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Thursday, April 2, 2009

Reality vs Fantasy

FN: The broader markets are stretched to the upside of their ranges. A move above 830 on the S&P 500 could flip the trend from DOWN to UP.

The current battle is a big one. The market threw a bit of a party in anticipation of the FASB mark-to-market vote. The vote came in this morning. As expected the rules will be 'relaxed' and 'significant judgment' will be allowed in the valuation of assets 'held to maturity'. (I'm not sure if the asshats holding these assets have any judgment...)

It is important to understand that the FASB decision does not change what really matters: CASHFLOW.

A bank holding toxic assets does not like what they would fetch on the open market. The market price is (mostly) the present value of EXPECTED future cashflows. For example, the market price of a particular mortgage reflects that fact that while it is CURRENTLY paying, it will stop in three months. The way the banks are now going to value that same mortgage is quite a bit different. They will categorize that mortgage as a 'hold to maturity' and since the mortgage is still throwing off cash as intended it will be valued at par (or something ridiculously close to par) INSPITE of the fact that everybody knows that it is very probable that the mortgage will cease payments sometime in the near future.

The effects of this decision will be fleeting. They have to be because it does not change what really matters.

FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update1): “The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. FASB approved the changes during a meeting in Norwalk, Connecticut.”

FN: Meanwhile in the real world job losses continue to mount. The unemployed will continue to default on their mortgages, car payments and credit cards. It will not matter what kind of ‘significant judgment’ is applied to their debts. In the end, when all is said and done, the market will mark them to reality.

While battles between Reality and Fantasy are almost always epic, Reality always triumphs.

U.S. Initial Jobless Claims Rose by 12,000 to 669,000 (Update1):The number of Americans filing unemployment claims unexpectedly rose last week to the highest level since 1982 and those staying on benefit rolls jumped to a record as companies kept cutting jobs to trim costs.

Initial jobless claims swelled by 12,000 to 669,000 in the week ended March 28, topping 600,000 for a ninth straight time, after a revised 657,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls soared in the prior week to 5.73 million.

Another Labor Department report tomorrow may show the jobless rate in March rose to the highest in more than 25 years, reinforcing concerns that the economy will continue to bleed jobs as companies reduce output. Less employment and slowing incomes may thwart a rebound in consumer spending, setting back prospects for an economic turnaround in the second half of 2009.”


Anonymous said...

Ah, but since St. Ronnie Reagan's men "enlightened" us, bad employment numbers = good times in the equity markets, yes?
And cash flow is king: as long as so-called "insolvent" banks can make their obligated payments when and as they come due, they are NOT INSOLVENT....except in some abstract "bookkeeping" sense, with all of the assumptions and footnotes appertaining thereto...

Anonymous said...

"pressured by U.S. lawmakers and financial companies"

They need to rename this banana republic the Enron Empire seems to fit the bill. Fraud got us in this mess and by God fraud will get us out of it.

Anonymous said...

The bottom is in. A new bull market is in progress.

none said...

Yes, and I've got a bridge left to sell. Any candidates?

Google these three titles, interesting stuff:

Comparison Of Bear Markets: Weinstein Stage Analysis
Merrill's Rosenberg: A New Bull Market? Are You Out Of Your Mind?
A bear's bear: We're only at beginning of collapse

Anonymous said...

And how many times have stock prices moved with no change occurring in the underlying business?
Constantly, eh?
Reality vs. Fantasy?
Both require an observer's judgment of the psychological state of the subject.
But since when has fantasy (ie guesses as to the future) NOT played a role in the reality of the current price of an object, such object being itself not essential to the present continuance of the life of the buyer?
The market is anti-inductive.
And confidence, and the lack thereof, as to the state of the future, counts, when it comes to the economy, and the price of securities.

Anonymous said...

S&P 837

Congrats bulls.

Anonymous said...

It is all part of the rip the tax payer off plan. Mark 2 whatever the bank wants. then sell to the "private-public" partnership at the new inflated values. Then default and pass the loses to the tax payers...

Doug said...

Wow, put a new shaky foundation under the house of cards to prop it up a little longer.

Jonathan B. said...

so, are you losing as much money as the people who are listening to your blog recently have been losing?

none said...

If this counter trend rally (or secular bear market rally) were to rise 25% that would take the market to 838. Our worst case (for the bears anyway), in our opinion, would take the market as high as the old resistance area of 878 on January 28th of this year. That would be a rise of about 30%

Anonymous said...

"The current battle is a big one."

LOL, not really.

The bears capitulated before the market even opened.

It's a slaughter.

none said...

I thought and wrote that this could turn into a monsterrally, several weeks ago (target for s&p: 1000). It might become one, like the one in 1930:
But the markets appear to be rebounding. How do you explain this?

In '29, the [market] peak was on Sept. 3, when the Dow hit 381. The first crash bottomed on Nov. 14, 48 per cent below the point from whence it had begun. Then you got a massive rally [because of government monetary intervention]. Into April, 1930, it recovered [almost] 50 per cent.

none said...

200 days ma, thé ma to look at during a bear market, sits at ... 1000:

none said...

FN: why don't you put a big graph of the s&p or dow or whatever on your blog, that displays the timing of your (main) trades and calls
it would allow us, and yourself too, to keep track of your trackrecord

DK from CNBC First in Business WorldWide said...

Oops, U must lose a decent amount of money today. lol........

Anonymous said...

Bulltard hubris and triumphalism on display here and in other blogs. Possible bearish indicator.....?

Anonymous said...

Been down so long it looks like up to me...

Trader_Jose said...


Hope you can help me ... are you familiar with the ISE Sentiment index and, if so, can you tell me how to read it?


Trader Jose

wunsacon said...

Jonathan B., I'm sure Ben doesn't like being wrong. But, why come to his blog to add insult?

Josh said...

A rally is only to be expected. Plus the Feds are definitely goosing this market upwards (as well as the gold price downwards).
There is G20 and a jobs report coming up. That means double or tripple goosing. No "free" markets any more.
The old adages will apply IMO, like "Sell in May and go away" and if that does not happen sufficiently, well there is also end of August into September/October. If the market is still up then, it will be a huge payday for shorts.
I used to be a Gann freak years ago, and occasionally still use his stuff. Gann maintained a "Nine" year in every decade( a year of completion)is nearly always a bull year. History shows he has been correct long after he died.
I was out of shorts before the market opened because of the pre market price action on the ES.
Another adage. "The taller they are, the harder they fall."

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