a) The outcome of the upcoming stress test results have been partially anticipated. The Governor of the Bank of Italy, the French Minister of Finance and the Chairman of the British FSA are confident about their
respective results. Analysis predict that the TIER 1 capital ratio of 6% would be largely achieved by the European
Major banks.

b) Obviously a stress test, to be credible, need to report some bearable bad news too. Additional fund raising
might be needed by Greek banks, Spanish Cajas and some of the German Landesbanken.
(To be noted that representative of both Spanish Cajas and German Landesbank have recently declared their confidence in the results).
The important aspect is that the outcome shouldn't be too negative - this might have a negative impact on several Asian investors that might refuse to buy European bonds in the future. The results of the tests will also have a strong impact on the Euro and in market liquidty.

c) According to Barclays Capital the capitalization required will be in the region of 85 billion euro most of which
to go to Spanish banks (36 bl) German Landesbanks (34.5) and Greek banks 8.6 billion.
Other Swiss based forecasts expect only a few banks to fall short of the 6% tier 1 capital requirement for instance
some of the greek banks at 5.6% (given that the Basel Committee regulations required only 4% this shouldn't be a
major issue).

d)The "haircuts" to be applied to Government debt seems to be around 17% for Greek Sovereign Debit, 10-11% for UK Debt, 6% for the French debt and around 4% for German Debit. Some analysis feel that this is not enough and tests
should have considered a 50% write down for Greek debts. I found this argument groundless. A Sovereign default
in Europe is very unlikely to happen.

e) The big question is IF these stress tests will have a similar impact of the american ones in 2009, namely to restore
confidence on the European banking system. My answer is almost certainly yes if, as it is expected, most of the European banks pass the tests and some objectively obvious problems are recognized, hence increasing the credibility of these tests.
This positive view is confirmed by analysis at Goldman Sachs that expects no surprises from European major banks.

In Short: To restore confidence in the European banks the stress tests should confirm that major European banks
are in good health - few exceptions might come from Greek, Spanish Cajas, some of the German Landsbanks and Irish banks but not sufficient to trouble the markets.
I think that the results will be positive and better than expected. Test methodology is in my view very appropriate.
The results should remove much of the uncertainty in the markets and a rebound of european banks is to be expected after
their publications.

- The rebound of the Euro, fueled mainly by Spanish bonds auction confirms my previous theory that the European are full of opportunities as their problems have been largely overstated. Even Greek banks are becoming interesting given the possible mergers in their highly fragmented market and the interest of some Sovereign Wealth Funds in acquiring largely undervalued Greek banks.

Overall I think European companies present better opportunities than U.S. ones. As an example of U.S. related issues we should note that some US States like California and Illinois are struggling to replay their bonds (cutting wages and deferring payments to suppliers) so in a way they are in a worse situation than many European Governments;

- Given the substantial penalization of European banks and the new financial regulations in the U.S. European and Swiss banks are still a good buying opportunity. Many European banks do not rely on credit card loans (that are not largely diffused in Europe) but in a more traditional and profitable approach to banking.

- Commodities (through a broad Index Linked ETF) are in negative this year and this is a very good entry point. Despite the volatility China, India and other emerging countries will fuel demand and supply remains limited. My advice, given the cycle in commodities, is to rely on broadly diversified exposure perhaps equally weighted among the 4 main commodities sectors (Agriculture, Precious Metals, Industrial Metals and Energy). This strategy will also serve as a good hedge against inflation.
This inflation hedging strategy has been recently adopted by several pension funds like the California State Teachers Retirement System and Calpers.

- Earnings will continue to surprise positively in this quarter - for this reason exposure to equities is still highly recommended. Rebound till end year to be expected.

In Short: Positive on the Euro, European Banks and overall on European Equities. Recommend exposure to commodities directly through a well diversified ETF as a hedge against inflation and as a bet on continuing growth. Earnings to surprise positively as the year is most likely to end in positive territory as Economic growth will, even if at a lower pace, continue.

Strategy: Banks and Regulations in Europe

- French Economy Minister Lagarde voiced her optimism about the upcoming stress tests results to be releases by
July 23. As Der Spiegel reported last week apparently some regulators were against the sovereign default scenarios to be part of the tests so the devil is in the detail and much depends on which methodology will be used. I feel that a sovereign default scenario is very difficult to forecast and unlikely to happen, at least in the short-medium term.

