All the Banks Pass their Stress Tests, Surprise, Surprise, Surprise

By: Paul_J_Nolte

I can just hear Gomer Pyle crying out “surprise surprise surprise”. All the banks passed their stress test. What remains an open question is just how stressful was the test – a stroll about the park (benign economic growth with very little defaults) or something to get the heart racing. Best guess, based upon the results – a lap around the kitchen table. Another big surprise was Wells Fargo’s earnings report – well above expectations, however little background as to quality of loans/balance sheet and how much bad debt is still hanging around.

The coming week will be loaded with both economic data (from housing to inflation and production) and earnings. Oh, and don’t forget about tax-day squished in the middle. The bank earnings due this week may support Wells Fargo’s claim of a better road ahead, but the key will be what the balance sheets look like and how much in loan loss reserves are built. This week could determine what the rally is really made of – the Energizer bunny or merely a rabbit “peep”.

We finally have some confirmation, albeit tepid, that this rally has surpassed some prior peaks. But in doing so, the stage maybe set for a long and drawn out correction. Some indicators we use measure the amount of “up” volume as a percentage of total volume and net number of advancing stocks over the last five trading weeks. At Friday’s close these indicators were at all-time highs or matching only one other time in the 20-year history of our data – January ’04. Unlike today, ’04 marked the end of a year long run higher (not five weeks) that marked the beginning of an 8-month correction that took stocks down 10-20% (depending upon the market).

And that occurred during a bull market. While we still believe there is more “testing” of the lows over the months ahead, we could be entering treacherous waters for the markets given the rapid gains achieved in a short period of time. We are struggling with the thought that all is right with the world after a six-month firestorm. As mentioned above, the coming week could be make or break for the current bull-run.

The bond market, unlike the stock market, is worried about the economic condition and isn’t quiet buying what Wall Street is selling. The higher yield in bonds is a direct result of the heavy issuance of Treasury bonds to cover the rapidly rising government debt. With huge supplies and modest demand, buyers are demanding to be paid higher rates to buy the bonds. This week inflation reports will likely show modest if not zero inflation. Coupled with a slowdown in production and rising unemployment excess capacity abounds and is not likely to spur higher inflation until the economy begins to rebound – which is not likely until early 2010 (and may be later!).

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.