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Archive for the ‘Stress Testing’ Category

Well, the results of the stress tests were revealed this past week.  It turned out to be much ado about nothing.  In fact, most of the banking stocks went up on the news.  It does leave the question as to what the Obama Administration is really trying to accomplish through a process that didn’t make much sense.  For now, we will leave speculation for speculation’s sake.

I found it interesting as to the criteria that was used in stress testing the banks.  They were looking for how the banks would react to the worst case economic situation.  Over the weekend, Alan Abelson wrote about the criteria in his article in Barrons:

“The “worst-case scenario,” as the cliché goes, that the Fed crew was able to dream up was one in which the unemployment rate, already a hair under 9%, would rise to 10.3% next year, housing prices would fall another 22%, and the economy — which has been shrinking at more than a 6% annual rate the past two quarters — would contract at a 3.3% pace.”

Well, I think that we could easily see 10.3% in unemployment.  Of course, that is dependent on how aggressive the Government gets with their monthly job “estimate.”  A decline in growth of 3.3% is also not unlikely.  That scenario would produce 599 billion dollars of loss for the banking system.  Now can you imagine the armageddon outlook if you were to come up with a realistic worst case scenario?  

Then there were the unemployment numbers.  I wrote about the numbers in detail on the Prudent Money Blog this morning.  It is funny that no one is writing about the creation of the 226,000 jobs out of thin air estimated by the Government in the jobs report.  Can the Obama Administration really pull off this illusion making everyone think that everything really isn’t that bad?

Well, the stock market certainly thinks so.  The market continued the rally this past week.  Thus far, the S&P 500 is up 40% from the price level of 666.  This falls right in line with what happened in the 1929 bear market.  The major stock market rally in that bear market was up 46%.  Keep in mind that even with this stock market rally, we are still a little bit over -40% from the highs in October 2007. 

I put together a very detailed analysis in my recent letter to my clients.  After going through that process, I have some very strong technical evidence that this is nothing more than a bear market rally and its days are numbered. 

Keep in mind that everything gets exaggerated in this type of bear market.  The moves both up and down are much bigger.  Guard your risk very closely!

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As the news and analysis continues to flow from this stress testing of the banking system, I become more and more disturbed.  The Government decided it would be a good idea to run a simulated stress test on 19 of the largest banks in the  United States.  They want to make sure that they banking system can handle the worst situation.  The Government has the results of the test and have told the banking system.

The Government is basically telling the banking system whether or not the individual banks are weak or strong.  They are doing this based on their own system.  In other words, career politicians and in some cases, individuals who have never run a bank before, are telling bankers about their health based on a simulated experiment.  Those results were due to be released tomorrow.  Then it was changed to Thursday.  Now it has been changed to Friday.  Banks are up in arms about the results and don’t necessarily agree with the Government’s assessment.

The Government is now giving banks mandates and telling them that they have to raise capital.  Citibank is rumored to need 10 billion dollars in extra capital to meet the Government mandate.  For the weaker banks, they will be forced to give the Government more and more ownership through the use of common stock. 

So, go with this scenario with me for a while. There was a king who wanted to take over the entire country.  The king  knew that he had to control most of the country’s businesses in order to have complete control over the system.   So, the king had his servents assess the local businesses.  The servents reported back to the king that the businesses were weak.  The king said that they had to triple their sales in a week or he was going to take ownership.  The businesses knowing that this would be impossible had to give up control.  As a result the king controls the country.

The red flags are flying and the Government is taking a step-by-step approach to get ownership of the banking system and this seems to disturb only a small percentage of Americans.  For that, I have no answer.  Maybe I am completely off base and paraniod.  It woulnd’t be the first time.  I just know two things.  First, politicians have never proven that they can be trusted.  Second, the Government is seeking to control alot of our once capitalistic system and doing so at an alarming rate of speed.  Paranoid?  I don’t think so.

With stress testing and swine flu outbreaks (probably a little overrated) as the backdrop, the market continues to march higher.  At this point it looks like the S&P 500 has a date with destiny at the price level of 900.   Analyst Jeff Saut posted his weekly commentary this morning and wrote that he characterized the last 9 weeks as a buying stampede.  It is a period where investors stampede into the market and buy as much stock as possible.   His analysis shows that the longest buying stampede that he has on record is 41 days.  Currently, we are on day 39 of the buying stampede.  We are also at a point where the stock market (S&P 500) is almost positive for the year.  That would occur at a close above 903. 

If you are wanting to reduce risk by selling stock, there might not be a better time to do so. As this rally continues, the risk grows greater and greater.  If you were going to stay fully invested you would do so based on the notion that all of the worst is behind us.

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