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Archive for November 5th, 2008

Ten Points About the Markets

Wednesday, November 5th, 2008

1) It is a wonderful thing to be the world’s reserve currency; we can milk the rest of the world until things change.  There is some push from emerging markets to have a change, but the effectiveness of that push is questionable.  Someone has to give the US an ultimatum, and no one is there yet.

2) With the decline in fixed income volatility, mortgage yields are falling.  Good for mortgages, but the real question is what happens when the Treasury starts borrowing like a maniac.

3) Many hedge funds have raised the gates.  Capital cannot easily exit.  GIven the weak balance sheets that hedge funds have, this is normal for a bear market.  The only surprise is that investors did not anticipate the troubles.

4) Perhaps the money to banks from the government is going only to relatively sound institutions.  That is consistent with the idea of making some institutions sound, and letting them buy up marginal banks.  Upshot: don’t expect an early increase in lending.

5) Analyze those that are on the other side of the table.  If they have a reputation for being smart, be extra careful.  Many municipalities and other entities lost money dealing with investment banks.  No surprise.

6) Many do not understand mark-to-market accounting.  First, GAAP is the least of the problems — collateral agreements require MTM.  Regulators can ignore MTM as they please. Second, MTM is misapplied by auditors; it does not mean “last trade,” but an estimate of where a liquid market would trade.

7) Shut the barn door after the cow has escaped.  Yes, loan underwriting standards have tightened, in the middle of a credit bust.

8 ) There is less cash flow to service; the financial sector should shrink.

9) S&P 500 at 600?  Not impossible, and not likely, but if profit margins crush down, possible.

10) where could longs make money in October 2008? Nowhere.  Real bear markets crush almost everyone.

In closing, I am not concerned about the victory of Obama.  The new president will have little freedom, and will face significant unsolvable problems.


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.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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