Tuesday, April 14, 2009

What if your stress test was like eating an ice cream sundae?

Everyone that's ever had to endure an actual stress test at their cardiologist knows the challenges they present. However, imagine the joy of a stress test if they took out the walking, the treadmill, the wires, added a chair, soft music, mood lighting and offered you unlimited ice cream sundaes? You'd probably keel over from a massive coronary in 15 minutes, but your stress test results might show that you'd passed with flying colors!

Well, that brings us back to the bank stress tests. It seems that Mr. Market finally caught onto Wells Fargo's accounting slight of hand and Goldman's missing month and the markets have struggled so far this week. Intel's earnings might garner the bulk of the press tomorrow but don't be surprised if talk that the "stress test" results coming out gets people revved up again. Another convenient leak hit the NY Times tonight........US planning to reveal data on health of top banks.

However, the game is rigged. The economic data that the FDIC and the Treasury uses in their base forecast and adverse conditions forecast have already been surpassed!! The trend in unemployment indicates that conditions at the end of 2009 may be WORSE than the government's worst case scenario for 2010. Like any good analyst can tell you, the output of your model is only as good as your inputs. Garbage in, garbage out.

So while the government seeks to soothe the market's concerns about the banks by showing that all is happy days at the banks, investors in the know realize that the reality is banks face a weak environment that is probably getting worse (albeit at a slower rate) not better. In fact, foreclosures have resumed sharply since 4/1 -- why you ask? The administration asked the banks and Fannie/Freddie for a moratorium on foreclosures in Q1. That moratorium has expired and the banks are making up for lost time.

Cheers!

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