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The Real Stress Tests


Swine-flu panic, other disasters force us to question our assumptions.


How prescient were the Kinks when they penned this song?

This is the age of machinery,
A mechanical nightmare,
The wonderful world of technology,
Napalm, hydrogen bombs, biological warfare,

This is the twentieth century,
But too much aggravation
It's the age of insanity,
We gotta find a solution
I'm a twentieth-century man, but I don't want to die here.

Well, if it isn't one thing it's another. The stress tests for those insolvent banks were meant to "lock and contain" toxicity and let us press on. There have been so many world-shaking events, but days like this make you wonder if you're ready for the big one.

The bank stress tests are dealing with an artificial reality - as if we could amputate the cancerous limb and leave the body healthy. The reality is that many banks are already riddled with disease, and more losses and death need to happen before rehabilitation can begin.

Today brings us several jolting reminders; for one, a misguided plane exercise over Washington and New York. I suppose the failure to provide a warning proved the true "stress test" - though the results of both were discouraging. The "attack" plane passed over crucial government buildings, and people panicked, fleeing their work places and homes.

The swine flu has elicited sharp sell-offs in protein prices and had stocks swinging wildly in morning trade.

But now, an earthquake in Mexico City -- which is already the center of the flu epidemic --adds a new layer of concern to the magnitude of the economic disruption: a human toll.

I usually dismiss almost any non-recurring event. But when the focal point of a potentially pandemic disease is hit by something that will further strain health services (such as water and sanitation facilities), it makes me think the economic effects could linger and cost more than is currently being discounted.

I happened to sell an iron condor in the Spyder Trust (SPY) in the OptionSmith portfolio on the belief that the S&P 500 would remain between 810 and 890 for the next few weeks. It may do so -- and it's a limited-risk position -- but it looks like it will be a rough ride to get there.
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No positions in stocks mentioned.

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