Stress Test --> 10.3% Unemployment in Adverse Scenario
A: Just wanted to throw out that the fed released the Bank Stress Test White Paper moments ago. The ADVERSE Scenario, which 'was designed to characterize a recession that is longer and more severe than the consensus expectation', anticipates a peak U3 unemployment rate of 10.3% or so by 4th quarter of 2010; we are at 8.5% currently. The BASELINE scenario, which 'reflected the consensus expectation in February 2009 among professional forecasters on the depth and duration of the recession', has unemployment peaking at 8.8% for this cycle. Clearly we can throw out the baseline scenario right away, because it is highly likely that unemployment will jump by more than 0.3% at some point by the end of 2009. Reading through the paper now.
Here are the charts showing you BASELINE SCENARIO & ADVERSE SCENARIO assumed by this test on the banks for GDP, UNEMPLOYMENT, & HOUSE PRICES:
Equity markets are clearly in an uptrend, a likely bear market rally that could last longer than expected. Program trades, momentum trades, quant trades, short squeezes, etc.. all control the markets now - making the markets a bit more irrational than they might otherwise be. I would use caution when interpreting stock market movements to mean all is well again.
You are going to start hearing major criticisms about the ADVERSE scenarios assumed over the next few days, and rightfully so. In meantime, expect the unexpected from stocks for a while longer as any news is reacted to positively.
Comments (15)
I completely agree with you Noah. As an individual investor I'm treading very carefully. Sadly I haven't touched any financial companies..I ALMOST bought a bunch of AMEX but i chickened out, Sigh.
Right now it seems as the underlying fundamentals don't matter whatsoever -- everything is driven by momentum -- it seems as if stocks are just surging as a sector rather based on each company's underlying fundamentals. I still believe there are some companies that are relatively cheap at their current prices.
Noah, I made a strange long term investment today -- one that i've been on the fence about for a long time -- since it is truly speculative -- TIVO!
GLUCK everyone.
Posted by RegularAnon | April 24, 2009 3:23 PM
TIVO huh? Okay. Im adding to some shorts here, nibbling on some JULY puts. But I do see rally lasting a bit longer, market just wants to go higher. For me, I think I look at the next few weeks as a time to pare out remaining longs/calls and add to some shorts/puts.
S&P just seems to want to break 900, and if it does, it likely will push higher and then I think Im out of my longs for a bit.
Posted by Noah | April 24, 2009 3:38 PM
I'm doing fairly well trading, but I honestly have no clue where the market is going on a week to week basis. I'm rarely holding any short term trades for more than a day. But I'm happy with my longer term investments.
As you remember my previous long term investment recommendations - PM, MO, COP, NRG -- TIVO doesn't fit the bill! Tivo's current business is slighlty improving, but the most important thing in my mind is that they are not burning cash -- and will survive.
The reason I'm buying Tivo is their patent portfolio -- I believe that Tivo will ultimately prevail over Echostar (again!) -- and it will give them the leverage to force ALL the cable companies (as well as international companies).
Clearly Tivo is a risky investment. Their current business is not worth what their stock price is. HOwever, I believe their patent portfolio could be worth many billions. Guess only time will tell.
Posted by RegularAnon | April 24, 2009 3:49 PM
Insiders are dumping shares. FWIW.
Posted by brenda | April 24, 2009 5:13 PM
yep, heard similar story. And heard that through all this, no company is announcing any buy backs...that is also telling. The bear rally will surprise in duration as it always does, cause pain for shorts, and when least expect it, likely spike down in another wave.
Posted by Noah | April 24, 2009 6:11 PM
In my book, until the indeces break above their 200 day moving averages on volume, it's still a bear market and anything can happen. As of today, the SPX and DJIA are well below their sharply declining 200 day MAs, the NASDAQ is a little better. My guess is the market rolls over before it tests these levels, but a test is highly unlikely to be successful until the 200 day MAs are not declining so severely. This will take time. I see a buying opportunity ahead, will we go to the old low or lower, my guess that would take some really bad news....and I am not hoping for it by any stretch. My guess is its a long boring to painful summer while the market bases out and we absorb the remaining pain to come in the financial system. I'm hopeful the worst is over....and expecting the printing presses to be working overtime to keep the banks afloat. Still holding some gold to be safe in case the dogs stop eating Uncle Sam's counterfeit dog food.
