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Most Major Banks Pass Fed’s Stress Test

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The Fed announced the second round of its annual stress test on Wednesday. Each of the 31 financial institutions assessed passed a first round of quantitative tests the week before, but this time when qualitative factors were considered only 28 of 31 received approval to return capital to shareholders via increased dividends or stock buybacks. Deutsch Bank and Santander flunked while Bank of America received “conditional approval”. Citigroup got the greenlight to increase dividends for the first time since the financial crisis.

Meanwhile, U.S. stocks sold off last week. The S&P 500 ended the week at 2,071, down 1.6%. The Stoxx 50 was up 0.5% in euros but down -2.63% in dollars as the euro continued its selloff closing at $1.08.

US 10 year treasuries closed at 2.24%, up 25 basis points from the week before. German bond yields are now only 0.39%. Is it any wonder that the dollar is appreciating given these yield differentials?

The US dollar is up +22% since last year’s low on July 1. Declines in the yen and euro are starting to boost the exports of those countries improving prospects for economic growth. But a strong dollar depresses our exports and the dollar value of profits from overseas. Ed Yardeni notes: “Profits drive employment and capital spending. So, weaker profits can slow the economy. That is what is troubling the US equity markets these days; and possible Fed tightening.”

Is the Fed losing its “patience”? All eyes will be on the Federal Reserve next Tuesday and Wednesday. Here is what Barron’s says: “When the Fed’s policy-setting panel gathers on March 17 and 18, there’s a good chance the ‘patient’ language will be gone. That would leave the path open for the FOMC to lift its target for the federal-funds rate at the June 16-17 confab from the near-zero level that has prevailed since the crisis days of December 2008.”

Blackrock notes that US stock market is still flirting with all-time highs: “There is an enormous difference between the stock market today and 15 years ago. Back at the peak in 2000, the S&P 500 Index traded at roughly 30 times trailing earnings, while the Nasdaq was fetching a sobering 175 times trailing earnings. Today, those figures are 18.5 and 31, respectively. That’s not cheap, but certainly much less extreme.”

Earnings estimates for Q1 are around -5%, compared to actual +5% last quarter. The numbers should get better as we move into the April reporting season.

NYT: “The European Central Bank began its long-awaited bond-buying program on Monday, an unprecedented 1.1 trillion euro bid to help revive the Eurozone economy. Despite predictions that the central bank would have trouble finding enough government bonds to buy, officials in Frankfurt said they were not encountering any problems — at least on the first day of purchases.”

The Chinese government recently lowered their forecast for growth this year to 7% and suggested a “new normal”. Gone are the days of 10% growth. As Chinese leaders continue their National People’s Congress in Beijing, the slowing economy is front and center. The WSJ notes China’s leadership is “preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises that they need to rely less on state life support and get themselves ready to list on public markets.”

What color is the dress? I see “the dress” as blue and black. My wife says white and gold. How can this be? http://knowyourmeme.com/memes/thedress-what-color-is-this-dress

Looks like Aaron Burmeister is in the lead. Mushers are expected into Nome this coming Tuesday.

Jeff Pantages, CFA®
Chief Investment Officer

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