These Important Stocks are Trading Like a Financial Crisis Has Begun

By Justin Spittler

European bank stocks are crashing. Deutsche Bank (DB), Germany’s largest bank, has plunged 36% this year. Its stock is at an all time low. Credit Suisse (CS), a major Swiss bank, has plummeted 40% this year to its lowest level since 1991. As you can see in the chart below, the STOXX Europe 600 Banks Index, which tracks Europe’s biggest banks, is down 27% this year. It’s fallen six weeks in a row, its longest losing streak since the 2008 financial crisis.

These are huge drops in a short six week period. It’s the kind of price action you’d expect to see during a major financial crisis. The sell off in Europe’s banks has dragged down other European stocks. The STOXX Europe 600 Index, which tracks 600 large European stocks, is down 15% this year to its lowest level since October 2013.

European banks are struggling to make money…..
Deutsche Bank lost €2.12 billion for the fourth quarter… after making a €437 million profit the year before. Credit Suisse lost €5.83 billion last quarter… after making a €691 million profit the year before. Profits at BNP Paribas (BNP.PA), France’s largest bank, plunged 52% last quarter.

Europe’s crazy monetary policies are starving banks of income..…
Dispatch readers know the Federal Reserve has held interest rates at effectively zero since 2008. The European Central Bank (ECB), Europe’s version of the Fed, also cut rates after the global financial crisis. Unlike the Fed, the ECB didn’t stop at zero. The ECB dropped its key rate to -0.1% in June 2014. It was the first major central bank to introduce negative interest rates. Today, its key rate is -0.3%.

The ECB’s key rate of -0.3% sets the tone for all interest rates in Europe..…
It forces banks to charge a rock-bottom interest rate on loans. This has eaten away at bank profits, as The Wall Street Journal reports:

Very low interest rates hurt the profits banks make on loans, especially when investors believe loose monetary policy is here to stay. Long term rates at which banks lend then fall to be little more than short-term ones at which banks borrow.

The idea of negative interest rates likely sounds bizarre to you..…
After all, the whole purpose of lending money is to earn interest. With negative rates, the lender pays the borrower. So, if you lend $100,000 at -1%, you’ll only get back $99,000.  Negative interest rates are a scheme to get people to spend more money.

According to mainstream economists, spending drives the economy. By cutting its key interest rate to less than zero, the ECB is making it impossible for people to earn interest on their savings. This discourages saving and encourages spending.

But as Casey Research founder Doug Casey says, this isn’t just wrong, it’s the exact opposite of what’s true. Spending doesn’t drive the economy. Production and saving drive the economy. You have to save to build capital, and capital is necessary for everything.

Negative rates haven’t helped Europe’s economy…
Europe’s economy grew at just 0.3% during the third quarter. Europe’s unemployment rate is up to 9%, nearly double the U.S. unemployment rate. And the euro has also lost 17% of its value against the U.S. dollar since June 2014.

If you’ve been reading the Dispatch, you know negative interest rates are a new government scheme..…
Until recently, negative interest rates didn’t exist. Governments invented them to push us further into “Alice in Wonderland.” That’s our nickname for today’s economy, where eight years of extremely low interest rates have warped prices of stocks, bonds, real estate, and nearly everything else.  

For months, we’ve been warning that negative rates are dangerous. Last month, Japan, the world’s third-largest economy, joined the list of countries using negative rates. Sweden, Denmark, and Switzerland all have negative rates, too. According to The Wall Street Journal, countries that account for 23% of global output now have negative interest rates. 

This has set the stage for a huge economic disaster..…
To avoid big losses, we recommend owning physical gold. Unlike paper money, central bankers can’t destroy gold’s value with bad policies. Instead, gold’s value usually rises when governments devalue their currencies.

For example, Europe’s currency (the euro) has lost 17% of its value against the dollar since June 2014. But the price of gold measured in euros is up 14% in the same period. We recently put a short presentation together that explains the best ways to “crisis proof” your wealth.  We encourage you to watch this free video here.

