Posts
What do we need to do to save our economy? First of all, Mr. President, Mr. Geithner, You need to come out and give the public some reassurance. That's all the market wants right now; Lie to us if you have to but tell us its all going to be alright. This is not the time to be honest, for god's sake you people are politicians...you should know better!
But seriously the major problem with our economy is that home prices have fallen through the floor and there is no bottom in sight. There need to be a bottom in the housing market before any recovery can take place, plain and simple. OK so now you dropped the ball on the $15,000 tax credit for first time home buyers, not too bright, but at least you are trying with this new mortgage subsidy plan. I am unsure how this plan is going to work properly, why would people who are current on the mortgages continue to pay? Where is there incentive?
Look politicians you have 2 options, neither of which are attractive:
1. Nationalise the banks and eat the losses from foolish bets by greedy men. This seems like a good idea at first glance because it would keep people in their homes, however, we would have a revolution in this country if it actually took place. Nationalisation is the first step towards communism. Its a slippery slope that ends up with the goevernments hands in everything that we do. I find it hard to believe that, even though this may be the lesser of two evils, would actually happen.
2. Let capitalism run its course, let the foolish banks who gave loans to people who could never in a million years repay them, go under. Wipe out all the shareholders, hold them just as much accountable for not doing research in the bank which with they were investing. And let many Americans get evicted from their homes and have their credit rating destroyed. It is not a pretty choice but if we believe in capitalism, it is the choice that the government must make. Social Darwinism at its finest.
I don't, realistically, see any other option here. Nothing else seems to make sense. Barring some sort of miracle I see the American economy to be in big trouble for the forseeable future. I wish it weren't so but we dug ourselves into one heck of a hole and it will take some time to get out of it.
Friday, February 13, 2009
Thursday, February 12, 2009
Growth Industries
Now is a great time to be looking at growth stock candidates, believe it or not, the risk is much greater at a market bottom than at a market top. Now is a great time to be cherry picking stocks that you think will be home-runs in the future, and with already depressed prices you can better diversify and have a better chance at picking the next Microsoft. I have 3 picks of what I feel will be great growth candidate industries:
1. Companies that are in the market of developing "products" using stem cells; such as STEM. Stem cell research is the wave of the near future. Companies are aggressive trying to find ways to use stem cells to clone organs; Imagine a world where you can smoke as many cigarettes as you want with impunity, knowing full well when you get a malignant tumor you can simply go to the 'stem cell store' and have a cloned lung replace your old worn out one. What would people pay for something like this? The answer is "whatever it costs". It is very difficult to put a price tag on longer and healthier lives, and people will be willing to spend whatever it costs to prolong their existence. Stem Cell research has been set back 8 years (thank you W.) but now these companies are going to be quickly making up for lost time. Stem Cell companies make a great choice for a Growth stock Candidate.
2. Companies that our going to be involed with make Medical Electronic records is also going to be a winner, check out http://en.wikipedia.org/wiki/Electronic_Medical_Records for an idea of the companies that service this field. President Obama is making it his goal to have all American medical records be electronic by 2012. Will this happen? Most likely. The question is what companies are going to benefit the most from this system going online. That I don't have an answer for unfortunately, but with a little research you can make your own best guess as to which is more likely to succeed (If you don't feel like doing that much work, don't worry, I am in the proccess of making a list of my favorites that will be the subject of another post.)
3. My last choice for a groth industry, and the one you may say "eh I don't think so", is companies with the rights to Carbon Nanotubes (as of right now IBM is the biggest one that comes to mind). What are Carbon Nantubes you may ask? Essentially it is a Ultra-high strength and light weight material which is also heat resistant. Carbon Nanotubes (CNTs) can be used in lots of practical situations, but the one thing that they me best at is if SPACE TRAVEL ever becomes routine. No I am not referring to Star Trek style space travel, but rather airliners that travel to the edge of outerspace in order to travel significantly faster than planes flying at convential altitudes. CNTs can make this a reality as the biggest obstacle to space flight is both the going up, and the re-entry. Because CNTs are so lightweight it will be much easier to get to outerspace at a lesser fuel cost than is currently demanded; and because they are ultra-resitant to heat, re-entry would become quite easy and there will be less worry about being scorched on the return trip. Is space travel the next big thing, well I hope so, and if I'm right I'd love to profit off it.
