By: Larry MacDonald

What continues to impresses is how this market rally has climbed one of the tallest walls of worry in ages. The discrepancy between Mr. Market and commentary from analysts and journalists is a yawning chasm indeed. Is this the usual pattern seen at the start of bull market rallies or is Mr. Market just myopic to how serious the damage is to the U.S. economy this time around? Here are some highlights from my meanderings through the online landscape.

Stress tests may have some teeth after all

Krishna Guha, Financial Times of London
“A Fed white paper on the tests revealed that regulators ignored recent changes that water down mark-to-market accounting rules when assessing how much of a capital buffer each bank needs to ensure that it could comfortably survive a deeper recession than expected.
This is likely to result in some banks having to raise more equity than they would have done if the new accounting guidance had been applied, resulting in a stronger capital buffer but also greater dilution for existing shareholders. Regulators also took an expansive view of the risks banks need to hold capital against, including off-balance-sheet exposures and counterparty credit risks.”

Insiders dumping shares

Michael Tsang and Eric Martin, Bloomberg news
“Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market”

The coming tidal wave of corporate bond defaults

Floyd Norris, New York Times
“So it went with the subprime mortgage crisis. And so it is now going with corporate loans and bonds. It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression …. One reason for the rise in defaults is that this is a severe recession. But it is not the principal one. Junk, circa 2009, is the worst junk ever …. Calculations by Moody’s Investors Service show that as of the beginning of April, a record 27 percent of speculative-grade debt issuers had a rating on their senior debt ranging from Caa down to C.”

Banks getting the wrong medicine

Daniel Hofmann, chief economist at Zurich Insurance Co.
“… big, troubled U.S. banks represent a large part of that country’s economic woes, but are being given the wrong medicine … The problem …is that the U.S. government has been treating banks as if they had a liquidity problem, while in fact they have a solvency problem …. The two problems are very different: you need liquidity if you owe $100 tomorrow, but your only asset is a $100 item that will take a week to sell. All you need is a short-term loan …. But if you owe $100 tomorrow and your sole asset is worth just $50, you have a solvency problem ….Those who see a solvency problem don’t believe that all the U.S. plans to create a market for bad bank assets will work. These plans assume that the assets have significant value and buyers just need some encouragement …. But if the assets are worth very little, some big banks are insolvent. Then, the only cure is to close them, let their investors and lenders take a loss and peddle the assets for whatever they’re worth …. If that’s the case, the longer government waits to administer this bitter medicine, the longer the U.S. will have a hobbled banking system and substandard growth.”

Retest of March low coming?

Mark Hulbert, MarketWatch
“… new bull markets often retest the lows of the bear markets that preceded them. That means that, even if a new bull market is now underway, it is not necessarily essential that you immediately increase your equity exposure …. Consider what happened after the 2000-2002 bear market came to an end on Oct. 9, 2002 .. The bottom line? Even if the train has left the station, there’s still a good chance that it will return to pick up more passengers.”