Stress Test: For Banks or Investors?

The buzz these last few days and circulating around the trading floor surrounds the details and outcome of the Bank Stress Tests. What will they show? Who will get exposed? Which, if any are solvent? The tests were originally designed to assuage investor concerns. Instead, the tests have raised fears and increased rumors on who will pass and, more to the point, who will fail. The Treasury has attempted to get out in front of the release of these results and inform jittery investors that this is not a pass-fail test, but rather a way to identify which institutions require additional capital. Apparently, after the results are announced and the under-capitalized institutions identified, they will be given a window of six months to raise capital from the private sector. Sounds reasonable. It has raised some fears and rumors a large bank will be thrown under the bus to prove the soundness of the test and add validity.

Financials should receive some detail beginning Friday and into the weekend. The Federal Reserve and Treasury have done some of their "best" work over the weekend these past twelve months. Do we really want to be too long with the markets closed? Which leads to a potential strategy. For investors with a taxable account, as a way to minimize taxes (eliminating the need to sell profitable positions) may wish to utilize the Short Proshares. For NASDAQ utilizing PSQ- short the QQQQ. For the Dow utilizing DOG - short the DJIA, and for S&P SH - short the S&P 500. For more aggressive investors there are additional Proshares that return twice the inverse return of the relative indexes.

Barring any surprises these positions may be unwound or sold come Monday after assessing the news, reactions and current environment. The market has run into some resistance recently and has had difficulty overcoming. But, the retracements have been minor and met with good buying. I believe we are in a base building phase fairly well contained by 860 on the upside and 806 below current levels on the S&P 500. Earnings are likely to help drive our next big market move and they are coming in fast, furious and widely mixed.

So, as the weekend approaches, if you seem to be tossing and turning more than normal, this strategy may help keep the Ambian in the medicine cabinet.

Disclosure: I do not currently own any of the investments mentioned above, but may at some point in the future.

Comments

[Roger Knights:]

"The Treasury has attempted to ... inform jittery investors that this is not a pass-fail test, ..."

No bank left behind.

Apr 24 02:50 PM

[Blake Winston:]

fed says certain banks are under capitalized...the market goes up. COF comes in with bad news, the stock goes up. Stress test insight iss essentially inconclusive...market rally's up.

I believe none of it and agree with the shorts, BUT, one cannot help but be frustrated with the puffery abound which has everyone prematurely thinking this is over.

Apr 24 06:02 PM

[Moon Kil Woong:]

I think right now I'm more worried about the Former head of the Treasury and the current Fed going to jail for coercion and fraud on BAC than the mock stress test.

I wonder how many other morally dubious things they have been doing? And is anyone investigating them using AIG to bailout their mythical can not loose money Maiden Lane illegally anymore now that Maiden Lane is being forced to report it lost $4 billion of public money? It's not the chump change, it's about the outright lies and coversion involved in this deal.

Or how over 50% of AIG bailout money ended up in overseas banks? Or why Goldman got paid out 100% of their deivatives positions with AIG before they expired while everyone else was left hanging.

Ooooh, the intrigue is killing us (stockholders and the taxpayers).

Apr 24 07:24 PM

[The Geoffster:]

The stress test is a sham designed to allay the fears of the masses. It will probably work too! Treasury and the Fed will do anything to save the banks and it would be foolish to bet against them. Just the same, I'd stay away from bank equity. We have opted for the Japanese model. Ten years from now, we should be where we are today, barring war or a pandemic. Buy precious metals and short the dollar and treasuries.

Apr 24 07:46 PM

[$OMALIA:]

Sell JPM against long BAC.

Apr 25 07:34 AM

[Old Trader:]

Although I'm not terribly confident of this rally continuing, the range for the S&P posited by this article is fairly tight (less than 10%), so I don't know that I'd want to be short the market. Imho, an overweight cash position is a more prudent investment posture to be maintaining. Currently, preservation OF capital trumps return ON capital.

Apr 25 10:39 AM

[henarl:]

No bank will be shown to "fail" the so called stress test. The FDIC could not stand a run on any large bank. The stress test is just a govt. PR scam to pacify an angry public.

Apr 25 11:39 AM

[RATHER FISH:]

If you go to a resturant and they give you lousy food,service cheat on your bill you stop going and if everyone stops going that resturant (business) closes and a better managed business takes over. THE TOO BIG TO FAIL BANKS....SHOULD BE CLOSED. Let new management take over. STOP THE NONSENSE.

Apr 26 06:18 PM