The problem with socialism is that eventually you run out of other peoples’ money. Margaret Thatcher
If one enjoys or studies history, you eventually come to the conclusion that in most areas of the world, sovereign countries have a tendency to engage in conflict. These conflicts are often the result of economic issues, in some way shape or form. One of these regions which has a long history of disagreement is Europe. England versus France, Spain versus France, England versus Spain, Prussia (Germany) versus France, England versus Prussia, Ireland versus England, Russia versus Germany. Lest you forget, the United States was founded on the premise of getting away from a European country, England. Notice I did not mention World War One or Two, but clearly they were massive conflicts involving all of Europe. So, Europe historically has what they call, a rich history. Economics and history are always intertwined, and this week was no exception. You see, the European Central Bank, headed by Mario Draghi, put the kibosh on the lovely little rally the market enjoyed. Mr. Draghi decided things really are not very good in Europe and extended their ultra low interest rate policy until, at the earliest, the beginning or middle of 2020. He also chopped the GDP ‘growth’ forecast in Europe from 1.7% to 1.1%. Got all that?
Meanwhile, here in the United States, our February jobs report came in weak, in a very big way, with only twenty thousand jobs created versus the estimate of 180k. What are the implications for these macroeconomic muffins? First, one would have to think dollar strength might be on hold, at least for a while, until the US economy puts up a better jobs number. Of course, relative to the rest of the world, we are a roadrunner in terms of growth. So, while it would make sense the dollar will take a pause, consider the economic plight in Europe. If you have been in the markets for any length of time, you know that Europe has been a basket case for many years. If it is not Greece, it is Italy, or France, or Germany, or the UK. The picture heading the way talks about the ‘Sick Man of Europe,’ as many countries were labeled in the past. A more apt reality today is that Europe has long been a problem for the global economic picture. Many of the banks own plenty of sovereign debt and the low interest rate environment makes it difficult to generate spread, so, coupled with non performing loans and it’s pretty apparent European banking ain’t so great. The best example of that would be Deutsche Bank, which trades near multi year lows. It is the largest depositor in Germany by far, but investors are concerned about it’s derivative book, so it trades at well below book value (.23 to be exact- Goldman sits at .94 and Chase at 1.46 for a little comparison). Not that it is so wonderful here in the good old US of A, but our banks look pretty solid. Many investors have commented about the challenges regarding Brexit, which again, involves Europe and politics. The Brits are facing the brunt of the decision this week, so we will see how that plays out. Part of investing is considering where to avoid, and for a long time, Europe has been one of those places. It looks like Maggie called it right, eh?
In the markets this week regarding specific companies, Salesforce destroyed its numbers, as usual. Children’s Place was no place for children with it’s miss, while Target and Urban’s Outfitters were solid. Vail Resorts displayed its dominance when it snows, while Brown Foreman showed people still like a shot of Jack Daniels. All in all kind of a tough week for the market as it went down every day, thanks to the weakness in Europe and here in the United States. It will be interesting to see if the next jobs report is stronger, but in the meantime, don’t expect any help from Europe, as it’s a little sick.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.