You stress test a plane well before takeoff, BUT we stress test banks when they may be in a nose dive....

The Federal Reserve sought to bolster confidence in the U.S. banking system as concerns over the European sovereign-debt crisis roil financial markets and pose risks to the economic expansion.

The Fed yesterday told the 31 largest U.S. banks to test their loan portfolios against a deep recession to ensure they have enough capital to withstand losses. Banks with large trading operations will also test against a European market shock. The most severe scenarios outlined by the Fed include an unemployment rate of as much as 13 percent, an 8 percent drop in gross domestic product and a 52 percent plunge in stocks from the third quarter of 2011 to the fourth quarter of 2012.


“This is a daunting test,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the largest banks. “The Fed’s credibility as a tough guy can’t be challenged based on this.”

The tests, which the Fed said don’t represent its outlook for the economy, aim at making banks’ capital adequacy more transparent by demonstrating whether they can handle a deeper downturn and financial market shock. The Fed helped clear away uncertainty surrounding banks in May 2009, when it published stress tests showing that 10 U.S. firms needed to raise a total of $75 billion, giving investors more clarity.

Humala on a shining path forward!!!

Peru’s stocks tumbled the most in two years and dollar bonds fell after former army rebel Ollanta Humala claimed victory in the country’s presidential runoff yesterday and sparked concern that he will seek greater state control of the economy.

I think his election represents a great buying opportunity.  Excluding Mr. Chavez, most of the former populist revolutionaries of the Southern Cone have become quite pragmatic in their maturing years.  Humala is no Chavez; he is more in the camp of Lula de Silva of Brazil.

Humala defended policies that have made Peru the fastest growing Latin American economy over the past decade.  Some investors may be concerned he will raise mining royalties and impose greater state control over natural resources.  My guess is that they should be more worried about England’s treatment of taxes in the North Sea!!!

Peru’s benchmark Lima General Index of stocks sank the most since October 2008, retreating 8.7 percent to 19,378.78 at 9:38 a.m. New York time.  Yields on dollar-denominated bonds due 2037 rose 17 basis points, or 0.17 percentage point, to 5.91 percent, according to data compiled by Bloomberg.

The cost to protect Peru’s debt from non-payment with credit-default swaps jumped 20 basis points to 168, the highest since April 27, according to data provider CMA in London. The sol weakened 0.3 percent last week to 2.7631 per U.S. dollar.

Peru is the world’s top silver producer, third in copper and zinc and sixth in gold. It has vast oil and gas reserves.

Good stock bets are (not to mention the currency and bond plays):

Southern Copper Corp. (SCCO), Peru’s biggest producer of the metal, fell 8.6 percent in U.S. trading to $31.73.

Hochschild Mining Plc (HOC), a producer of silver in Peru, fell to its lowest in four months in London trading, declining 8.7 percent to 498.8 pence.

Viva Zapata!!!