Better Than Expected

The dream may very well be over.

The dream of economic recovery in 2009 that is. The rally in the markets that began in March of this year is about to fizzle and take the next big legs down. Why? Well, it seems that reality is about to take hold. The results of the stress tests done on the banks are due out today (in about 90 minutes from now as I write) and they will show that many of the tested institutions need more capital on hand because their reserves are not large enough to withstand additional defaults from tapped out, strapped and unemployed borrowers. The real problem, though, is that the stress tests were conducted using better than current figures.

So if the stress tests are fundamentally flawed, yet they show that the banks are largely under-capitalized, then banks are in even more trouble than we are about to be told. If BOA needs an additional 34 billion per the regulators, reality dictates that they need a lot more than that.

I have read over and over that the numbers, while very bad, have been “better than expected”. Talk like this swirls around the financial media and news outlets. But while “better than expected” may sound good in the twenty second sound bite that encapsulates it, it really still means “bad”. Unemployment numbers “better than expected” as only 490,000 people lost their jobs. Housing sales “better than expected” as people buy foreclosed properties. Bank losses and under capitalization “better than expected” as banks pass faulty stress tests.

But the fundamentals have not changed. The numbers of unemployed in the U.S. continue to CLIMB, not decrease. That's still nearly a half million people who lost jobs – not who got jobs – they LOST them. Housing sales are still down when you break out new construction and existing homes, separating them from sales of foreclosures. Banks have made “profits” this quarter, but have received boatloads of money from the government via TARP and through cheap loans via the FED, which have kept costs down and coffers partly filled.

So, if BOA and its like are “making money” it's all a farce, because they are using our bailout funds to make themselves look better than they are. I can look well capitalized too if someone gave me billions of dollars, but if I have to pay it back, it's not really mine now is it? And if some regulator comes to look at my books and says that I may need to save a lot more money because the future looks pretty bad, but reality is already worse than what they used for the evaluation, then I am up the proverbial creek sans paddle.

Tomorrow may be a very bad day in the markets, or it may not. But I know that until I start to see more substance and less flash, I'm still not going to be spending money I don't have on things I don't absolutely need. And that goes for stocks as well. I don't absolutely need to own any – especially not now.

And the number of people like me is growing. That's a bad sign for the "better than expected" crowd because ultimately, they need us.