Tuesday, September 30, 2008

Rome Burns

Despite the bounce in the stock market today, Rome, that would be Wall St, continued to burn. Credit spreads continued to be blown out and lending continued to be non existent. A man without water can survive for several days. How long U.S. economic activity can last without credit is yet to be seen. To think yesterday was a bottom I would argue is relying on the same hope of every other bottom. Just that, hope instead of facts. No fire extinguisher has emerged to extinguish the ongoing inferno and valuations yet seem attractive on a broad basis.

What is really concerning to me is the constant bombardment on market mechanisms taking away precious information from investors. First it was short trading. Banning shorts which provides information in itself. Friends have asked me what I think about the put call ratio and the VIX. My response, I don't know. Without shorts everything is blown out of having significance. The normal sign posts of bottoms and tops are at best flickering lights. Is the VIX astronomically high or are investors paying up for the only type of insurance they can buy, put premium? Then it was the government setting the clearing price in the bailout which may or may not be accurate. Now it is the attack on fair market accounting. Most of you will probably disagree with me but I really think fair market accounting is a good thing and does not carry much blame for the current situation. Blaming the shorts obviously didn't work, the market still went down so now we have to blame something else besides the obvious and so we might as well blame the accounting. The banks have been playing games with the accounting anyway with many balance sheets looking much better than they actually are. Now you are going to make it much more difficult than it already is to try and figure out what is on the balance sheet of a bank? Now that adds confidence. I think in 50 years people will be writing about what is going on and the destruction of information and be like what were those idiots thinking. The problems are obvious but people keep wanting to point to something else. It is absurd.

I think we will continue to bounce around. With the destruction of information and the destruction of market participants, volume is going to continue to dry up which will push down the equilibrium fair intrinsic value of stocks as people demand a greater premium for less liquidity and the inability to hedge easily. In my opinion the bailout plan is a bad plan anyway though something needs to be done. It will be something the hope buyers will be able to latch onto for a small period of time. The patient is dying, the city is burning, and how long the economy can put up with the stresses we are seeing in the stock market is yet to be seen. Many people forget the lag on tighter credit. Bulls constantly throw in your face the time lag in rate cuts reaching the economy. Well shouldn't there be the same time lag in liquidity drying up? The clock is ticking as more of Rome continues to burn.

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