Looking Askance at the Stress Test Rally

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The ADP Employment Change at -491k was significantly better than the expected -645k. This pushed stocks higher. However, as we keep noting, ADP has not tracked the NFP number due to BLS’s whacky seasonal adjustments and its dubious Net Business Birth/Death Model.

The Street ‘officially’ expects the Employment Report on Friday to show NFP losses of 600k. But in lieu of the ADP Employment Change being better than expected, traders expect a NFP near -500k…In April 2008, the BLS added 176k phantom jobs via its Birth/Death Model.

As we always warn, the headline NFP is less important the details of the report; and one must scrutinize the Household Survey and U6 (comprehensive unemployment) to better ascertain economic conditions.

Today – ‘Stress test’ results are due for official release but most of the results have already been leaked. Undoubtedly these leaks were carefully managed so there would be no adverse reaction on the official release…Because stocks, particularly financial stocks, have rallied sharply the odds favor a final surge
and reversal if results are perceived to be benign.

It is crystal clear that the scheme over the past two months has been to drive financial stock prices higher so banks could raise capital. Mission accomplished!

The Fed and the solons have accomplished the task of providing an environment, with ample patsies, for banks to raise needed capital. But once banks have procured that capital, watch out.

The fact that Bank of America rallied 15% after it was announced that it would need to raise $34B is proof of wildly bullish sentiment and irrational exuberance. Buyer beware; patsy plow ahead.

Our friend Andrew notes that two months ago, Warren Buffett could’ve bought Wells Fargo at $7. Now St. Warren proclaims that he would support a WFC secondary at $25. Why did the ‘King of Value’ not see value at $7 but now sees it at $25? Perhaps St. Warren is more trader than investor these days.

If Wells Fargo needs to raise $15B, it is far cheaper to raise it at $25 then $7. So once again solons via crony capitalism and smiley-faced fascism utilize massive rigs with taxpayer funds to bailout the elites.

Stocks are at their most overbought level since September 2007 as measured by the Commodity Channel Indicator (moment indicator). And S&P 500 stocks are at their most overbought level since 2006 as measured by percentage of stocks above 50-day moving averages (92%, 460 S&P 500 per Bloomberg).

Prudent traders are now exiting long equity positions and will wait for the inevitable retrenchment. Then, depending on news and developments, new strategies and positions can be employed.

We must reiterate, because there is so much Street and financial media hype to the contrary, the waiting and watching is an investment and trading choice. And if fact, it is one of the best choices when risks are immeasurable due to the shrouding of pertinent financial details, like bank balance sheets and Fed lending, and a record rig is artificially propping markets.