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Mark's Market Blog

3-14-09: Spring forward, international valuation problems

By Mark Lawrence

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Last week I wrote the way to bet is that we're looking at another 5% drop in the markets in the coming week. In support of my heart-felt prediction, the market duly rose by 12%. There was wonderful news: spring is in the air, the western rains and eastern snows have stopped. GM announced that they would not need another $2B to finish out March, they would be fine on their previous $13.7B. Their stock almost doubled on the week. Bank of America announced that in January they made about $1.56, a huge improvement on their projected enormous losses. Their stock doubled too. Is this it? Was that the bottom on March 6th?

S&P 500, Dec 13 '08 to March 13 '09

In my blog on banking crises, I wrote that the likelihood was that the market would bottom out somewhere between a DOW of about 5000 and 6500, somewhere around March 2011. The DOW ended last week at 6550. I believe we have another leg down yet to go, but probably a run up in prices between now and then. Bear markets are like cats playing with mice - you seemingly get lots of chances to get away, but in the end the cat gets you. However, the message of hope and change this week is that the worst is behind us, we're going to recover in late 2009, the stock market leads by 6 months (that's 'cause although individually none of us are worth beans at predicting the future, collectively when we hold hands and chant "We care, we care, we care" we can do it with remarkable precision. Huge committees always out-perform individuals, right?) Unemployment will continue to increase for another two to three years. Car sales and house prices most likely won't start to recover until employment starts to pick up again, but this stock market is telling us it's immune to all that.

This last week Obama's Auto Task Force has been visiting Detroit, getting to ride in the Chevy Volt, GM's all-electric ultra-green car. They've been getting an all-expense paid junket through the hopes and dreams of the US car makers. Their report on the viability of GM, Ford and Chrysler is due on March 31st. On Friday, the task force hired Matthew Feldman, a bankruptcy attorney and restructuring expert. GM stock immediately dropped 10% in after-hours trading. My take: GM's bond holders continue to resist their "haircut," and the task force is now also sending a helpful message to them about flood waters and remaining spaces on the ark.

For the first time in 25 years, car registrations dropped. GM hailed this as a sign that the market is clearing. Others say it's a sign that people are permanently moving to buying and owning fewer cars.

A great quote on illegal immigrants and our economic problems: People who were born in this, the freest and most prosperous country on Earth, with a free education and every other opportunity to improve their lives, find themselves afraid to compete with a group of people who don't have legal status, often can't speak English, and usually have no more than a 6th-grade education. -- John Navarrette

We keep hearing about the breakdown of the global financial system. What does this mean, and why is it so hard to fix?

In the decade 1998-2007, net financial investment for US households totaled negative $3 trillion. Meanwhile, foreign investors flocked to US investments which offered decent returns and high (perceived) safety. Between 1998 and 2007, foreign investors poured roughly $10 trillion into acquiring financial assets in this country, $7T of that into Treasuries and mortgage-backed securities. Then the investment bankers created credit default swaps which pay off if a bond defaults, effectively insuring the bonds. Wall Street sold bonds to foreign investors and at the same time collected fees on credit default swaps on the bonds in order to reassure the nervous investors.

Investment money, 1952 - 2008

This international angle is very important. We keep hearing that no one knows how much the toxic assets are worth. If the buyers and sellers were all American, it would be relatively easy for Geithner and Bernanke to gather them in a room and make them come to a ‘reasonable’ agreement about how much these securities were worth, just as was done ten years ago in the LTCM crisis. But with most of the counterparties in other countries, the job becomes much more difficult. There’s no way for Bernanke and Geithner to force European or Chinese banks to accept a particular price. This leaves the government with three unpalatable options:

The solution being sought is a world-wide banking conference to try to agree on a valuation. If this succeeds, then the bank's books will clear and everything will get better. If no agreement can be reached, there will be continuing trouble.

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