Thursday, February 5, 2009

Honali or Bust!

I had to resolve a total network connection loss tonight so I am a bit short on time. Luckily, as you will see in this post, my material tends to write itself!

Honali or Bust!
"Puff, the magic dragon lived by the sea
And frolicked in the autumn mist in a land called Honali
-from the song "Puff the Magic Dragon" by Peter, Paul and Mary

Things were looking bad as the day started. Bank of America alone was down over 20% in the early going. We have seen this show before with Bear Stearns, AIG, and Lehman Brothers. The end seemed near and as a Bank of America account holder, I was interested to see just how my money would be handled.

But then things changed. A ripper of a financial stocks rally began and ran all day long turning huge losses into gains by days end. Now understand that huge percentage moves are not too hard with stocks that are single digit midgets (as coined by Todd Harrison at Minyanville), but still this was some action.

So what was the big turnaround catalyst? A "rumor" was being reported by all the major news sites that the draconian measure of "mark to market" was going to get the boot, possibly as soon as next week. You read that right. The banks may soon have full license to play "mark to what I want to" and vastly improve their balance sheets. My speculation is that during the whole "bad bank" talks it became obvious that the black hole of any asset buys was going to expose just how bad off the banks were, even after the government paid huge premiums for junk assets. That would have happened in a mark to market scenario. Hence it is make believe time!

The financial sector may be able to access that storied fantasy land "Honali" where Puff the Magic Dragon lives and waits for impressionable young bankers in need of balance sheet repair. The government is nothing if not kind I guess, though that depends mightily on just who you are.

So playing pretend would not really have an effect when all the players know the truth, right? Wrongo! As I said in the intro, my stuff writes itself and here is my masterpiece of the evening (from Reuters):
Wall Street jumps on bank rescue hope
By Rodrigo Campos Rodrigo Campos – Thu Feb 5, 2:11 pm ET
NEW YORK (Reuters) – Stocks rose on Thursday on investor hopes that the Obama administration's plan to shore up the financial system would include a measure that would help banks stem losses and revive lending.
Traders said investor sentiment was buoyed by talk that Washington would suspend an accounting requirement on the recognition of losses that has resulted in billions of write-downs for banks.
"The notion that you can suspend this mark-to-market provision, which was established after Enron, as way of halting the slide in the value of financials is at the fundamental core of putting on the brakes," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
"The market reaction is a barometer how well (the suspension) could impact market psychology and market value."
The leading early candidate for total moron of the year is a strong one. Peter Kenny writes my blog this evening, so I guess I am grateful.

This whole nasty "mark to market" madness was set up to keep dishonest businesses, like ENRON, from playing too many balance sheet tricks. People went to jail over Enron. There was public outrage. This time around the book making game of Jenga is deemed both good and necessary! This stuff writes itself! Mr. Kenny comes right out swinging saying that playing make believe is the only way to save the banks! Honali or bust indeed!

Not content with just that whopper, Mr. Kenny then goes on to show his total lack of fundamental understanding by asserting that marking to myth a bunch of bank assets will "halt the slide in the VALUE" of the financials. That's rich! If we hold hands, take a Michael Phelps hit of the bong, and fly away to Honali the banks will actually be solvent and have some value! Whoopee! Other than the value of whatever money the taxpayers pour into the banks, they are all ZEROES.

By now any sane player will know you cannot be in many stocks because of crazy intervention wizardry that can manifest at any moment. When the best policy action is to play make believe, you know you have a problem. I really have nothing to add to this thing, I think it stands on it's own merits.

Have a good night. Dream of Unicorns!


watchtower said...

"The world has gone mad today
And good's bad today,
And black's white today,
And day's night today..."

"Anything Goes" by Cole Porter

Anonymous said...


I've got a request for Friday rock bloging. It's not really rock but I like it. It's on youtube so it should be easy to find but I'm going to make you work for it.

Gone, Gonna Rise Again / Michael Johnathon


watchtower said...

I thought KD had an interesting read today:

"It's A "D", Not An "R" Folks"

"Depressions are a different animal. They come about because of structural problems in the economy, and are always credit-driven."

From the Market Ticker website which is linked to the side over here.

Anonymous said...

Companies that loaded up with debt when credit was cheap are struggling to maintain ratios required to hold their high-grade status as earnings decline.

To deal with the downturn they are cutting costs and downsizing but in many cases their ratings are out of their control as global economic woes continue to spread.

"In general the population is spending less, so there's very few things that are spared," said Greg Habeeb, portfolio manager at Calvert Asset Management in Bethesda, Maryland.

"One of the few areas that might be spared is the food sector, because people have to eat, but everything else is under siege," he said.

This is why goverment spending with borrowed money will make this worse. They are competing with tese companies for a shrinking pool of capital. Like as in real money generated from real production.