event of a recession or a sovereign debt crisis. Had the tier1 ratio been 7%, 24 banks would have failed the test. Was the test too soft?
European regulators seem to have dismissed the idea of a national default since the test ignored the majority of bank’s holdings of sovereign debt. The stress test only took into account potential losses on government bonds banks trade rather than those being held until maturity. While some analysts view the tests as too soft, some central bank members boasted about the strength of the European banking sector. Are the stress tests results really behind us or will investors come back to it as an excuse for a pull back?
Hungary stepped into the spotlight last week. On Friday two rating agencies threatened to downgrade Hungary’s sovereign debt following its rejection of IMF austerity measures. Could Hungary be viewed as a mini-Greece for worries?
The markets are enjoying a ride on the back of excellent earnings till now. It will take more good news in order for them to break higher. The earnings from biggies such as BP, Boeing, Chevron, Exxon Mobil, Sony and others will set the pace of the coming week. However, global fundamentals remain weak: We have not seen any major improvement in jobs, construction or spending. I wonder if the glow of earnings will fade after the reporting season ends.
My DIY stock portfolio is overweight in Canadian oil producers for a reason. I believe Oil consumption is on the path of growth for the next decade and I intend to take every advantage possible of it:
Hey Mich – I read that article as well. Like the article referenced, it’s not a “test” if almost everyone passes. I wish university was like that… *Sigh*.
I know you’re a fan of big oil and gas…so regardless of the consumer sector, people always want to drive their cars and air condition their homes. You’re in a good sector my friend. I need to get more into that myself!
Where do you think the Dow will finish at year-end?
Hi FC,
Unless humanity is able to switch off consumption of oil and gas, I feel pretty safe in this sector. Any drops in price are to be considered buying opportunities if your bet is against doom and gloom. I really need to post about why I like to invest in the energy sector on top of it being a personal favorite.
I am hoping the DOW will be higher at year’s end, but who am I to know. In fact is I don’t believe anyone does. What I see in the very short term is a strengthening market if the earnings parade keeps on topping expectations. Following that, the earnings glow might fade if global economic indicators don’t show any improvement. That’s as far as I go in guessing.
Yeah, who knows where the DOW will be this Christmas, but I can’t see it moving too much higher. Again, who could know?
Yes, I would like to read about your favourite sector. I’m partial to the financials because if banks and lifecos aren’t making any cash, nobody else is either. That doesn’t mean I don’t/shouldn’t/haven’t diversified.
BTW – I’ve been looking DAY. Solid. Might be a good one for the TFSA in 2011 even though I lose the dividend tax credit in there. DAY is fighting it out for my affection between JE.UN and a few others that will convert in 2011.
Regulatory regime uncertainty is one reason why companies and people are sitting tight. If you don’t know if taxes will rise, if a tax will be placed on banking, if a cap & trade bill will pass, well… it lends to a lot of uncertainty in the environment. When people are uncertain, they spend less and flee to cash.
I think some people’s propensity to be frugal doesn’t last forever, and everywhere, people want to live a higher life and consume more. People in China want to own cars, drive, and eat meat. This is all going to drive up commodities unless you’re a complete doom & gloomer
You are absolutely right Kevin, all of this unusual uncertainty is temporary. You mentioned people from China, add to that the middle east and India amongst other growing economies and you get a recipe for global growth in the making!
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