Seeing both sides
this months newsletter I wanted to divert from
the personal finance topics to layout arguments
for what could change the negative market momentum.
I am not trying to naively paint a positive picture,
but to start a dialogue. It is important to always
see both sides.
could say the path of least resistance is down
in the market. While I have to be realistic and
say that could be the case there is also a counter
argument that says we could move up, at least
So lets take a look at both sides:
is on the downside, news is horrid and the economy
is a wreck. That is basically what we are hearing
everyday from the media and it is easy to jump
on that bandwagon.
We have just registered weekly and monthly exhaustion
levels with the S&P on a widely followed technical
indicator. This usually precludes a 1 to 4 month
counter trend rally. Note: although the indicator
means the month of March should close higher than
February, it doesn't mean that we can't take a
stab lower prior to recovering later in March
(think V shaped bottom)
Mark to Market account change: The current accounting
rule requires companies to mark their assets at
current market prices, which is why we have so
many problems with highly leveraged institutions.
Let's look at it this way:
= Liabilities + Shareholder Equity
if you are a Bank and have a whole bunch of securitized
mortgages or credit card debt sitting on your
books that was once trading at 100 cents on the
dollar and now is trading at 30 cents on the dollar,
your assets have shrunk dramatically. So to equal
out the equation above, if your liabilities haven't
changed then the only thing that could drop to
reflect the lower assets is your shareholder equity
(stock price). So far the governments band-aid
approach of buying stock in banks hasn't helped.
What could you ask? A mark to market accounting
GM, Citibank, American Express, you name them
and they have massive amounts of securitized debt
on their balance sheets. The holes in the dike
are popping to fast for the governement to plug
them one by one. So what if they temporarily suspended
the mark to market account rule? Maybe a rolling
3 year average of the price of the securitized
debt. This would give companies a chance to solve
the problem on their own without taxpayer dollars
over a longer period. Because right now the way
accounting rules work, it doesn't matter if the
company is making enough cashflow from operations
to hire folks and keep moving forward. If their
Balance sheet is dropping they have to declare
losses and can become technically insolvent quickly.
So if this rule changed, we would see a dramatic
market shift overnight. By some measures possibly
20% gains in the market.
CDS backstop: I won't go into this to much but
just to say that Credit Default Swaps are a derivative
with nightmare proportions. AIG underwrote these
in mass quantities never assuming there models
would go bust. If the government were to step
in and backstop them or eliminate them from speculative
plays then we could see a big surge just like
with the mark to market change.
may be long shot ideas, but it is obvious that
the approaches that the goverment has used thusfar
with our tax dollars haven't worked. I may be
overly optimistic that our politicians are intelligent
enough to make these bold steps, but the possibility
must be considered. (I continue to hear rumors
about these items happening, but so far nothing.)
there are the arguments on the positive side.
I would be curious to hear your thoughts. Feel
free to email me.