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David England: Always follow the money
Column | Eye on the Market

David England: Always follow the money

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If ever in question, simply follow the money.

Last week, we saw weakness in the U.S. financial sector, and with some of the top U.S. banks grossly underperforming the market.

So some have asked why I choose the financials as the canary in the coal mine, so to speak. Since the coronavirus hit, within weeks, it pushed world economies into a global recession, more severe than the global meltdown in 2008. Currently, we are in an inflection point, with many economies trying to recover and get back to work.

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The depth and length of the current downturn will depend on many factors: The virus itself and possible mutations, government and public health responses, results of the previous and future economic interventions, and just as important, the action and behavior of the general public.

Per date, close to $10 trillion has been thrown at the problem with more coming. We will know soon if it has helped or simply slowed a global recession or even worse a possible depression. My hope is the trillions helped tremendously and we will see remarkable recovery in the third and fourth quarters and the forecasted second wave is nonexistent.

Per the amount one trillion, it is so large, many have trouble understanding just how large it is.

To better understand how large $10 trillion is, let’s jump to time and seconds. If we clock a million seconds, that’s close to 11 days. A billion seconds is nearly 32 years. A trillion seconds is close to 32,000 years, depending on the calendar used. Do the math: You can see the size of the $10 trillion thrown at the world economies and why, when studying the financial sector, that banks are so important.

Today, we look globally and examine the relative strength of the Chinese and European banks for strength and weakness clues to see if we could be going into a global rally or recession.

Let’s begin with China. Why? It is the second-largest (country) economy, ranked by gross domestic product, behind the United States. Here are the largest China banks that are chartable and publicly traded on an American exchange, ranked by market cap, and dividend yield: Chinese Construction Bank, 1.93 Trillion-4.72%; Industrial and Commerce Bank of China, 569 Billion-4.62%; Bank of China, 31.5 Billion-5.93%; Chinese Merchants Bank, 21.74 Billion-4.72%; and Agriculture Bank of China, 12.49 Billion, 5.16% yield.

Next, let’s view the relative strength performance of these top Chinese banks, during the current rally starting on March 24 to date, and compared to the strength of the Shanghai Stock Exchange Index, symbol $SSEC (red area).

Top Chinese Banks

The Chinese banks ranked by relative strength are as follows: Chinese Merchants Bank (14.46% purple line), Agriculture Bank of China (10.43% blue line), Bank of China (4.69% red line), Chinese Construction Bank (4.30% pink line), and Industrial and Commerce Bank of China (1.43% brown line). The relative strength performance of the $SSEC (red area) is 8.40%. For comparison sake, the SPX is outperforming all with a 32.82% return.

While all banks in this group currently have a positive return during this recent rally, only two banks are outperforming and three are underperforming the Chinese index $SSEC. At this point, I do not see any major structural weakness with this group. If any of these banks would drop below their previous lows, then they qualify to consider as short or put candidates. If they rally above their previous highs, they would qualify as potential long candidates.

Now let's identify the largest European banks (by location) that are chartable and publically traded on an American exchange, ranked by market cap, and dividend yield and location: HSBC Holdings-England, 101 Billion-.50%; BNP Paribas-France, 38 Billion-9.03%; Banco Santander-Spain, 32 Billion-.11%; ING Groep-Holland, 21 Billion-27%; and Deutsche Bank-Germany, 58 Billion-1.64%.

Top European Banks

The European banks ranked by relative strength, performance of top European banks, compared to the strength of the SPDR EORO Stoxx ETF (FEZ purple area), during the same timeframe: Deutsche Bank (28.60% brown line), BNP Paribas (15.16% red line), ING Groep (12.43% orange line), Banco Santander (-10.62% green line), and HSBC Holdings (-10.66% blue line). The FEZ return during this timeframe is 22.07% while the SPX had a 33.18% performance.

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Only one bank in this group is outperforming the main European Index FEZ. Four banks are underperforming the main European index FEZ. If any drop below the current March 2020 lows, they would qualify to consider as short or put candidates. If any should break out above their previous highs, they would be considered as long candidates and would show strength for the region.

Here are the action points. Are you monitoring these overseas banks to signal the next upturn or downturn? If not, it would be wise to set an alert if any of these large Chinese or European banks rally or take a nosedive.

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I am very concerned about some of the banks in the European group. Why? Since the European Central Banks (ECB) policy rate went negative in 2014, the tools to help stimulate their economies are greatly reduced, compared to the tools we have with the Federal Reserve.

For those planning to short any of these banks or any securities —if you short a security that pays a dividend, it is still paid by the person short the security: You.

To get a head start on next week's column, take the time to research the top Latin and South American banks for additional clues to see if we could be heading into a global rally or a recession. It will be time well spent.

If you have market questions, email them to my address below.

Plan your work, work your plan, and share your harvest!

DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to thetraderseye@gmail.com. Full Disclosure: The author does not own any securities in this column.

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