Chart of the Day

Deutsche Bank’s stock has been destroyed. Today’s chart shows Deutsche Bank plummeting 46% over the past year. Yesterday, it hit an all time low. Today, Deutsche Bank jumped 10% after the company said it’s considering a bond buyback program. The company hopes this will ease investor concerns.

E.B. Tucker, editor of The Casey Report, doesn’t think the plan will work:

Deutsche Bank is in trouble. It barely survived the last crisis. In the aftermath, it took tremendous risks to make as much profit as possible. But its winning streak is coming to an end… and it still has to pay for all its obligations. Deutsche Bank also has problems beyond its control. Europe isn’t growing. It’s also dealing with negative interest rates. This is a double whammy for big banks, especially ones that took on too much risk.

The article These Important Stocks are Trading Like a Financial Crisis Has Begun was originally published at caseyresearch.com.

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Make No Mistake, the Oil Slump Is Going to Hurt the US Too

By Marin Katusa, Chief Energy Investment Strategist

If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scott free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told. In reality, though, many of the jobs the U.S. energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts U.S. GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on U.S. made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it. Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It’s no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil sector capital expenditure—in fields representing up to 7.5 million bbl/d of production—would be at risk, according to Goldman Sachs. And that doesn’t even include the US shale sector! Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil and gas related capital expenditure in the U.S. is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.

We’re not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out—and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that’s made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don’t make money below $55. And fully 50% are uneconomic at $50.

So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the "too big to fail banks" slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It’s hard to see why it should be different this time. It’s a crying shame. The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve’s easy money policy.

However, there are a handful of domestic producers with high operating margins that are positioned to profit right through this slump in oil prices. To find out their names, sign up for Marin Katusa’s just launched advisory, The Colder War Letter.

You’ll also receive monthly updates on the latest geopolitical moves in this struggle to control the world’s oil pricing and the energy sector at large and what it means for your personal wealth. Plus, you’ll get a free hardback copy of Marin’s New York Times bestselling book, The Colder War, just for signing up today. Click here for all the details.

The article Make No Mistake, the Oil Slump Is Going to Hurt the US Too was originally published at casey research

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Crude Oil Tops $80 a Barrel for First Time Since May as Equities Rise

Crude oil surged above $81 a barrel for the first time since May as a rally in global equity markets increased speculation the economy is strengthening. Oil jumped as much as 3.6 percent after equities climbed on better than expected earnings and the Institute for Supply Management’s U.S. manufacturing gauge fell less than forecast. The dollar dropped against the euro, boosting the investment appeal of commodities.

“Oil is following the S&P 500,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “Fundamentals don’t seem to matter. You don’t need to be an oil analyst anymore. You just need to be a stock market analyst.” Crude for September delivery rose $2.44, or 3.1 percent, to $81.39 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Earlier, it touched $81.77, the highest price since May 5. Futures climbed 4.4 percent in July, the biggest monthly gain since March. Prices are up 17 percent from a year ago.

The Standard & Poor’s 500 Index increased 2 percent to 1,123.86 following positive earnings reports from companies such as Humana Inc. and Oshkosh Corp. It jumped 6.9 percent in July, the biggest monthly advance since July 2009. The Dow Jones Industrial Average strengthened 191.94, or 1.8 percent, to 10,657.88. The MSCI World Index, a gauge of equities in 24 developed nations, rose 2.3 percent to 1,150.79, the highest level since May 13. European stocks climbed to a three-month high on gains among banks and basic resource producers.

“Equities did well in July and profits are generally OK, so people are feeling bullish across the board,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.....Read the entire article.

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The Death of an Energy ETF....RIP DXO

It has been no secret that the CFTC is looking into many exchange traded notes and exchange traded funds that deal in the energy markets, along with other futures and other investment vehicles, to see how the role of speculators has played in the price swings in the commodity markets. Today came the announcement that one ETN is going to be killed (ergo redeemed) as a result. Deutsche Bank announced that it will redeem all outstanding units of its PowerShares DB Crude Oil Double Long Exchange Traded Notes (NYSE: DXO). The financial firm said that limitations imposed by the exchange on which Deutsche Bank manages the exposure of the notes have resulted in a “regulatory event” as defined in the terms of the notes… and this is causing Deutsche Bank to redeem the notes.....complete story