Today U.S. futures are mostly lower, with the Dow Jones Industrials set to open marginally higher and the only one of the main three indices in the green. This follows Asia and Europe lower, which fell on economic data and concerns about what the EU will do about the Greek Bailout moving forward. Once again the bailout is creeping back into the news flow and just when the market had been able to put that on a backburner. Due to that and recent news we will take a look at the EU banks today and briefly describe why investors need to stay away.
The market hit multi-year highs yesterday before backing off, and that is something that investors need to pay attention to moving forward. This market rally has been strong, and although we believe it is still intact, we may see a pullback to consolidate. We are still bullish though and would buy on weakness.
We have our first set of economic news out today, and it is as follows (data set - consensus):
- MBA Mortgage Index - N/A
- Existing Home Sales - 4.55M
- Crude Inventories - N/A
- FOMC Minutes - N/A
Looking at Asian markets we see markets are lower:
- All Ordinaries - down 0.17%
- Shanghai Composite - down 0.50%
- Nikkei 225 - down 0.27%
- NZSE 50 - down 0.80%
- Seoul Composite - down 0.41%
In Europe markets are lower:
- CAC 40 - down 0.60%
- DAX - down 0.68%
- FTSE 100 - down 0.92%
- OSE - down 0.75%
Last night Dell (DELL) cut their full year earnings outlook which really is not a surprise when one looks at all the issues that the company has had in recent years. Investors pushed the shares down by 5% in the after hours trading session and that weakness will carry over into today's trading session and could cause issues for peers and some suppliers. Dell's earnings continue a trend we have been seeing where commoditized tech is having growth issues and the new tech, which helps better run these commoditized products, supplies the real growth.
We are bearish of Dell and Hewlett-Packard (HPQ) over the next 6-12 months due to growth concerns and costs to reorganize their business, even with a new operating system coming out. It is our belief that if you want exposure to this area that one would be better served purchasing IBM (IBM) and Microsoft (MSFT) which would be better plays as IBM is leveraged to the higher margin hardware and consulting and Microsoft will benefit from their Windows 8 release later this year. Trying to invest in an actual computer manufacturer seems a fool's game to us these days.
European banks have continued to underperform U.S. financials, but to us this is no surprise as the eurozone continues to face headwinds moving forward. Outside of Germany and France nearly the entire European continent that uses the euro currency is contracting, and the last numbers we saw had France at zero growth. That is a pretty bleak situation and provides little hope for the banks to increase lending and profits. That points out the operating environment, but there continues to be headline risk with the LIBOR scandal and now numerous institutions being investigated by the U.S. government for skirting sanctions with Iran. The Royal Bank of Scotland (RBS) is the latest bank being looked into by the U.S. with potential ties to Iran according to the Financial Times. This comes on the heels of Standard Charter's settlement and would in fact be RBS's 2nd such case, if they are indeed found to have conducted business in violation of the sanctions, in as many years for the company. They paid half a billion dollars to settle a case in 2010 which resulted from a large acquisition the company did.
Our view is to stay clear of European banks at these levels as there are rumors that more institutions are coming under scrutiny and these are the healthier banks which are most attractive to investors … the rest you have to steer clear of simply based on operating results or macro news. One would do far better in JP Morgan Chase (JPM) which is the best franchise in the U.S. and some of the regional banking franchises which we have discussed in the past.