CautiousInvestor

25-to-1 Leverage Earns Banks an 'A' on the Stress Test

Since Treasury did not release the stress test in a form that permits replication of the underlying math, we are left to rely upon comments and assurances from Treasury.

And since they have possibly conflicting objectives, I do not believe everything said by Treasury officials can be taken at face value.

Having had time to think about the outcomes of the stress test, it's very clear the test was designed in such a manner so as to allow banks to maximize projected earnings and minimize potential losses, permitting the banks to earn themselves out of this mess.

Under consolidated results, banks will offset 60% of expected losses through projected earnings for the years 2009-2010.
By keeping TCE at 4% as opposed to 5%, it allows banks to use more of projected earnings to offset potential losses while at the same time remaining in compliance with the "strict capital ratio standards" imposed by Treasury, FDIC, OTS and COC.

Darkest Before Dawn: Does That Mean a Bottom Is Near?

In this instance it's the darkness of uncertainty hanging over the market that, in my humble opinion, will delay the reaching of a bottom. This is not to say the market will fall indefinitley; rather it is to say the bottoming process will be protracted.

Before there can be dawn, we must pierce the fog of uncertainty hanging over the market. We must better understand the health of the US banking system and when it is likely to stabilize. The conversion of Citi preferred into common and today's effort....the third or fourth in a series.... to assist AIG clearly suggest this may be some ways off as credit market conditions continue to deteriorate. Adding to the uncertainty are the stress tests presently underway, possible outcomes and additional writedowns, the six month window for banks to raise private equity, housing market developments and the perilous condition of the EU and European banks.

Another precondition for dawn has to do with better understanding the real economy and answering the interelated questions of how bad will it get and whether the Stimulus and Recovery policies will do anything more than buy time. Economists and market sages are declaring current conditions horrible, sentiments confirmed by the ISM survey, and are deferring likely dates for an economic recovery. More and more are suggesting the economy will not turn around until Q110 which will correlate as to when we can expect to see meaningful improvements in corporate profits.

We all would like for things to improve but until the clouds of uncertainty pass by and reveal real reasons to be hopeful, things will remain gloomy for a bit. The market is forward looking but the fog is presently too thick to see through the uncertainty.

When Warren Buffett Speaks, It's Still Worth Listening

We can expect Berkshire to report pretty lousy earnings this weekend.

Any investor must respect Mr Buffet although he recently come under fire for acquisitions, selling long dated put contracts and the performance of Berkshire.

Whatever the outcome, it will be too early to draw definitive conclusions as he thinks in very long time frames. But we can be sure Mr Buffet will take full responsibility and, if required, learn from any lapses in judgement.

Berkshire Testing November Lows - Already Down 17% YTD

Buffet has met his challenge with this market.