U.S. Debt stalemate, Swiss Franc and Gold - video July 29th, 2011

U.S. Debt stalemate, Swiss Franc and Gold

July 29th, 2011 at 08:38am

Dr. David Costa of Robert Kennedy College on CNBC 29 July 2011 from Dr.David Costa on Vimeo.
- U.S. Debt stalemate, Swiss Franc and Gold
=============================
-

Just after the resolution of the Greek issue as a result of the U.S. debt ceiling stalemate investors have returned to the "risk off mode".
I am confident that a solution will be found but part of the damage in terms of investors confidence has been made. Both the U.S. and some European countries face problems like high debts and unemployment that are very difficult to cure in a low growth environment.

The fly to safety landed in both Swiss Francs and Gold. I see the gold prices to remain strong till the end following the appetite of investors wishing to hedge their exposure to equities, to a weakening dollar and a possible US downgrade.

- Swiss banks and Change

UBS and Credit Suisse reported much lower profits in their investment banking activities with cut in workforce as high as 4% in the case of Credit Suisse. This represent a substantial change of the banking landscape where Swiss banks continue to be successful in the Wealth managing business and should perhaps accept that the model of the universal bank with both strong investment banking and wealth management operations is obsolete. Swiss banks continue to benefit from inflows from Asia and emerging economies and should focus exclusively on the wealth management business and any activity as a support, and not core, to wealth management.
Swiss banks need to adapt to change and try to be leader in a market that is less capital intensive and where they benefit from a long history and positive image, particularly relevant in periods of uncertainties like now.

- Sparkling diamonds ? Adapting to Change

Among the sectors that do not seem to face any slowdown we have luxury goods. Both LVMH and Swatch group reported strong results (LVMH net profits up 25% in the first six months Swatch +24.5% in profits despite the strong Swiss franc) and since my recommendation of last year this has been among the best performing sectors. Diamond leaders De Beers, that operates jewelry stores in a 50/50% joint venture with LVMH, is set to open its second store in Hong Kong and several more in China during this year.

According to the De Beers by 2015 China, India and Middle East will account for 40% of global
consumption surpassing the US. (China has currently 11% consumption, India 10% Middle East 8% and U.S. 38%).

Similarly Salvatore Ferragamo (previously mentioned on the Show and up 30% since the IPO of 1 month ago) sells
more in Hong Kong than in any other of their stores.

This confirms that investors should embrace change and focus on well known brands with a strong presence in Asia, India and fast growing markets. This is applicable to any sector including private banking: these private banks with a strong presence in Asia and developing markets will benefit from this inevitable "new normal" !


In short
Adapting to Change
===================

- While I do think that the US will reach a resolution of the debt ceiling stalemate many issues and the high debt remains. There is a strong need for ways to reduce unemployment and re-create growth.;
- Investors demand for Gold and the safe heaven Swiss Francs will remain at least till the end of the year. Important to note that Gold has not increased year to date in Swiss francs and has increased only marginally since last year.
- Swiss Banks need to adapt to the new environment and focus to maintain their leadership in the Wealth Management business and focus their investment banking activities as support and auxiliaries to the main core business;
- In the new normal where growth is mostly coming from China, Asia and Emerging markets investors need to embrace change and invest in these companies that will benefit from this new trend.
-We cannot ignore the facts that among the best results reported this semester we have luxury good European companies. This because China and emerging countries can pretty much produce anything but in the case of luxury they want the brand and artisanal manufacture unique to these companies.


- Italian worries not justified - Perception problem
================================

The worries about Italy are mostly the investors vote of no confidence toward Europe.
European inability to deal with the Sovereign debt problem of the peripherals Economies in a decisive manner is bringing indiscriminate fear into the markets.
There is a need for decisive and immediate action to contain the debt crisis.
The Italian deficit plan is appropriate and should be soon by voted by the Parliament. Most of the Italian debt is held internally so any comparison with the situation in Greece or Ireland (and even Spain) is not justified;

- A Default would be a big mistake
I still maintain that any type of default or credit event on Greek debt would impact investor confidence toward all European debt. As declared by Trichet I think that the solution should be in the form of "�No credit event, no selective default, no default�. The perception and market reaction to any form of default or credit event can be catastrophic.

- Italian banks not under "stress"
As many of the Italian retail banks have already increased their capital requirements I do not expect big negative surprises: on the contrary I expect the Italian banks to pass the tests with good margins.

- European Rating
I think that a European Rating agencies would be beneficial to create diversity in a market clearly dominated by three players. Additionally, rating agencies should suspend their rating on these countries that received international aid (e.g. Portugal and Greece) and given them enough time to implement reforms. Europe should create their rating agency and bring more diversity to the market.

- Gold Protection
As I previously recommended holding Gold will help investors portfolio and provide a good degree of protection.

- Swiss and European Equities still interesting
Swiss equities, now down on the light of the negative market trend generated in Europe, are a good buying opportunity. Similarly many European companies, especially in Italy, have a solid balance sheet and are now trading at heavy discounts.

In short
Strategy: Perception is not reality
====================================

- Many of the worries about Italy are largely overstated. Negative perception and speculation play a strong role.
- Europe has to avoid a situation where perception becomes reality by acting quickly and decisively to contain the crisis without triggering a default or credit event;
- European banks stress tests to be largely positive;
- Swiss and European Equities, particularly blue chips with a strong brand and a presence in emerging markets, are a good buying opportunity. I recommend allocating part of the portfolio to Gold and Commodities as a hedging strategy.
http://david.fm/109-dr-david-costa-cnbc-television-12-july-2011-perception-is-not-reality.html


All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.