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Posts Tagged ‘Prudent Money Blog’

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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The stock market rebounded nicely this morning and is back over 841.  This could potentially be a tough 2 to 3 weeks for the stock market.  We really need to watch closely so that we can stay on top of the main question concerning the market right now. Was the end of the bear market in March and this is the start of a good time to be in stocks or is this stock market rally that started 6 weeks ago nothing more than a typical “bear market” rally?  If it is the latter, you really need to consider reducing risk if you have not already done so.

It always comes back to the banks.  The tech stocks were the poster children of the last bear market and the banks and financial services companies are the poster children for this bear market.  As I wrote this morning in my Prudent Money Blog, the Government actions of wanting to assume more and more ownership in the banks is making the markets nervous.

The upcoming release of the stress test for the banking system really has the markets on edge.  Hal Turner wrote over the weekend that the stress test has been leaked and the results are horrible.  Who knows if that is a rumor or not?  The bottom line risk is getting high and we need to watch those price levels of the market. 

So we have had one very bad day on Monday followed by a good day on Tuesday.  Today will probably tell us in the short-run what the next few weeks will look like.

 

 

 

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