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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Your Link to Freedom, Privacy & Prosperity in the Offshore World
Wednesday, September 28, 2005 - Vol. 7 No. 196
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In This Issue:
* COMMENT: Breaking the Bank (Part II).
* OFFSHORE: Swiss Back EU Labor Accord. Will Swiss Join the EU?
Hong Kong Democrats Test Beijing Patience.
* WEALTH: Canadian Liberals Tax Deal. Tax Havens Invest in South Korea
* PRIVACY & RIGHTS: No Flying Nun Stupidity. U.S. Passport Disaster.
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COMMENT: Breaking the Bank (Part II).
Dear A-Letter Reader:
Last time, dear reader, I laid out my case why I think the American banking sector is not going up - and indeed is poised for a leg down. My main points were a collapsing interest rate spread, tapped out consumers, a potential bursting of the housing bubble, and new restrictions on loan-loss reserves that can only be described as well intentioned lunacy. I also promised to tell you about bargain priced banks overseas.
I'll get to that. First, two bits of news that indicate the theory I expressed last Monday may already be playing out.
#1. Consumer confidence is plunging. The consumer confidence index dropped to 86.6, the lowest level in two years, from 105.5 in August, according to the New York based Conference Board research group. Now, we don't know how much of this is short-term from seeing dead bodies float through New Orleans. But that was the biggest drop in 15 years. It's fair to say that consumers aren't in a buying mood.
#2. An air leak in the housing bubble. New home sales in August dropped 9.9% to a 1.237 million annual rate, according to the US Commerce Dept. That's the slowest pace since November. You can go broke trying to predict the end of the housing bubble, but this news must make "home flippers" nervous.
So much for bad news piling up for US banks. For good news, I look overseas, especially to Europe. Eric Roseman, the editor of Renegade Investor , turned bullish on European banks earlier this year.
"European banks are where US banks were back in the late 1980s," Eric says. "At that time, we had too many regional and money center banks in the United States and the industry was ripe for consolidation that took place in the 1990s. In Europe, mergers have accelerated over the last three years amid a very low interest rate and financing environment and due to more liberal cross border merger laws introduced by the European Commission."
The multiples and cash flow for most European banks are very attractive, with banks in Italy paying in excess of 10-year government bond yields, Eric says.
We can't give away all of Eric's secrets, but one of Italy's major banks "is one of my favorites," Eric reveals. "It trades at 12.7 times trailing earnings and pays a 2.7% dividend - yet its shares sell for just 3.95."
The earnings for this Italian bank are tremendous and growing by double digits over the last three years. The bank is also aggressively < expanding into Central and Eastern Europe, where margins are among the highest in the world.
Eric also likes another bank that is Italy's largest bank and very profitable. The bank trades at 13.6 times earnings and yields 4.4% -- more than benchmark 10 year euro bonds. It has a great future, Eric explains, because it is making major acquisitions in Germany and Eastern Europe.
Speaking of Germany...
"Germany is another example of great change taking place in the banking industry," Eric says. "Deutsche Bank has taken the boldest steps reducing labor, cutting costs and increasing margins through investment banking. "
Germany's recent election results, where no party ended with a clear majority, were a disappointment for smaller and mid-sized businesses that rely more on micro economic policies and tax changes. But this is not the case for Germany's large caps, Eric says.
"Corporate Germany has already started to reform since 2002, cutting labor, reducing costs and transferring manufacturing to Asia and East Europe. Whereas German GDP has been flat since 2002, corporate earnings have grown by more than 50% over the same period. German large-cap companies are very aggressively introducing US-style corporate restructuring policies. German stocks will continue to rally and still offer exceptional value compared to other major markets."
Eric is playing the European banking sector to win. His Renegade subscribers bagged 41.8% on Hypo Vereinsbank and 126.3% on < October 2005 Deutsche Bank Calls earlier this year. They're riding open positions in a bushel of banks to potentially huge payoffs. And < his profits don't stop at the German and Italian borders. Just today, his subscribers are taking up to 13.4% on India's HDFC Banks and 25.5% on Bank of Ireland. Is there more where that came from? Bet on it!
You know another place where banking is hot? China! We've all heard about the mountains of bad loans on the books...corruption and embezzlement among senior managers...and other woes. But some of the world's top financial institutions - Royal Bank of Scotland, Bank of America, and the Singapore government's investment arm, Temasek- have spent about $17 billion in China buying sizable stakes in some of the world's worst banks.
Do they know something we don't? Maybe they figure that China's banks have hit bottom. And I think it's pretty clear, for all the reasons I laid out in Monday's A-Letter, that US banks are topping out. Where< would you rather put your money to work? Me, I'll take Eric's advise and go overseas. After all, that fits the Sovereign Society investment philosophy of true diversification-buying the strongest stocks in the strongest sectors in the strongest economies and the strongest currencies.
Best wishes,
SEAN BRODRICK, Investment Director
The Sovereign Society Ltd.
E-mail: seanbrod@bellsouth.net