In my opinion most of the European banks will pass the stress tests and surprise positively BUT to be successful these tests need to be transparent, have a credible and solid methodology and a clear conclusion/action plan.

- Markets perceived the call for austerity of ECB President Trichet as bad news. The are clearly two predominant school of thinking - the American "call to spend" to fuel growth and the German-European view to reduce deficit with
a set of austerity measure and cost cutting. Given that unemployment in Germany
fell in June to 7.5% and a weaker Euro will boost German exports. The German view seems to be a better solution.

- An excessive strength of the Swiss Francs might have negative impact of Eastern European banks that conducted many of their lending operations in Francs. This might have a negative impact on several banking groups with extensive operations in Eastern Europe.

Summary: European banks will likely pass the stress test without major problem but the market might not perceive that positively unless there is a convincing methodology.
European strategy to reduce deficit is certainly positive, it might not seems so in the immediate short term, but on the medium long term it will certainly pay off. Despite the gloom Germany and other European economies remain highly competitive, especially with a lower Euro. I feel that despite the volatility European banks, particularly these traded in Euro, are reasonably priced and in many cases (smaller regional banks with clean balance sheets) present limit risks. Many of the scenario proposed with Sovereign default are, given the European 720bn package, unrealistic. Swiss investments (and Swiss Francs denominated asset) highly recommended. A centralized European banking regulator might not add much value.

- Today at 11:15 the European Central bank will reveal the three month cash demand level from banks. This will be seen from the market as an important indicator of European bank liquidity: the ECBE rate of 1% is in fact higher than the market rate and borrowing in the three month window over 300 billion is considered by several analysts as a bearish news on European banks. The bank of international settlements recently affirmed that there is a risk that European banks will struggle to refinance their debt if the investor sentiment remains negative.

- While this is Today bad news for European banks it is good news for many of traditional Swiss banks that attract new inflow of funds not based on fiscal advantage but higher stability. Additionally, the Swiss National Bank recently stopped to avoid an appreciation of the Swiss franc as exports remain strong despite the appreciation.

- A good news from China is that this year as many as 54 million Chinese will be traveling abroad (China National Tourism Administration forecast) vs 35 million in 2009 and triple than 10 years ago. This, combined with the yuan 18% vs the Euro this year could open an investment opportunity in European Travel and Leisure companies. This is one of the sectors that will benefit from a cheaper Euro. As some valuations are interesting this could be a good medium-long term investment opportunity;

- In the short term markets will probably remain volatile throughout the summer. The good news is that much of the bad news are already out in the market so unless we see something catastrophic happening (e.g. bank troubles, a big default and further negative data particularly employment data) we should see a rebound from September if not before. European markets are currently largely oversold.

Summary: ECBE announcement very important for this sensitive market, Swiss banks to gain based on security and stability (and the Swiss Franc too) European Travel and Leisure sector interesting as it will benefit from a lower Euro. Volatility to be expected but as always largely oversold markets are a buying opportunity to many investors.

Dr. David Costa of Robert Kennedy College on CNBC 23 June 2010 from Dr.David Costa on Vimeo.

- A recent study by Merrill Lynch confirms that the wealth of the millionaire investors rose 18.9% to 39 Trillions in 2009. Compared with the 32.8 Trillions of 2008 and 40.7 Trillions of the pre crisis level we can see that Millionaires returned to pre-crisis level.

- The faster growing regions are Asia Pacific (31%) but even North America rose a respectable 18%.;
Global wealth increased 11.5% last year to 111.5 Trillion (111.6 in 2007)

- Given the volatility it is good to invest in sectors where Europe is clearly a World leader and has a very important competitive position that cannot be easily compromised like Luxury. Barrier of entry in these markets is very hard making them very immune to most common competitive pressure and European companies are doing well (e.g. Volkswagen has to increase production for their Audi A8 - A1 model given the high demand, especially in Asia).

- Europe is THE place where most of the luxury brands, from watchmaking to fashion are concentrated. These century old house of brands will benefit greatly from lower Euro thanks to exports in Asia, Middle East and North America;

- "The European Gloom" virus is good news for investors looking to buy brands that will probably be around much longer than any temporary crisis and have still acceptable valuations.

Summary: A good strategic play in Europe is to invest in European luxury companies with good valuations and high brand recognition / exports in Asia and fastest growing regions. As it is not always easy to pick the right brands investing through a specialised fund is a sensible option.