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| Daily Jurojin - Monday, April 20, 2009 |
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Monday, April 20, 2009Market's own little stress testThe next several trading days will likely be marked by jitters over the early-May release of the government's own figures revealing the health of the largest 19 U.S. banks. Despite the trio of last week's results from JPMorgan Chase, Goldman Sachs and Citigroup the battle to regain health is far from won. While other banks also noted improvements in revenues or a pick-up in local activity last week, the media immediately picked up on subtle nuances within the Citigroup earnings report as to why last quarter didn't mark anything special in the ongoing plight. Each of those major banks revealed exceptionally healthy trading revenues in fixed income, foreign exchange and equities. Making markets to the government and making suitable trades when yields rise and fall is hardly rocket science, nor is trading on wider spreads on heavy volume in traditionally less liquid markets. Neither revenue stream is sustainable nor does it tell us anything about the real health of either the consumer or the underlying economy. We're just two weeks away from another certain jump in the unemployment rate at the end of next week. After the government announced its plan to stress test the nation's banks under what it called 'adverse conditions' the rate of unemployment leapt far faster than was anticipated. Subsequently the private sector and the Fed ratcheted down their GDP growth expectations. Both of these events make the outcome of the stress test more difficult. As one analyst noted over the weekend, the six month window of time that any unsuccessful candidate has to raise private capital will likely be shrunk to just six minutes in the aftermath of the government's announcement. Still, investors have arrived at the week prior to the results on a relatively positive note. Stock markets around the world, with the exception of Japan, have risen now for six straight weeks, with the S&P 500 index off its lows by 28.5% as of last week's close. Relationships continue to forge as more becomes clear. Last week saw stocks and the dollar rise while bonds and gold fell. The dollar's advance in the wake of generally better than expected earnings was a surprise given the fact that in recent week's any sign of global optimism has been a dollar negative. It would appear that investors are more encouraged by the view that despite the quantitative easing at the treasury, the proof of the pudding is in the eating. The large fiscal spend is somehow now finding its way further down the line of all things important and investors are happier to see signs of growth rather than worry about prospects for inflation further down the road. Possibly more importantly is the position that as the first member of the G7 into the deepening abyss of economic gloom and the onset of the behemoth magnitude of monetary and fiscal easing, investors widely expect the U.S. economy to be the first one out. However, in so doing they have created a precedent or a model to exit the maze. Sadly for Europe, it involves a large fiscal spend and at the very least significant purchases of domestic corporate debt. The U.S. is well down this road psychologically if not actually, while we're still three weeks away from having that path unveiled at the European Central Bank when it next meets. How despondent the Eurozone bulls will be when the euro loses its cherry will be quite an entertaining site to witness. Having flocked to the euro as a 'safe swim zone' from the perils of quantitative easing, it will be great sport to see the sharks unleashed when the ECB makes up its mind. The Supreme Council of the Secret Order of Jurojin |
