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Goldata Financial
Dedicated to
above average returns in the stock market.
STOCK MARKET COMMENTARY
February 9, 2009
From Elliot
Goldberg, Registered Investment Advisor, Goldata Financial
Last week, the market proved, once again, that
it trades on expectations of the future, as opposed to the facts of the
present. The current fundamental news continued to be horrific ---
Macy’s slashing its dividend and laying off 4,000; Motorola (MOT),
United Parcel Service (UPS), Dow Chemical (DOW) and Cisco (CSCO) all missing
earnings expectations. Friday’s pre-market brought the January unemployment
report where expectations were for 525,000 job losses. The actual number was
-598,000. Three months ago, news like this would have resulted in a down 6%
week, but the averages finished to the plus side. What happened? The thought
here is that the answer lies in the events of Thursday morning where reports
surfaced that Treasury was considering relaxing or suspending the
mark-to-market rules for banks. If you’re not familiar with the
implications of this, here’s the story. If a bank buys a bond at $100
and the last trade is $90, it must show (or mark) it on their balance sheet
to the last trade and deduct $10 from profit (and capital). In today’s
market, the banks have many of these “bonds” that last traded at a
distressed price of say $20, but, if held to maturity would be valued today
at say $70. Under current mark-to-market rules, the banks must deduct $80
($100-$20) from their capital (and profit), thereby making them appear to be
undercapitalized and insolvent. By suspending this rule, the banks would
immediately bolster their balance sheet, decreasing the need to hoard capital
and deter lending. This policy was used effectively in the late-1930’s
by the Roosevelt administration for just this purpose (Let’s hope we
move a little quicker than they did) and got us through the Latin America
lending crisis of the early 1990’s. Obviously, the Feds must be
vigilant in auditing the banks to make sure they do not abuse this, but it
obviates the need for additional capital injections into the banks, which
would lead to further dilution of their stock. More good news to report is
that it appears that the Chinese stimulus plan is working as their stock
market is back to its highest level since last October and the price of raw
materials that they had been importing pre-Olympics is rising, implying
increased demand, the missing link here. Money is continuing to come out of
risk-free Treasuries as the 3-year yield peaked over 3% for the first time
since the fall. Looking forward, the question must be asked: “Has this
week’s action implied the market has discounted the bad fundamental news
fully?” I’ve got to give this one to the bulls. I’ll
continue to keep stops tight, but last week saw some new market segments
appear on my investment radar that have been absent for many months,
including tech and oil. I view
this as a positive as the areas of strength in the market are broadening.
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