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Bonds News

FUND Q&A-US bank stress test results to call market's tune

NEW YORK, April 23 (Reuters) - The results of the bank stress tests by the U.S. government are likely to dictate the U.S. stock market’s direction in the days ahead, according to Jeff Morris, vice president at Boston-based Standard Life Investments.

Morris, whose company manages more than $5 billion invested in U.S. equities, spoke to Reuters in an interview on Thursday. Below is a Q & A snapshot:

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Q: ARE WE OUT OF THE WOODS WITH REGARD TO BANKS?

A: “We are not quite out of the woods. I think there are some beams of sunlight coming into the woods, and the woods are no longer on fire like they were in the fall. We clearly got a credit cycle that’s going to be long and persistent.

“If anything that came out of first-quarter earnings, (it) is that other groups outside of mortgage are starting to experience deterioration -- commercial, industrial loans, credit cards -- which with unemployment going up, there’s no doubt losses are going to rise, possibly into double-digit range.”

Q: HOW ABOUT THE STRESS TESTS RESULTS?

A: “It’s going to be an exciting time both tomorrow, and on May 4, when we get the results of the stress tests. I say it’s exciting because there are just so many cross currents about what they’re going to say, how they’re going to deal with banks deemed to have adequate capital and those that don’t, how does this all play out.

“Clearly the strong will like to be able to say ‘we passed the stress test’ and move on, but they have to manage the communication and have to be so careful. Once we have two or three banks that we pass, then the implication is: ‘How about the rest?’”

Q: HAVE YOU ADDED TO ANY OF YOUR BANK STOCK POSITIONS?

A: “If anything lately, we backed off a little bit in some of the names that have run, just for an example, like a Wells Fargo. We had a small ‘overweight’ position, the stock moved up, (Wells Fargo) posted their earnings pre-announcement, (the stock jumped) 30 percent and we took a little bit off the table.

“Among the large banks, we’re ‘neutral’ on Wells Fargo and U.S. Bancorp, as well as Bank of America. Our ‘overweight’ is JPMorgan -- being a good bank, obviously not a flawless bank.

“In their quarterly release, they pointed out the fact that their loss deterioration in credit cards is likely to come much sooner rather than later. Prime mortgage is also something that’s become problematic.

“There are credit problems, but they (JPMorgan) are coming from a position where within the investment bank, they did very well. They are in a position of stronger capital than the other money-center banks, a healthy amount of reserves and an institution that’s well managed and not kind of trying to find itself. They have challenges but are also probably going to have lasting gains in the investment banking world.”

NOTE: The U.S. government is due to release details on Friday of how it is conducting the bank stress tests, and banks may also start receiving the results of the tests.

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