DOW, S&P 500, Soar To All-Time Highs; Will The Coup In Turkey Derail The Rally?; Italian Banks Real Elephant In The Room; Gold & Silver Likely To Benefit From Turkish Coup

DOW, S&P 500, Soar To All-Time Highs; Will The Coup In Turkey Derail The Rally?; Italian Banks Real Elephant In The Room; Gold & Silver Likely To Benefit From Turkish Coup

    Perhaps the most hated and distrusted rally in some time, continues to melt-up higher, as Central Bank easing around the globe fuels the TINA (There is no other alternative) rally in stocks.  With bond yields in negative territory, other than cash and some investment in precious metals, the U.S. stock market remains ‘the best house in a bad neighborhood.’  As Vito Racanelli writes in this weekend’s Barron’s, “after being caged in a tight range for nearly 14 months, and after several fruitless attempts to top its previous all-time high set in May 2015, the bull charged to a new high in convincing fashion.  The DOW and the S&P 500 set records every day but one” [Friday], and closed out the week with 2 percent gains.

     There were several reasons for the surging U.S. stock market.  The Bears got mauled, and were forced to cover their short bets; there was “decent economic news out of the U.S. and China; and, Central Banks show no signs of curtailing their easy monetary stances.  Put it all together, and you get the ingredients for a rally in stocks.

     For the week last week, the DOW climbed 370 points, or +2 percent, to close at 18,516 points; while the S&P 500 ended the week higher by 32 points, or +1.2 percent, to 2,161 points; and, the NASDAQ closed out the week up +1.5 percent to 5,029.  For the year, the DOW is +6.26 percent; while the S&P 500 is +5.76 percent; and, the NASDAQ is finally in the green for the year at +0.44.  The broader, small-cap Russell 2000 is +5.07 percent for the year.

     “Trading volume, and many other market technical measures, like breadth, are strong,” Mr. Racanelli writes.  “That tells you this breathtaking run is a good breakout,” said Keith Bliss, Director of Sales at broker-dealer Cottone.  Mr. Bliss added that “another confirming measure is the 11 percent post-Brexit rise in the small-cap Russell 2000 index”, which has outperformed their larger-cap brethren.

     Tony Dwyer, Chief Market Strategist and Senior Managing Director at Canaccord Genuity, told CNBC’s Fast Money on Friday that he believes the S&P 500 will end the year 15 percent higher than Friday’s close.  Mr. Dwyer, who is known as a perma-Bull, can’t be lightly dismissed.  Last December, Mr. Dwyer forecast this 2016 rally in stocks.

     But, there are of course, those who see trouble ahead,  Ralph Fogel, Head of Investments at Fogle Neale argues that “the DOW Transports aren’t near their highs, and this lack of confirmation is disconcerting.”  Mr. Fogel adds, “if you take a few hundred stocks out of the equation, the broad market hasn’t surpassed the highs.  The market’s price-to-earnings ratio isn’t cheap at 18 times, and corporate earnings-per-share growth is deteriorating.”  Despite these observations, Mr. Racanelli notes that “Mr. Fogel remains fully invested,” in equities.

So, In The Wake Of The Turkish Coup, And Metastasizing Terror Attacks By Militant Islamists — Does This Rally Have Legs?

     My guess is… does.  While we could see some selling of equities tomorrow, due to the coup in Turkey, the easy monetary stance by the Central Banks; and, the low to negative yield on bonds, really leaves the investor seeking yield little choice.  And, the U.S. stock market is viewed as the best house in a bad neighborhood, and is likely to remain so.  Cash, and precious metals are the other two options that investors will no doubt adopt.

     If the coup in Turkey results in more chaos, and shows signs of expanding beyond Turkish borders, all bets are off as they say.  That is a major reason that gold and silver should see healthy gains this coming week.

Italian Banks Near Collapse?  July 29 Stress Test Results Will Be Crucial

     Jonathan Buck writes in this weekend’s Barron’s, that Italy’s banking sector is weighed down by an eye-popping 360 billion Euros ($400B) in non-performing loans.  That is equal to 18 percent of outstanding loans in the country,” Mr. Buck notes; and, “one-third of the estimated 1T Euro non-performing loans in the Euro Zone (E.U.).  As Italy is the E.U.’s third largest economy, a full-blown crisis there could be much more damaging than prior events in Portugal, Ireland, Greece, and Spain.  To put this in context, — Italy’s non-performing loans are three times greater (percentage-wise), than was the case with U.S. banks at the height of the 2008 financial crisis.  And, Italy’s financial and political leaders seem incapable of bringing their banks back to solvency — without assistance from the other E.U. members.  Moreover, Mr. Buck adds, “the Italian government and the E.U. appear to be at odds about how to tackle the problem.”

     “European authorities are due to disclose on July 29, how Italian banks fared in their stress tests, which are designed to assess their ability to withstand an [unexpected] economic shock,” Mr. Buck writes.

     I will look at the futures this evening to see how world markets are reacting to the Turkish coup.  If we are down significantly, gold and silver should benefit greatly, and I may add to my positions in both before tomorrow’s open.

     But, nothing seems to be able to derail this bull market — so it will be interesting to see if Turkey moves the needle.  My guess is that baring contagion beyond Turkey’s borders, any selloff will be short-lived.  The Central Banks show no sign of changing their easy monetary stance, leaving investors with few options beyond equities.  V/R, RCP

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