The big news yesterday: Fitch Ratings service comes out and issues a warning for U.S. banks. Fitch may lower its credit ratings of the large U.S. banks if the eurozone debt crisis is not resolved. U.S. bank stocks got hit hard on the news. Bank of America Corporation (NYSE/BAC) stock now trades at $5.90 (I wrote months ago that I wouldn’t touch this stock).
The problem countries in the eurozone are Ireland, Portugal, Greece, Spain and Italy. All these countries have a very high national debt to GDP ratio. Italy is of the biggest concern, as it is the third largest economy in the eurozone after Germany and France.
According to Fitch, the direct eurozone debt exposure to the big American banks, being JPMorgan Chase & Co. (NYSE/JPM), Bank of America, The Goldman Sachs Group, Inc. (NYSE/GS), Wells Fargo & Company (NYSE/WFC) and Morgan Stanley (NYSE/MS), is $50.0 billion.
So far, the eurozone crisis has claimed the governments of Greece and Italy. The shares of the big French banks are dropping like a rock because of their exposure to Italian-government-issued bonds. It’s a “pyramid effect” mess in the eurozone.
Here’s my prediction on how this will play out:
The European Central Bank (ECB) will come to the rescue and buy the bonds of the troubled eurozone countries just as the U.S. Federal Reserve purchased the debt of the U.S. government. To accomplish this, the ECB will need to print more euros. (Anyone say “inflation?”)
In the event the ECB does not bail out the troubled eurozone countries (the majority of eurozone countries will need to approve this action), the U.S. government will come to the aid of big American banks whose financial stability is jeopardized by eurozone country bond defaults.
Falling Chinese real estate prices are becoming a big concern…and the after-effect could reach America.
Sixty-six million people live in Beijing, Shanghai, Guangzhou and Shenzhen and these four big cities are seeing the price of homes softening. Chinese real estate prices could fall as much as 20% to 30% next year in these cities, according to a story in Beijing Business Today.
As you may recall, the Chinese government, fearing speculation in the Chinese real estate market, raised home down payment requirements and mortgage rates in April to cool the housing market. These steps may have gone too far, cooling the Chinese real estate market too quickly.
As China’s economy has grown so fast, as the country has become a big world-buyer of materials related to home building, materials companies have looked at exports to China as an offset to the pathetic American new home construction market.
A slowdown in the Chinese real estate market would have severe global ramifications, possibly causing more damage to the U.S. economy than the eurozone crisis. We are watching this developing story closely for our readers.
Where the Market Stands; Where it’s Headed:
The S&P 500 is trading at 12.9 times our conservative estimated earnings for 2012. Over the past five years, the S&P 500 has traded at more than 14 times its estimated 12-month earnings. About two-thirds of S&P 500 companies beat earnings expectations in the third quarter ended September 30, 2011.
I continue to believe that we are in a bear market rally that started back in March of 2009. Pressure on stocks because of the European Union debt crisis is simply dragging out this bear market rally from its final blow-off.
What He Said:
“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments.