Do the Patients Know More than the Doctors?
May 11, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Imagine that you are having health problems. You decide to go a doctor, who decides to give you a complete physical. After looking at your blood levels, the doctor tells you that your cholesterol is too high and you must change your diet. Instead of agreeing, you protest, telling the doctor that the number is in range, and he needs to change his testing methodology. In the end, the good doctor agrees with you, and you go home happy (but no healthier!).
In essence, this is what happened to the banks and the stress tests this past week. After deciding that 10 out of the nineteen banks were substantially undercapitalized, the Fed was met with vociferous protests by the banks. In the end, the Fed capitulated. Bank of America went from needing more than $50 billion to less than $34 billion. Fifth Third Bancorp went from $2.6 to $1.1 billion. However, the biggest winner was Citicorp, which went from $35 to just $5.5 billion! Apparently, C convinced the regulators that they had “pending transactions” that would significantly change their capital structure in a positive way. To me, this seems like the teacher asking the students what they would like their grades to be. I thought the Fed was supposed to be independent.
In any case, the market continued its’ upward climb, with the rally now entering its’ third month. While it is unclear how long this will last, what is clear is that market sentiment has changed 180 degrees. For over a year, virtually any news was interpreted in a negative sense and was used as an excuse to sell stocks. For the past two months, investors use any news as an excuse to buy. Although I think we are going higher short term, I am very wary that market sentiment could turn again. Therefore, as usual, I would continue to use stop losses in most positions.
