Italian Bank Job, Moody’s Sings the Bank Blues, Weak Rally, 4 Stock Buys

There was news out of Italy. Late Monday.

Deputy Prime Minister Matteo Salvini announced a 40% “windfall” tax on that nation’s banks. DBS Morningstar estimates that the five largest Italian banks have reported aggregate first-half (2023) profits of some E10.5B, which would be year-over-year growth of 64%, largely driven by increased net interest margin, fees, and heightened cost controls.

Italian leadership has been critical of the nation’s banks as they have increased lending rates as the European Central Bank has increased benchmark short-term European rates, but have not done much for savers. The new tax was approved in an Italian cabinet meeting, but will still require broader parliamentary approval prior to becoming law. Italy’s two largest banks, Intesa Sanpaolo and UniCredit were each trading 7% or so lower shortly after the European open of trading this (Tuesday) morning.

Moody’s indicated that commercial real estate exposure is a key risk to some banks as interest rates have increased, as demand for office space has decreased and as availability of credit has been tightened. Moody’s also cautioned that lenders with sizable unrealized losses not necessarily reflected in their regulatory capital ratios could be more vulnerable to a loss of confidence in this higher interest rate environment.

These actions have resulted in pressured European (especially Italian) equities early in the Tuesday trading session as well as pushed U.S. equity index futures into the red overnight.

Sloppy Monday

As far as broad equity rallies go, Monday’s had to be one of the weakest we’ve seen.

Literally every single mid-major to major U.S. equity index traded higher on Monday. The S&P 500 tacked on 0.9%, as the Nasdaq 100 traded 0.87% higher. The Dow Industrials and the Philadelphia Semiconductor Index were the winners on Monday, both running more than 1% higher. The small-caps were the day’s losers, with the Russell 2000 just barely shading green (+0.08%) for the session.

Breadth on Monday was inconsistent, however, with what one might not expect to see at day’s end, after a broad market rally. Winners beat losers by about 7 to 4 at the NYSE, but losers beat winners by a narrow margin (11 to 10) at the Nasdaq. Advancing volume took a 61.8% share of composite NYSE-listed trading, but just a 41.7% share of composite Nasdaq trading. On top of all of that, trading volume tailed off on a day-over-day basis quite significantly for names listed at both exchanges as well as across the constituencies of both the S&P 500 and Nasdaq Composite.

To put it bluntly, Monday’s session may have counted as far as the trades made goes, but does not go very far in terms of confirming much at all. The professional money was largely silent.

What I’m Trading

I did take the time to add to several long positions on Monday, all in names expressing continued weakness despite or in spite of the headline-level rally for the indexes. All also in violation of my own net basis, which is something I do not take lightly. That said, sometimes a position gets away early and the investor never expects to see a chance to add, and then takes such action after seeing several days of sustained pressure.

It’s important when doing so to have a plan. As always, have price targets and panic points, but when fattening a position, know exactly how far you are willing to go on the chart with the add. You may get run over at first, which is fine as long as you have a clue as to where you are willing to add next.

Not that I know anything more than the next guy or gal, except that I wanted to get larger in these particular names and am still willing to do so. I see the uncertainties that stress financial markets at this time, such as fluctuating dollar valuations, an evolving slope of the Treasury yield curve as we approach the July CPI release this Thursday, geopolitically driven upward pressures on non-core inflation and slowly rotting labor market health.

I also see certainties or semi-certainties, such as the annual August-into-October negative seasonality impact that would or should hamper equities this time of year, but will they? Or can they?

The monetary base and underlying money supply remain far larger than they should be, providing for an excess of liquidity that has persisted, in opposition to the FOMC’s best efforts. Does this excess liquidity place an increased drag on the time taken between actions taken by the central bank and the impact upon economic activity? Apparently. Does this excess liquidity warp the expectation that economic contraction lags the inversion of the yield curve by some nine to 18 months? Possibly. Especially when there is no political will anywhere to get one’s house in order.

Trade accordingly? Trade carefully.

Just be mentally prepared for two months of potential equity market volatility if not outright weakness. Beyond this week’s inflationary question marks, we still have Jackson Hole later this month, another “Jobs Week” just after that, and then the FOMC policy decision on September 20 before we hit October. Remember, October tends to be the month where money can start moving back into our marketplace. Oh, don’t get me wrong. We’ve seen some awful Octobers, but that’s not the norm. November is a better bet for the timid or the careful.

Auction Time

Don’t forget that the U.S. Treasury will go to auction with $42B worth of 3-Year Notes this afternoon to be followed by an auction of $38B worth of 10-Year Notes tomorrow and an auction of $23B worth of 30-Year Bonds on Thursday. This is an aggregate of $103B worth of debt to be sold, up from $96B for these three auctions in May.

It will be interesting to see just how well these larger auctions go, with the volatility seen in that space over the past week or so. How much participation will there be from abroad? How much of this issuance will dealers end up stuck with? We’ll know soon enough.

Today’s Earnings Highlights (Consensus EPS Expectations)