Thoughts

Amnesia Abounds

Down big on Tuesday, up big on Wednesday, down big on Friday. Did I mention that Mr. Market has no memory from day to day?

The Two Main Issues

Can the improving U.S. economy trump Europe's problems?

To what degree has the improved U.S. economy been discounted in share prices?

From my perch, the critical issues for the markets over the balance of the year are whether the improving domestic economy can trump the problems in Europe and to what degree a better-than-expected U.S. economy has been discounted in share prices.

Is Switzerland Safe?

As of year-end 2008, the banking industry in Switzerland had an average leverage ratio of almost 30-to-1.

The industry's short-term liabilities were equal to 260% of the Swiss GDP. My concern is with the second- and third-tier banks.

I have thought recently that investors have been too dismissive of the European debt crisis, as fiscal imbalances are only resolved by austerity measures that slow aggregate growth. Today the issue is back on the front burner as Portugal's spreads have widened ever further.

Which gets me to Switzerland -- a country widely believed to be a safe haven financially and economically.

I have done little analysis of Switzerland's banking industry or on the country's economy. But we have learned from history that there is an inherent risk to any country when the financial services business is large relative to its GDP.

As of year-end 2008, the banking industry in Switzerland had an average leverage ratio (assets/net worth) of almost 30-to-1, while the industry's short-term liabilities were equal to 260% of the Swiss GDP, or 1,275% of the Swiss national debt.

There are about 330 authorized banks and securities dealers in Switzerland ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients.

UBS and CS are the largest and second largest Swiss banks, respectively¸ accounting for more than 50% of all deposits in Switzerland. Each has extensive branch networks throughout the country and most international centers. They are sound.

But my concern would be with the second- and third-tier banks.