Stress Test a Hoax? Another Wave of Banking Tsunami?



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May 09 2009
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Something is not right here although I hope I’m wrong. Not many months ago the stock market happily plunged with a single bad news although there were dozen of good news accompanied it. Now a single good news plus dozens of bad news is enough to send the stock market to the moon. Everything was upside down literally. Maybe it’s the sentiment of the investors who chose to ignore or pretend the worst is over (although I hope the worst is really over). But we have to analyse logically and not jump onto the bandwagon. Sure, if you’ve already jumped and made good money then congratulation but still you need to ask youself – what’s next?

At this moment there are more analysts who think that the worst is over than analysts who think the current rally is a sucker’s rally. And who can blame them when the bullish graph is there in front of their trading terminal. It doesn’t matter if the current rally could be just another sucker’s rally with stamina booster at the end of the day because their job is to go along the tide. And the tide now says the bull is in charge of the trading floor. You would need to have a dragon-heart to defy the tide but how many can resist the temptation seeing the stock price skyrocket. What if the rally is real and you’re actually the sucker missing the boat watching the stocks movement without any actions? This is why stock trading is such an exciting game teasing your emotion again and again.

The job losses registered in the month of April was 539,000 when the expectation was 610,000 hence the rally on Friday. But it’s still 539,000 jobs lost nevertheless and the unemployment rate is at 8.9%. What’s wrong with the people here? Has the “denial syndrome” pandemic spread from Malaysia to U.S.? OK, maybe the jobless figure was not that bad compared to the estimation but that’s because the expectation was set too low, not to mention the “special help” from government in creating 60,000 vacancies to help the situation. It was the same like what the Malaysia government did – creating artificial positions although the new recruits may have nothing to do. Where were these vacancies when the economy was in good condition? Get the picture?

U.S. banks’ stress test results were release and in total the banks need $74 billion more – Citigroup needs $5.5 billion, Wells Fargo needs $15 billion and Bank of America needs $33.9 billion amongst others. Ironically the stock market perceived the result as good because it was, well, better than expected although they played down the risk of credit cards. But we’re talking about $74 billion here which in another word means the banks are still in the risky zone, not to mention the banks’ better than expected earnings result was due to creative accounting. Of course everyone seems to bulldoze this fact and prefers or rather pretend that the banks are out of the woods already. Maybe they’re right considering the Obama’s administration would most likely bail them out if there’re still worms not out from the can.

Anyway, William Black, an Associate Professor of Economics and Law at the University of Missouri believed the stress test was purely a propaganda or rather a smoke screen to give an impression that everything is well with the banks when in fact it is not. What better way than to tell the public that the banks are well capitalized and the crisis is over? William Black’s simple argument was that Fannie Mae, Freddie Mac and AIG had passed much more stringent government stress test but still fails ultimately. In fact William Black predicted another wave of banking tsunami with losses of more than $2.5 trillion compared to U.S. government’s $599 billion estimate. Also the issue is – if the government foresees $599 billion in additional bank losses, why on earth the government was requiring the banks to raise $74 billion only? Where’s the remaining $525 billion?

It’s good to have celebrations once in a while but before you get too carried away with it, ask yourself if the U.S. banks’ problems are really over or it was another political lies hoping the scheme will work and the losses would disappear overnight. Either way you would have to make a decision and boy, isn’t this fun, challenging your emotion – to buy or not to buy? Or maybe it’s the opportunity for you to sell? Scratching, scratching head.

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Comments

Yea u r rite. its not easy to sit still when the market is hot. time 2 sell? i think so. economy is going to contract, but the market moves d opposite way! time 2 buy? well, its not easy 2 buy when for example, d stocks u going to buy already up 50% or more. thats a lesson. buy at time of extreme pessimism, just do it. maybe u just hv 2 stay focused on ur target price n a wide MOS. emotional stability d key to success.

Yea u r rite. its not easy to sit still when the market is hot. time 2 sell? i think so. economy is going to contract, but the market moves d opposite way! time 2 buy? well, its not easy 2 buy when for example, d stocks u going to buy already up 50% or more. thats a lesson. buy at time of extreme pessimism, just do it. maybe u just hv 2 stay focused on ur target price n a wide MOS. emotional stability d key to success.

Yeah..this market has been super bullish even though the bearish fundamental have been the same all the long.

Yeah..this market has been super bullish even though the bearish fundamental have been the same all the long.

The market is usually 3-6 months ahead of real economy. It may true that people are in denial wanting only to believe the positive news rather than the bitter truth.Whatever it is, as long as it’s a rally get on the bull, hold on the horns and enjoy the ride. Just don’t fall off the bull, get trampled and gored by the horns.

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