The Two Things That Matter Most

Two issues will matter in the next two weeks: the bank stress tests, and earnings.

The stress test: a primer.

What's up with the bank stress test? They're going on now for the 19 largest banks.

When will the tests be completed? Most banks start reporting the week of the 20th, so it is unlikely banks will know anything until after that. This makes some sense: nobody wants to be asked, "How did you do on the stress test?" in the conference call.

Will the tests be made public? Not clear, but it is likely that the company will be able to make some kind of public announcement.

That means everyone will make the results public very quickly.

Can banks rebut results? The belief is that the answer is yes, that this is a very open dialogue, which is going on right now.

What if they fail? They will be given six months to raise money, either through the public markets or through the government, in a formula the government has already made public (a 20-day average of the stock price prior to and including February 9th, plus a 10 percent discount).

All of those prices are below where the stocks are now. For example, Bank of America's 20-day average on February 9th was $6.24, it's now trading at $7.50.

Earnings season starts Monday with Alcoa.

Alcoa : talk about bad luck. What else could go wrong for this company? The stock is down 80 percent from a year ago, and with good reason.

First half 2008: skyrocketing energy costs

Second half 2008: collapsing demand & prices

First half 2009: no recovery in alumina & alumina prices, more production cuts, excessive inventory

Sheesh, can you see the CEO, Klaus Kleinfeld, turning to his wife and saying, "I could have been a contender, I could have been in molybendum..."

The good news is that the company has become a cost-cutting monster in the past couple years, and they did float a successful $1.3 billion offering of common stocks and convertible notes on March 19. Look for VERY CONSERVATIVE GUIDANCE.

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