Roubini: Don't Believe The Stress Tests Or The Bank Rally

WSJ : The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions.

The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.

The stress tests' conclusions are too optimistic about the banks' absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday's announcement of the results, it shouldn't be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term. Here are some suggestions for how to extricate ourselves.

Continue reading : wsj.com

News Today - May 5

* Reports say U.S. government may order 10 or so banks to boost capital levels, but insurer AIG won't need further help from Washington.

* The first reported case of H1N1 in the city and the first case of SARS in 2003 both occurred at properties owned by one small hotel chain. full story

* U.S. automaker GM says its sales in China rose 50% in April, setting a monthly record for the company's results in that country.

* Fiat Group, fresh from an agreement to buy a piece of troubled automaker Chrysler, has plans to purchase GM Europe and spin off the recombined carmakers into a new company. If successful, the new company would become one of the largest car manufacturers in the world behind Toyota. The combined company would generate about $100 billion annually with sales of between 6 and 7 million cars a year.

* Chrysler's plans to scale down its offshore outsourcing may mean reduced biz for its vendors such as TCS, Wipro and Satyam

* The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector.

* The U.S. banking sector is likely to see further consolidation and JPMorgan Chase may be called on by regulators for more acquisitions, Chief Executive Jamie Dimon said on a webcast call Monday.

* The European Union sharply lowered its forecast for both the union and the countries that use the euro, saying the economy will shrink 4 percent this year

Tracking the Economic Indicators : United States

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Buffett Says He Sees ‘No Signs’ of Recovery in Housing, Retail

Bloomberg: Billionaire investor Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., said hes seen no indication of recovery from the real estate slump that helped cause the U.S. recession.

"Theres no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing," said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based companys annual shareholder meeting today. "You never know for sure, even if theres a leveling off, which way the next move will be."

Paul Volcker, one of President Barack Obamas economic advisers, said this week that the economy was "leveling off at a low level" and doesnt need a second fiscal stimulus package after the $787 billion plan signed by Obama in February.

The U.S. economy contracted at a 6.1 percent annual rate in the first quarter, weaker than forecast, making this recession the worst since 1957-1958

Continue reading : Bloomberg.com

A 30% rally means end of bear market ?

Source : dshort.com

News Today - May 4

* China's manufacturing sector expands in April, marking its first growth in nine months, according to data from CLSA Asia-Pacific.

* Fiat Group, fresh from an agreement to buy a piece of troubled automaker Chrysler, has plans to purchase GM Europe and spin-off the recombined carmakers into a new company. full story

* Warren Buffett criticizes the government's bank stress tests, saying that marking down broad types of assets based on different economic scenarios doesn't work.

* Nestle, Nissan and Ciba all vow to continue as Satyam clients, Press Trust of India reports, with Nestle even increasing its business with the beleaguered Indian outsourcer.

* Economists expect the U.S. unemployment rate to rise another half of a percentage point to a 26-year high of 9% in April, with little end in sight. But the pace of deterioration seems to be slackening.

* The World Health Organization’s chief is preparing to declare the outbreak of A/H1N1 swine flu a pandemic, though that doesn’t mean the disease is highly lethal or that it will hit the entire globe.

* Berkshire Hathaway chief Warren Buffett defended the government's handling of the economic crisis, but warned that the purchasing power of the dollar may fall as policymakers stretch to finance expensive rescue plans.

* The Obama administration seems prepared to say that while a few of the biggest 19 banks may need more cash, the system is more solid than analysts fear.