Can you hear that retching sound? That’s Australian bank NAB gagging as it spews out a bit more bile.
Last week NAB owned up to the fact that it faces financial penalties after identifying more breaches of anti-money laundering and counter terrorism laws. The bank stock sold down.
Over the long term, this is a healthy process as far as the outlook for bank stocks.
We need all these issues out in the open and dealt with so the market can get back to assessing the earnings outlook on those merits alone.
It makes for a volatile hold in the meantime.
It’s not all bad, though…
The RBA is again inflating Aussie house prices.
That means bigger debts and a probable return to strong credit growth. New loan approvals have risen for four months in a row.
The important thing to watch, as far as bank shares go, is the price action.
It will give us a big clue to the extent the issues, such as NAB’s above, are priced in.
For example, we don’t know how big NAB’s fine is going to be.
But it’s unlikely to exceed the one CBA copped.
That means analysts can factor in the likely worst-case scenario.
If the stock begins rising anyway, it would suggest the market is bidding for the dividends regardless. That would be a sign of strength. We’ll keep watching as it all unfolds.
Mind you, my eyes are darting all over the place considering what’s going on all over the world.
Chaos all over the place
Stick your head out the window. All seems pretty good. Summer is coming.
Stick your head in a newspaper. There are staggering riots happening all over the place.
Hong Kong continues to go down into an abyss of violence and chaos. Police are now threatening to shoot protestors with live bullets.
If we continue around the world, protestors in Iran just set fire to a branch of the country’s central bank.
A car bomb was just detonated in Iraq as part of their turmoil.
Lebanon’s currency is down 20% against the US dollar as capital and people flee its cratering economy.
Rockets are going into Israel again and return air raids into Gaza.
Clearly further escalation of any of these issues could show up in a myriad of places. I’ve already warned one of those might be the price of oil.
Whether or not these peripheral economies matter enough to upset the big three of Europe, China and the US remains to be seen.
But we can be too sanguine either, because we can never be sure which companies might be exposed here.
For example, years ago US banks got themselves into big trouble lending to Mexico. The US government had to bail them out after the Mexican peso collapsed.
US taxpayers were rightfully mystified to discover a remote issue outside their country was now adding to their federal debt bill.
Back to today. Any counterparties to Lebanese or Hong Kong banks will certainly be sweating.
Your chance to replicate famous moves of history?
However, one of the most famous lines in finance is to buy ‘when there’s blood in the streets’.
You know the scenario: some massive and imminent danger causes investors to flee and sends asset prices tumbling.
This creates a huge discount for the brave and possibly foolish to step in and buy when the long term is most likely bullish.
I don’t know about Lebanon, but I’d certainly say that’s Hong Kong right now. The stock market over there is taking a battering as the economy is crunched into recession.
Is this a bet you’d take?
It’s not as if Hong Kong is going to disappear. It’s a major financial hub for China, which isn’t getting any smaller in world finance.
It’s not a bet I’m up for. But it’s not so much because of the riots.
It’s simply that I don’t know enough about HK stocks in the first place to back the idea with any conviction.
I’m not sure the Hong Kong market is down enough either to classify as crazy cheap in the spirit of Baron Rothschild.
We have the blood, but not the total fire sale. But there could be a big rebound here at some point. It might be an idea to do some homework on.
It is notable, also, that Chinese behemoth Alibaba Group Holdings Ltd [NYSE:BABA] is pressing ahead with its $15 billion listing in Hong Kong, regardless of the current ructions.
This would suggest that Hong Kong remains on its current path. That is being slowly absorbed into the Chinese State.
In the meantime, we’ll keep a careful eye on those flashpoints in the Middle East.