Look Ahead: Will Markets Stop Stressing Over Stress Tests?
There should be some answers Friday for a market that's been stressing about the government's stress tests.
Ford, 3M and Honeywell roll out earnings before the bell Friday, but a lot of the focus will be on what Treasury's stress test for banks looks like. (See more below quote box.)
In the early afternoon, the Treasury releases the details of how it is evaluating the 19 largest recipients of TARP (Troubled Asset Relief Program) funding. The tests have become the subject of intense discussion in the market, and news and rumors related to them have been highly market moving. There will be no information released on individual institutions until May 4 when the actual results will be made public. Banks though are expected to start receiving their reports Friday.
"You're going to have a hundred different analysts picking apart the minutiae of the details, and you're going to have a bull case and a bear case for each," said Pete McCorry, who trades bank stocks at Keefe Bruyette.
The stock market Thursday continued its quiet see-saw trade, and was up about 1 percent at the close, nearly the mirror opposite of Wednesday's finish. Stocks are basically flat for the past two sessions.
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Traders say the sideways action is not unexpected as the market struggles to set a course amid a barrage of earnings and other news. Many traders have been anticipating a sell off as the earnings season got underway but it hasn't come.
McCorry said the market's thin trading makes it susceptible to the kinds of moves it has had in the past two sessions. "It seems to me investors are grabbing at the positives," he said. "'Green shoots' is going to become part of the lexicon. Those are the type of things people are hearing. What they're ignoring are the several other comments, including the one from (Bank of American CEO Ken) Lewis that credit is deteriorating at a faster pace."
He also pointed to March's poor existing home sales number which had an immediately negative impact on stocks early in the day. The best performing stocks were financials Thursday, up about 4.5 percent. Of those, many of the credit card-related names did well. Capital One rose 17 percent. Executives from the biggest credit card companies met with President Obama Thursday afternoon, but traders said there were no surprises as the president chided the banks for ratcheting up rates and fees and other policies.
After the bell, American Express said its quarterly profits were down 56 percent to $437 million, as customers cut back on spending. American Express increased its loss reserve by 49 percent. Its stock rose with other financials during the trading day but added as much as 6 percent after hours on better than expected revenues.
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Microsoft also reported sharply lower profits, and its stock rose as well in late trading. Its profit of $2.98 billion or $0.39 per share was in line with estimates.
ITT , Schlumberger , T.Rowe Price and Xerox are also among the companies reporting earnings Friday. Key economic data due Friday includes durable goods, at 8:30 a.m. and new home sales, at 10 a.m.
In the Treasury market Thursday, bonds posted slight gains after the Fed was in the market. The 10-year's yield was headed toward 3 percent in early trading but as buying kicked in it slid to a level of 2.93 percent.
Stressing Over Stress Tests
Jeff Rosenberg, who heads global credit strategy research at Bank of America Merrill Lynch, said what's leaked out about the stress tests in news reports shows the Treasury test is no "wimpy" test, and those news leaks have helped lift some of the uncertainty.
"They're priming the market. They don't want a big rip off of the band aid surprise event. They want the market to have a good understanding of what to expect. I think we do know what Geithner has already said—that the vast majority of banks will pass the stress tests," he said.
Stocks sold off early in the week on worries the government would dilute bank shareholders by converting more preferred holdings to common stock. Geithner's comments Tuesday soothed those concerns. "The real message is that by making a statement of adequate capitalization, you reduce the risk of future equity dilution, and that's where the maintenance of value comes from. It's all about the fears of dilution," he said.
Rosenberg said if the Wall Street Journal's reports about the details of the tests are correct then his analysis shows the majority of banks are healthy. The Wall Street Journal reported that the government has made assumptions about the losses in mortgages, credit cards, commercial real estate and every other type of loan. For instance, the paper reported an assumption of 20 percent losses on credit cards and 11 percent on home equity loans.
- From 'Fast Money': The One Airline to Get on Your Radar"It's not just about the concentration of (the bank's) exposure though that historically is their number one variable. It makes no distinction for the asset quality. So, the questions is can the asset quality differentials outweigh the broader level of asset concentration?" he said. It seems to be the intention of the government to allow banks to learn the results and make their own case to regulators on the the findings, ahead of the May 4 public release. "It's not like we're talking about a community bank that has $4 million of deposits and made $3 million of loans, and you can go out and knock on the door and figure out the quality of the assets. It's a very, very uncertain exercise depending on how you tweak the assumptions. You can come up with vastly different conclusions. It's really a judgment call. We're not stress testing the banks. We're stress testing the regulators," he said. Rosenberg, in a phone interview, also spoke of improvement in credit markets. But the markets remain unable to function well without government intervention. From 'Mad Money': Is It Time to Take Profits?
"The source of the improvement is government guarantees. What would happen to credit markets if you removed government guarantees? The answer is we'd be right back into he thick of it, where we were in September and October," he said. "The entire short-term credit market is government guaranteed. There is virtually no risk being taken by private investors in the short-term credit markets."
"The most important positive message is government can be successful in ensuring stability. We are not going to have a collapse of our financial system. We are not going to have the collapse of the financial system that is a catalyst to Depression...There's a cost to choosing stability and stability is probably the right choice but the cost is it's a prolonged recovery," said Rosenberg.
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