Posted by jeff | April 24, 2009 7:45 PM
We all probably have our own unique trading styles and mine tells me we have much further to go on the upside. The daily index charts are in an uptrend, the weekly charts are forming a failed sell pattern and the monthlies a climactic bottom. I don't try to predict how exactly how far we go or in what time frame but have trailing stop losses in place on all trades. I don't think this rally helps RE at all. Reading other blogs, the RE bulls(brokers, owners) are touting the stock market rally as proof they are correct in their bullish bias. As this stock market rally gains steam it will attract money that otherwise might be going to buy RE. And when the stock market starts heading down again and RE has gone nowhere, we might just get the RE capitulation many of us expect.
After the pain this past decade has dealt out, we may be seeing the death of "buy and hold". The stock market crashes of '00-'02 and '08-'09 and the housing collapse are going to bring out the market timer in many people. Whether this turns out to be a good thing for current traders remains to be seen.
Posted by cfranch | April 25, 2009 7:20 AM
Noah, I agree. The only positions that have hurt me over the last month are my shorts (obviously). It is a frustrating time, because I for one have no conviction in this rally, and yet it goes on.
I too have started to sell my longs from the fall, some of them have hit a 20% up move (such as MHP and CAG), but many others are still down appreciably. If this rally gives me the chance to exit these positions with any type of profit, I will.
I have had some great short term trades that worked, GS and TUP, but others that have failed miserably (SRS and FAZ). Everytime I think the market will pullback for sure, it goes up.
Basically, I am going to just sit on the sidelines and wait because I have no conviction to buy, and my short trades have been killing me.
My guess is that we will at some point before October retest around 750, and at that point I would again start building positions to go long.
If I am wrong, and the market goes up to 950, I will get out of all equity positions, and do what I did for the last several years which is to stay out of the stock market and look at other asset classes (such as cape cod real estate) as places to invest.
Posted by mh23 | April 25, 2009 7:51 AM
cfranch - "I don't think this rally helps RE at all. Reading other blogs, the RE bulls(brokers, owners) are touting the stock market rally as proof they are correct in their bullish bias"
totally agree, If anything, it might make a buyer a bit more trigger happy if they are close to a deal for a place they really like, but certainly it will not mean a new surge in buyers coming in that otherwise would not. Its funny, Jeff & I discussed this exact thing about a month ago, when Dow was just passing 7,000 after making new lows. We said, the bear rally would likely start talk of how its all better again, and bullish talk on RE will begin.
Remember Jeff? We should have posted the article!
Posted by Noah | April 25, 2009 9:37 AM
Jeff - I agree. But I think the next wave down will be sparked by something..not sure what. GM bankruptcy seems all but priced in, Maybe CITI nationalization? Maybe sovereign default? Maybe loss of confidence in fed/treasury/us govt causing treasuries to fall? Not sure. But I agree that a great buying opp is still ahead of us. You just cant time it.
Posted by Noah | April 25, 2009 9:39 AM
The rally could last a bit longer until earnings season is finished. This is nothing more than a continued short covering rally - note the biggest gains are in the most heavily shorted sectors: casinos (LVS, MGM, WYNN), high end retail (RL), and of course financials of all stripes (GS, BAC, AXP, DB, FITB, etc).
Posted by In Debt We Trust | April 25, 2009 3:50 PM
Noah, I think it's at optionARMageddon, there's a discussion of Simon Johnson's observation that the credit markets don't think nearly as highly about the inevitability of happy bailouts for the banks as the equity markets. Worth a look.
Posted by brenda | April 25, 2009 4:03 PM
Just had another thought:
End of month window dressing for fund managers. How many of them would be selling into next week to realize gains on the biggest rally since 1938?
Posted by In Debt We Trust | April 25, 2009 4:26 PM
I cant find anyone bullish. None. Which is odd. Just like a while back people thought Bear at $2 was the bottom, Tarp was the bottom, Buffet article in the NYT was the bottom, etc, the upside today will last a bit longer than many of us think.
As for stocks implying real-estate upside...forget it. Everyone I know who is in Wall Street, or has significant exposures is thinking the rally wont last, so they wont be spending money on real-estate. People are fearful and will remain that way for a while.
Posted by iven | April 25, 2009 5:58 PM
Jeff,
"REITs with total debt to capitalization near 60% and debt obligations as a percentage of assets of more than 35% through 2012 are expected to come to market to issue equity in the coming weeks and months, underwriters currently in talks with REITs told dealReporter."
“We have been telling people get out and issue equity and be one of the first guys to do it; there is not enough money to recapitalize everyone,” said one underwriter currently working on similar deals.
http://www.ft.com/cms/s/2/
9c4763c6-2f3d-11de-b52f-00144feabdc0.html
Posted by In Debt We Trust | April 27, 2009 1:14 PM