Wednesday, October 1, 2008

Hold To Maturity huh

I want to touch yet again on the Gingrich, Bernanke, Gross, Lindsay, Isaac & Co. movement to abolish mark to market accounting for the banks on, "distressed", assets in an effort to give them some breathing room. The focus on changing mark to market to hold to maturity which really is code for mark to myth or if you prefer hide and seek accounting.

Actually they are carefully using their words in their description of what they want to do. Conveniently using words like rescue instead of bailout, moratorium instead of abolition, the kind Bill Clinton, of what's the definition of 'is' is would be proud of.

So let's for sake of argument, take their moratorium on mark to market accounting and given their belief in it's benefits and apply it to another arena in need of relief, tech stock investors.

In many investors' view the crash in tech stocks was crazy and completely irrational. They are not happy with what has transpired as this distressed selling has depressed many prices in the sector artificially below their true value. I thought I would use my simple math and apply the new found hold to maturity formula being proposed on mortgages to this sector. All assumptions are made without using any leverage as Mr. Gross did in his calculations of the benefits to our treasury should we pass the bill.

Nortel common stock current mark to market distressed price $2.25
Nortel common stock hold to maturity price $600
Theoretical gain to the treasury $26,566%

JDS Uniphase common stock current mark to market distressed price $8.50
JDS Uniphase common stock hold to maturity price $900
Theoretical gain to the treasury 10,488 %

I think you get the point I am trying to make. Better yet. Recession on the horizon. Lets ban the use of the word recession and that way it won't exist. We will have a hold to maturity economy, which if the government can print paper and bail us all out we won't have to live with the inconvenient real world dilemma of trying to sell anything, anywhere, anytime at below polyannic, nirvanic, rose colored glasses pricing. Utopia guaranteed !!

I continue to hear pundits and expects touting this market as a buying opportunity. These perma-bulls never have met a market they didn't like which should immediately call into question their credibility but that is another question for another time. I have also received many inquiries from friends and associates as to what they should do regarding their affairs. It got me to thinking about how we are experiencing the transition in phases of this market. The brilliant boys over at Comstock Partners, whom by the way you never get to see on pom pom TV, have outlined this with their piece 3 stages of a Bear Market. To quote them directly;

"Generally bear markets go through three psychological phases - "denial", "concern", and then "fear & capitulation".

I would surmise that we are currently witnessing the move from the denial phase to the concern stage. People are starting to wake up to the fact that this economy has some VERY serious structural problems, most notably the overwhelming use of debt. I could go on and on and on but suffice to say we could double the amount of this bailout bill and it will do nothing to fix our problems. Better to save this money for when we may REALLY need it.

I also want to touch on the NY Times piece regarding the bailout of AIG recently. The article outlined how the CEO of Goldman Sachs Mr. Blankfein was in the room for the meeting. When queried as to what Goldman's exposure to AIG was the response was "immaterial". We then find out Goldman's potential exposure to loss due a failure of AIG was approximately $20 Billion. Remember now, Treasury Secretary Paulson used to be CEO of Goldman in 2000-2005. Now do you start to see why I am so enraged as to what is transpiring, why I think the game has become rigged, why confidence has been shattered, why trust is lost, and why our capital markets are in a colossal world of trouble.

I am short to protect myself and my capital from this. I am long precious metals, both physical and paper to protect myself from this abdication of rules and order. I am concerned like never before.

I want to leave the equity market bulls and those with an inclination to use every dip and downdraft as a buying opportunity with one final item to ponder. If our markets are so resilient, so cheap on a valuation basis, why then do we need this bailout bill. Further, what does the need of this bailout tell you about our state of financial affairs?

Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit of Spdr Gold ticker GLD @ $86.85 stop at $83.59
Long 1 unit Ultrashort 20yr Treasury ticker TBT @ $60.50 stop at $57.32
Long 2 units of Ultrashort S&P ticker SDS @ 61.75 stop at $57.69
Long 2 units of Ultrashort Dow ticker DXD @ $57.85 stop at $53.79
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $126.36
Short 2 units of Apple ticker AAPL @ $178.05 stop at $177.76
Short 2 units ticker CRM @ $56.05 stop at $60.62
Long 2 units Hecla Mining ticker HL @ $5.20 stop at $3.89


Anonymous said...

Nice analysis..I always like to read your blog...Thank you..Keep up the good work...


Harleydog said...


thx, appreciate your kind words.