Monday, October 20, 2008

Where Have We Seen This Story Before?

Again, the markets exploded on some sense that ANOTHER stimulus check might somehow save the economy. The number one lesson of the markets is don't fight the trend. The trend feels like it wants to take the markets higher right now, so hitch a ride on this puppy while it lasts. The amount of bulls out there is a little staggering right now, sentiment is very positive right now. I remain convinced we're in the midst of a tradeable rally (up 17% from the lows already) that might have another 8-12% left in it.

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Keep your politicians away from any decisions that require an associates degree in accounting.

"The Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering an accounting rule that could have hurt the banks' finances.

The program, announced last week, is intended to encourage banks to lend again by having the government take equity stakes in the institutions so they can rebuild their capital levels. But in its rush to get the program under way, the administration overlooked a key detail involving the potential issuance of stock, people familiar with the matter said.

Under the initial plans, participating banks will sell the government a certain amount of preferred stock. But they are also required to issue warrants, which give the government the right to purchase a bank's common stock at a certain price. However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on their balance sheets. That could force the banks to record a loss and thus impair their capital levels -- the very opposite of what the government is aiming to accomplish.
(What the Deuce? Can't we just fake this?)

The Securities and Exchange Commission and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity" under generally accepted accounting principles, people familiar with the matter said. (Sweet! Rose-colored glasses for everyone!)

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I'm more convinced than ever that the current recession is likely to be the deepest in memory. The pain will be widespread and unrelenting. As a good friend in the software business remarked this week "This is going to make the dotcom crash look like a walk in the park". I'm hearing more comments like this from people in the field and that's my concern. Credit markets might be thawing, but that doesn't undo the damage to our economy which remains locked down.

Note this list of headlines on a night after the Dow rallied 400 points:

American Express Co earnings fell more than 20 percent as it set aside more money to cover growing losses in its credit card business.
Merrill to cut 500 trading jobs
Wall Street braced for new cuts, weak outlook at Yahoo
Texas Instruments outlook misses

Wow!

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