Despite a weak opening, the markets held up well yesterday considering the menu of bad news ranging from a miserable economy, poor earnings from U.S. Steel, the struggling banking sector and yes, the spreading swine flu.
Given that, a break even point on the day is almost cause for celebration. In focus were the banks and the upcoming “stress test” results next week. The WSJ reported that BofA and Citigroup may just have to raise new capital even though they don’t seem to agree with that conclusion.
The government has said that the need to raise more capital should not indicate insolvency. However, the additional capital is a measure to help cushion against potential future losses, the report said.
At least one expert was concerned about the government’s stress test.
“Among the many delicate points, you have to wonder where the government will get the funds to bail some of the top 19 banks out they don’t want to let go,” Kenneth Broux, an economist at Lloyds TSB Corporate Markets, told MarketWatch. “Either the banks will have to tap private investors, the capital markets, or see the government preference share holding converted into ordinary shares.”
Hmm, I am not sure why this expert is wondering were the funds for a potential bailout are coming from. The taxpayer cookie jar no longer has a lid on so that it can easily be accessed at anytime.
My guess is that we will see more of yesterday’s sloppy market behavior until the results of the stress tests are made public next week. I believe that this will be the moment of truth, and we will see if this bull has the legs to continue the path of the past 7 weeks.