Tough Enough?

by Larry Levin

That's the question investors and analysts are grappling with after the government released the parameters of the Supervisory Capital Assessment Program on Friday, just a couple of hours before the stock market closed. Read the Fed statement.

The timing suggests regulators were at least concerned about the market's reaction and wanted to give banks and analysts a couple of days to digest the material before trading resumed.

The SCAP looked at how banks would perform during 2009 and 2010, with the hope this would also cover 2011. Regulators looked at how loans on the 19 biggest U.S. banks would fare if gross domestic product fell 2% to 3.3% this year and gained 0.5% to 2.1% next year.

Unemployment impact was measured from 8.8% to 10.3% for 2010. Housing prices were evaluated at a national decline of 22% for 2009 and a 7% decline for 2010, according to the Fed. Construction loan default rates were expected at 18% by the end of 2010.

Many economists have predicted rosier numbers for the same period, a point the Fed was trying to offset with its bad-case and worst-case scenarios. But projections have been notoriously off the last two years. Few economists predicted today's massive unemployment rates, GDP growth in 2008 was about half of what economists predicted early in that year, and GDP actually shrank 3.9% in the fourth quarter.

Ultimately, the faith in the Fed's stress test will come down to two factors: how much credence customers and investors have in individual institutions that will require more cash -- and some, perhaps many, will -- and how many people have belief that the economy will obey the economists.

Should the numbers get far worse, there won't be anymore stress. Everything will be broken.




Previous Day's Trading Room Results:

Trade Date: 4/24/09

E-Mini S&P Trades*
(before fees and commissions):


1) Engf sell @ 11:10am at 862.50 = +1.00 (1 lot)

2) FT sell @ 1:30pm at 860.75 = b/e (1 lot)

3) Algorithm positions (4)...combined Secret's and Algo total...+0.50


Electronic (YM) Mini-Dow:

1) None today



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