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Bank Stress Tests?? What Stress?

Written by: Sean Hyman

Article Overview: So by now you’ve heard the unofficial results of the bank stress tests. Only ONE, that’s right, ONE bank out of the nineteen tested is in need of additional capital.   SHOCKER!!  I mean really, did anyone actually believe that the government would do more damage to the already-fragile banking system?  

Bank Stress Tests?? What Stress?

So by now you’ve heard the unofficial results of the bank stress tests. Only ONE, that’s right, ONE bank out of the nineteen tested is in need of additional capital. SHOCKER!! I mean really, did anyone actually believe that the government would do more damage to the already-fragile banking system?

Last Friday, the government disclosed the measures that were used to test the banks. This Monday, the US markets opened lower. All of the talking heads will tell you that we opened lower because of the dangerous swine flu, but I find this to be a bit too convenient. Wag the Dog, anyone?

Let’s face it; the government stands to lose far more than any individual bank that could not pass the stress tests!! (I wonder which bank will take one for the team?). One thing is for certain, the Government is “all-in” with a portfolio heavily weighted in banks.

When was the last time you bought a stock and then hit the message boards talking about how BAD of a company it is? Didn’t think so!

That’s why it’s really important to understand how big of a player government is and how it’s decisions can affect the capital markets. Find out what you can do to position yourself properly.

So what have we learned throughout this entire banks stress process? Not much. We still do not have a reasonable idea of the health of the banks, and we know that the government will provide with them all that they need in order to keep the cash circulating.

Let’s take a look at what this means going forward.

There are two basic schools of thought regarding the stress tests:

1. You believe that the process for the stress tests was sufficient, and that the results show that the banks are strengthening and the economy is on its way to recovery, or

2. You do not believe in the sufficiency of the stress tests, or that the banks are as strong as the government might have you believe.


The market is currently weighing these options as we lead up to the “official” announcement of the results of the stress tests on Mon., May 4th. Expect a lot of political jaw-boning and sideways trading up until the report.

If the prevailing feeling is from the first camp, then the markets could rally on higher expectations for the economy. This could have a positive effect on the US dollar, furthering the safe harbor trade as money comes pouring from abroad to invest.

Should the prevailing sentiment come from the second camp, then we could see the exact opposite. Markets could sell off in fear of what’s being hidden, with the US dollar weakening as money leaves the US.

Regardless of how this all plays out, it has become obvious that the government will do whatever is necessary to make investors believe that the picture is rosy is going forward. So in this regard, there is nothing to be stressed about at all!

Mike Conlon
Contributing Writer

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Article Tags: banking system, banks, capital markets, decisions, economy, flu, last friday, measures, message boards, one thing, schools of thought, shocker, stock, stress tests, sufficiency, swine flu, talking heads, unofficial results, wag the dog, when was the last time



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