SAUDI DECISION ON CREDIT SUISSE ROILS THE MARKETS, PRODUCER INFLATION EASES

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Saudi Decision On Credit Suisse

Please click here for a chart of Credit Suisse stock (CS).

Note the following:

  • The Morning Capsule is about the big picture and not an individual stock.  The chart of Credit Suisse (CS) is being used because it is the cause of the market drop this morning.
  • Credit Suisse was once one of the most systemically important banks in the world.  Credit Suisse handled the 2008 financial crisis better than other major global banks.  It did not need a government bailout.
  • The chart shows that over the last year, Credit Suisse stock has seen a major drop.
  • The chart shows that the stock has dropped 21% this morning on the Saudi decision.
  • Saudi National Bank Chairman Ammar Alkhudairy is ruling out more investment in CS.  Saudi National Bank is the largest shareholder of CS.
  • CS is no longer as important as a systematic bank in the global sense, but it is still a systematically important bank in Europe.
  • The drop in CS stock is causing a fear of contagion in European banks.  European banks are falling.  The contagion fears from Europe are spreading to the U.S.
  • After a brief respite on the government rescue program, in the premarket U.S. bank stocks are falling.
  • In yesterday’s Morning and Afternoon Capsules, we shared with you that prudent investors should keep an eye on the stocks of western regional banks FRC, PACW, and WAL.  Here are some numbers to understand the volatility.
    • FRC has fallen to $36.67 in the premarket from the high of $50.97 yesterday.
    • PACW has fallen to $10.62 in the premarket from the high of $17.25 yesterday.
    • WAL has fallen to $27.10 in the premarket from the high of $39.96 yesterday.
  • In the U.S., money is flowing into big banks like Bank of America (BAC), JPMorgan (JPM), Citi Group (C), and Wells Fargo (WFC). BAC has received $15B in new deposits over the last few days. 
  • Money is flowing into the safety of the dollar, gold, and Treasuries. The 10-year yield has fallen to 3.47%.  The 2-year yield has fallen to 3.90% after having gone to 5.08% only days ago.  
  • The European Central Bank (ECB) is meeting tomorrow.  ECB was set to raise its key interest rate by 50 basis points but the banking turmoil poses a difficult decision for ECB now.
  • The banking situation in Europe has overshadowed important economic data.
    • Inflation is slowing at the producer level.
      • Headline PPI came at -0.1% vs. 0.3% consensus.
      • Core PPI came at 0.0% vs 0.4% consensus.
    • The U.S. economy is 70% consumer based, therefore prudent investors pay attention to retail sales.  The new data indicates that the consumer spending binge may have ended.
      • Retail sales came at -0.4% vs. 0.2% consensus.
      • Retail sales ex-auto came at -0.1% vs. -0.1% consensus.
  • As an actionable item, the protection band provides a good balance between various cross currents.  Please scroll down to see the protection band.
    • Please be on high alert as hedges and cash levels may need to be increased.  
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

Money is rushing into the safety of gold.

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

Oil is falling on a potential banking contagion.

API data showed that crude inventories rose 1.155M barrels vs. a draw of 3.835M barrels consensus.

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin continues to levitate.  Bitcoin bulls are waiting to see if whales, after having pumped bitcoin aggressively over the last few days, will dump bitcoin as they usually do or will the whales run it up higher to entice retail buyers.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds are ticking up.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1931, silver futures are at $22.37, and oil futures are at $69.38.

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S&P 500 futures are trading at 3878  as of this writing.  S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

DJIA futures are down 607 points.

Protection Bands And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

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Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

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Picture of Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Picture of Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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