Wednesday, June 16, 2010

The Minsky Moment Clean Up Continues

We're not finished with the Euro banking crises. Spain and Germany are the key concerns due to the large state controlled portion of their respective banking systems - the Cajas and Landesbanken. These two country's banking systems are the only ones in Europe of size that were impacted by both a private sector crisis and a sovereign crisis.

While we are getting some clarity on the condition of the private sector banks' exposure to these problems, we still have little clarity on the public sector banks' problems. There seems little political willingness to reveal the problems - the high level of under performing assets and the resulting need for significant recapitalization.

The US and the UK banking systems have gone through this process and while they are still exposed to ongoing asset impairment, at least we know the story. We don not have a similar baseline for Spain and Germany; both countries have been trying to play "whistle past the graveyard" and hope for a recovery that would allow them to keep the problems under cover.

But it is now clear that they will have to improve transparency - really, really soon - if they want the capital markets to continue funding their balance sheets. The ECB/IMF have stepping into the gap and will continue to provide stop gap funding, but they both will expect clarity soon themselves.

The markets need this transparency to complete the Euro portion of this western balance sheet recession reset. Only then can we make intelligent and informed risk adjusted decisions. In the meantime, I am long the GBP and DIG assuming that the UK gets paid for being clear about the problems and is moving to solve them and the oil sector has been oversold on the GoM calamity. I am looking at some other oil plays that have suffered - things like TOT. I suspect I will try to trade some AAPL into the quarter and have added to AMAT.

I have averaged down on BAC. I'm not sure why. Banks are cheap but EPS will get hit this Q, I'm unsure whether there will be much improvement in impaired assets and regulatory events are still negative. In general I am wondering if corporate profitability has now peaked, meaning that companies need to see an uptick in revenues for the next leg in stocks. I am not convinced that can broadly happen - but there will be some pockets - in a consumer driven economy where the consumer is still delevering. Is the market's right shoulder starting to form?


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