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Ten Chosen Items from the Current Market Troubles

  1. Superstition is alive and well.  Google at $666?  Personally, I think it is all hooey.  There has always been a morbid fascination about the Antichrist in Western Culture.  Would that they had more concern about Christ.
  2. Longtime readers know I am no fan of FAS 157 or FAS 159.  From the Accounting Onion, here is a good demonstration of what could go wrong as FAS 157 is implemented.  In my opinion, the concept of fair market value allows managements too much flexibility.  For assets that have a liquid market bigger than the holdings of the company in question, fair market value is not a problem.  It is a misleading concept otherwise, because the ability to realize that asset value in a sale is questionable.
  3. This is an “uh-oh” moment on two levels.  Level one is defined benefit pension plans exiting US equities.  They are big holders, and a reallocation could hurt US stock prices.  Level two is that foreign markets have outperformed the US by a great deal over the last few years.  Perhaps the DB pension plans are late to the party?
  4. There are no “almosts” in investing.  I have owned Genlyte twice in my life.  Great company.  I had it on my candidate list in my last reshaping.  I didn’t buy it then.  Now it is being bought out by Philips Electronics.  Good move for Philips; the only way they could make it better would be to take the management team of Genlyte, and have it run Philips.  That won’t happen; it is more likely that Philips will ruin Genlyte.
  5. Activist hedge funds don’t always know best.  Smart managements and boards don’t get scared.  They calculate.  What’s the best thing for shareholders in the long run?  Do the hedge funds really have the willingness to fight?  Personally, I think it is usually best for managements to “call their bluff” and make the hedge funds work for control, rather than wave the white flag early.
  6. Higher US dollar oil prices are only partly a dollar phenomenon.  Oil prices are rising in almost every currency; there is a relative shortage of crude oil globally.
  7. Want an antidote to pessimism?  Read this post from VOX.  Personally, I think the lending issues are bigger than they think, but it is true that corporate balance sheets are in good shape.  Would that we could say the same for the consumer or the government.
  8. Appreciation of the Chinese Yuan versus the Dollar may be accelerating.  Alongside that, many of the Gulf States are re-evaluating their peg to the US Dollar.  Given the inflation, who can blame them?
  9. $300 Billion in losses from US residential mortgages?  That’s a believable figure to me.  Underwriting got progressively worse from 2003 to the first quarter of 2007.  Needless to say, that would kill a lot of non-bank mortgage lenders, and a few banks as well.
  10. Could Japan be the great countercyclical asset in this market phase?  There is more speculative fervor in Japan at present, and many Japanese investors are buying stocks and selling bonds, partly due to relative yield measures.

That’s all for now.  More to come.






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Accounting, Currencies, Macroeconomics, Pensions, Portfolio Management, Speculation | RSS 2.0 |

One Response to Ten Chosen Items from the Current Market Troubles

  1. Josh Stern says:

    Re: Point 9, estimating mortgage losses. The figure is believable to me also. Within the article, the author writes that part of it is connected with an estimate of 14% default rate on subprime, which is described as plausible but hedging on the pessimistic side of expected. But as far as I can tell, the ABX indices at markit.com which are so widely used predict a much higher rate of *loss* if/when they are construed as efficient prices. That “market” goes down day after and seems totally out of whack with reasonable assessments of fundamentals (as bad as those are), but yet is used in a lot of mark to market pricing.

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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