Was the market rally a stress test gamble?


When President Obama mentioned in an Oval Office interview on March 3 that he thought stocks were a good long-term buy, I was hoping his timing was good but respectfully doubted that many individual investors would follow his tip. Between then and May 6th, the Dow rose 26.6 percent from 6,726 to 8,512. I have been thinking that this rally may have been a short-term hedge fund trade on the stress test results. If my guess is right, the market will move sideways from here -- unless it can find a new game to bet on.

The stress test results released last night revealed that of the 19 financial institutions under examination, 10 need to raise $75 billion by November. Of the banks needing new capital, I was most surprised by Bank of America (BAC) and Wells Fargo (WFC), which need $34 billion and $13.7 billion in new capital respectively. The reason for my surprise was that BoA's CEO Ken Lewis kept insisting his bank did not need capital as did Wells Fargo's big owner, Warren Buffett.

Originally published