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Stressing Good News For European Banks By: Charles Payne

|Includes: Financial Select Sector SPDR ETF (XLF)
Okay, now it's up to the European stress test results to make this a triumphant week. It harkens back to the stress tests ordered on 19 U.S. banks last year. Initially, the announcement and lack of details fueled speculation of federal takeovers of large banks. Indeed, that was the goal, I think, but the outcry and swooning stock market put that to bed quickly. Still, the test was another way of challenging banks and their way of doing business. Banks have always given themselves stress tests. The fact is that lending hasn't improved since the U.S. stress test exercise, and even though worst case scenarios have occurred none of the banks are going under. Demanding 10 banks raise capital diluted shareholders and short-circuited lending.


When the stress tests were announced, the Dow was trading at 8,270 and the Select Spiders Bank ETF (NYSEARCA:XLF) was changing hands at $9.90. Confusion and fear sent both indices spiraling lower. By the time it was revealed that 10 banks needed to raise $185.0 billion, American investors sold $50.0 billion worth of equity mutual funds and billions of dollars of their stock holdings, taking massive loses. Most never came back to the market, so the subsequent rebound has meant nothing to them. (The test was based on financial conditions at the end of 2008. By the time results were posted, many banks had already raised funds or contracted to do so, thereby increasing capital levels and bringing the official amount needed to be raised to $75.0 billion).
So now the Europeans are stress testing 91 banks, although not Spanish cajas or large regional banks in Germany. The problem is that nobody has details on what exactly the examiners are looking for. In the U.S., regulators established two scenarios:

A) Unemployment hits 8.8% and housing values drop 14%
B) Unemployment hits 10.3% and housing values decrease 22%

There are three scenarios in Europe:

A) Benchmark
B) Adverse (recession)
C) Sovereign Shock

Keep in mind that sovereign shock isn't the same as default, and that has many saying this whole test is an exercise in futility. Tier 1 capital levels have to be above 6% in the first two scenarios but we aren't sure what happens to those banks that fail this test. We want to know which banks are holding all of those bad Greek, Spanish, and Italian debts. It's not going to happen, so the test is even more insincere than the one performed in the U.S. last year.

It's something of a game, one that worked like a charm in America for those investors not spooked out of their wits, and of course, those that bought on weakness.

Good/Bad News

It's all about expectations. I've said it a million times and will say it another million times. Existing home sales came in at a three-month low and yet the number is viewed as a success. Sales were down 5.1% sequentially, but up more than 9.0% year over year. Only one region, the Northeast, saw a jump in sales of existing homes. The real big (positive) news was that median home prices edged up to $183,700 from $174,600 while average home prices climbed to $230,900 from $220,900. Still, inventory increased, as did month's supply. It really is amazing with mortgage interest rates at all-time lows that more houses aren't moving. Even the notion of missing the bottom on housing hasn't sparked extra interest.

* 30 year fixed at 4.56%
* 5 year adjustable at 3.76%
* 1 year adjustable at 3.70%

There is no doubt the government's tax credit scheme simply borrowed future sales so with that in mind, we could extrapolate sales could have been better, but that's a ridiculous exercise. We need to see raw demand kick in, and I think it can only happen if people come out of their bomb shelters.

Moreover, many buyers have to squirrel away money to pay those extra taxes coming next year.

Disclosure: None