Spanish Banks Rescued | Value Stocks with Dividends
Finally, European leaders woke up and did something concrete and forward thinking in the Spanish debt crisis. While they only applied more bandaids to the troubled Spanish banks, it is a good step in the right direction. More importantly, investors will be encouraged by some real action instead of just more empty rhetoric.
Last week started out with heavy selling early Monday and the markets were on the verge of a technical cliff and a huge selloff. Fortunately, for all of us in the investing community, the markets finally bounced up from very oversold technical levels to avoid disaster. Then, after heavy short covering on bailout rumors, the bulls gained some traction. After resting on Thursday, the markets moved up on Friday when the institutions got their “secret insider intel” that Spanish banks would get bailed out on the weekend. With the bailout rumors giving hope to the markets, they finished with their best week of the year.
The DJIA finished up 3.6% rise, the S&P 500 moved up 3.7%, and the COMP finished up almost 4%. And true to the insider information that was leaked, Spanish banks were in fact given another lifeline yesterday in the form of 100 Billion euros ($125 billion dollars). So now Spain is added to the list of Greece, Ireland, and Portugal for bailout countries since the debt crisis began. It is 500 billion euros in all and it won’t be the end of it.
IMF Managing Director Christine Lagarde said in a statement that the euro zone’s plan to provide up to 100 billion euros was consistent with the IMF’s estimate of the capital needs of Spain’s banks and should provide “assurance that the financing needs of Spain’s banking system will be fully met.”
Momentum Rider believes that this money will not be enough in the end and it still doesn’t address Spain’s huge government debt. Spain is experiencing its own version of a US housing crash, on a larger scale. Property prices are estimated to drop at least another 20% due to staggering unemployment and the continued recession, further exacerbating the credit crisis, which is why this Spanish bank bailout became necessary.
The Center for European Policy Studies in Brussels estimates that the Spanish banks would have to write off at least 270 billion in mortgage debt. Spain’s two largest banks hold assets (debt and the country’s other loans on top of who knows what else) that are larger than Spain’s gross domestic product.
With the Spanish economy shrinking, unemployment at near 25%, and their housing market collapsing, the credit crisis worsens, because the banks’ “assets” are worth less and less with each passing day. The people of Spain understand they are in a credit crisis and are moving their money out of Spanish banks and sending it to Germany and other northern European banks in order to protect themselves. What can be referred to as a “bank run” is occurring today, but only on a small scale, at least for now.
The infusion of money into the Spanish banks was certainly necessary and it will be a strong temporary boost for the markets just as the previous bandaids have been. The US futures are already up big as we write this newsletter (near 1,337).
However, MR believe’s a stronger boost to the markets would happen if a “European Banking Union Agreement” was created that provides cross-border bank guarantees in euros. Otherwise the bank runs will not stop in Greece, Spain, and elsewhere and they will only get larger moving forward.
In other important market news, China’s key numbers came out over the weekend and they were good although not as high as some expected. China’s factory output rose 9.6% in May from a year ago, their industrial output rose 9.9%, and their retail sales increased 14.3% which was up from 13.8% from last May. They would be great numbers by US standards but they will cause some concern in select investing circles.
The bottom line going into this week is that the markets finally have some optimism and hope that Europe will finally take specific steps to help the Eurozone financial crisis. Bailing out the Spanish banks is the first real step this year but they need to follow up with much more in the next three to four weeks. The following is a list of more important European events and dates that could dramatically affect the markets in June.
1) Greece goes to the polls on Sunday, June 17, so Monday June 18 could see a big down day if the election news is not positive.
2) The “Group of 20″ leaders meet in Mexico, June 18 and 19. Depending on the election results in Greece and the market’s reaction, this could be a big market mover.
3) The next day, June 20, the FOMC will release their latest monetary policy statement with Chairman Bernanke’s quarterly press conference to follow. This may be the time the Fed signals or hints of another round of monetary stimulus.
4) A European Summit will be held in Brussels on June 28 and 29. They will be watching how this crisis develops in the next few weeks and concrete action is expected out of the EU leaders. There has been talk of a “grand plan” being forged to backstop the banking system and create fiscal unity among the group.
The upside target for the S&P 500 could reach near 1,358 or slightly in the next few weeks. That is the cross of the important 50 and 100 SMAs which will be strong resistance. Above 1,325 and below 1,360 could be choppy as the short term uptrend will have the markets significantly overbought.
Technical Analysis – Market Bounce Upside is 50 SMA Test
MR recommends investors continue to remain cautious and lighter on riskier equities until early July when the four events listed above have been completed and the longer term financial situation in Europe has more clarity. Until some of the longer term structural debt issues have been addressed with a detailed plan, the market still has a much bigger downside risk.
Traders should play a possible bounce early in the week but watch for a mid-week pullback from a very overbought state. The markets could get more downside selling here.
Refer to the chart below which shows that between 1,322 and 1,358 is yellow. That area typically produces very choppy trading action so be warned.
Conclusion
At least part of an action plan was finally implemented in Europe this year. Maybe this is the start of some longer term plans and investors can gain some optimism for future action. Expect early week strength and then heavy resistance and weakness later.
Based on the Spanish bank bailout, investors can start to look at some longs again but very selectively. Here is a list of 12 very good value stocks that should get a rebound in the short term for traders. Furthermore, this list of stocks is a solid one for investors to start scaling into if Europe gets serious and helps firm up this fragile market in the next few weeks.
There is no question that many of these stocks will go substantially higher once some confidence comes back to investors and money starts to flow. All are strong companies with good balance sheets, excellent dividends, and plenty of upside even with a slow economic recovery from here.
Best Investor Value Stocks with Dividends:
Investor Notes:
Gold and silver are still working higher in the short term. Oil is still trying to bottom and investors can scale in on any more weakness a little at a time.
The caution alert for retirement accounts and investors is still there but not as strong as it was last weekend. The decent market rebound and Spanish bank bailout news helped enormously in the short term. However, don’t get too excited until the next 2 weeks give us much more info about the European political and financial situation.
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Good luck in your trading and investing,
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