Banks Stocks Applaud The Stress Test

The bad news is out and bank stocks rallied. Bank of America needs to increase its equity by $34B and its stock is up $2 to increase its market cap by $12.8 billion. Perhaps the markets need more bad news like this. Obviously the government leak regarding the stress test results set up investor expectations such that a relief rally for financial institutions ensued after the actual results were released.

We must remember that these stress tests assume unemployment tops out at 10.3%. That is a very big assumption. By the time we get to that point, the banks are likely going to position their balance sheets to allow for additional capital raises, if their smart. Also, the Federal Reserve is assuming maximum bank losses for the 19 banks will top out at $600 billion whereas other forecasts have overall banks losses as high as $3 trillion. Of course those numbers aggregate all banks but the largest banks will likely encompass the bulk of the damage.

Today we will get the April jobs report. Most investors are hoping for an improvement similar to the ADP report. If more jobs were lost than anticipated, the market could reverse quickly and move lower. Futures are higher this morning which reverses the downdraft of yesterday but the employment report could change that quickly.