Stem Cells, Electronic Medical Records, and Carbon Nanotubes are the 3 growth industries that I am looking to invest in for my long term portfolio. I believe you too would be wise in doing the same thing. I have intentionally been vague on giving actual stock selections as I myself have not completed my research and don't know which stocks I am going to invest in yet. As I get more in depth with my analysis I will post some more specific choices, but I urge you to go out and look up some of these options on your own.
Good Luck!
1. Companies that are in the market of developing "products" using stem cells; such as STEM. Stem cell research is the wave of the near future. Companies are aggressive trying to find ways to use stem cells to clone organs; Imagine a world where you can smoke as many cigarettes as you want with impunity, knowing full well when you get a malignant tumor you can simply go to the 'stem cell store' and have a cloned lung replace your old worn out one. What would people pay for something like this? The answer is "whatever it costs". It is very difficult to put a price tag on longer and healthier lives, and people will be willing to spend whatever it costs to prolong their existence. Stem Cell research has been set back 8 years (thank you W.) but now these companies are going to be quickly making up for lost time. Stem Cell companies make a great choice for a Growth stock Candidate.
2. Companies that our going to be involed with make Medical Electronic records is also going to be a winner, check out http://en.wikipedia.org/wiki/Electronic_Medical_Records for an idea of the companies that service this field. President Obama is making it his goal to have all American medical records be electronic by 2012. Will this happen? Most likely. The question is what companies are going to benefit the most from this system going online. That I don't have an answer for unfortunately, but with a little research you can make your own best guess as to which is more likely to succeed (If you don't feel like doing that much work, don't worry, I am in the proccess of making a list of my favorites that will be the subject of another post.)
3. My last choice for a groth industry, and the one you may say "eh I don't think so", is companies with the rights to Carbon Nanotubes (as of right now IBM is the biggest one that comes to mind). What are Carbon Nantubes you may ask? Essentially it is a Ultra-high strength and light weight material which is also heat resistant. Carbon Nanotubes (CNTs) can be used in lots of practical situations, but the one thing that they me best at is if SPACE TRAVEL ever becomes routine. No I am not referring to Star Trek style space travel, but rather airliners that travel to the edge of outerspace in order to travel significantly faster than planes flying at convential altitudes. CNTs can make this a reality as the biggest obstacle to space flight is both the going up, and the re-entry. Because CNTs are so lightweight it will be much easier to get to outerspace at a lesser fuel cost than is currently demanded; and because they are ultra-resitant to heat, re-entry would become quite easy and there will be less worry about being scorched on the return trip. Is space travel the next big thing, well I hope so, and if I'm right I'd love to profit off it.
Stem Cells, Electronic Medical Records, and Carbon Nanotubes are the 3 growth industries that I am looking to invest in for my long term portfolio. I believe you too would be wise in doing the same thing. I have intentionally been vague on giving actual stock selections as I myself have not completed my research and don't know which stocks I am going to invest in yet. As I get more in depth with my analysis I will post some more specific choices, but I urge you to go out and look up some of these options on your own.
Good Luck!
Stimulus Package
For the past 8 years the American public has been critical of Republican spending, on that thought they ousted the conservative leadership, voted in a democrat, and one month into his tenure, guess what? "The package dwarfs the military budget and exceeds the cost of the entire Iraq war since the invasion of 2003." according to an article by Jonathon Weisman in The Wall Street Journal
Unreal. That is the only word that I can utter after reading the details of this stimulus package. Might as well burn the 789 Billion. This is going to accomplish nothing. I don't know how else to adequately phrase my feelings on this. I know the market is not going to like this plan, and am predicting, yet another, down day.
First of all, just Monday night, all Obama could keep talking about was how "I don't care how we have to do it but we are creating 4 million jobs!" Guess what? He has ALREADY conceded defeat on his #1 issue, now the stimulus plan, at best, hopes to create 3 million jobs. I guess I could just go over every piece of this bill that disgusts me but that wouldn't be worthwhile, I'm going to pick the largest oversight of this plan:
That is the lack of a tax-rebate for home buyers. Why is that so important? Great question! Because until the housing market finds a bottom America is not coming out of this recession; plain and simple, no amount of debate can change this, and no amount of foolish spending (doesn't matter where your throwing the money) can stop the tailspin our economy is currently experiencing. This was the one part of the package that could not be compromised. A $15,000 tax credit for first time home buyers appeared to be all but a shoe-in to get passage from congress. This would have absolutely put a bottom on the housing market and signaled the bottom of our overall economy. Without this provision the whole package is a waste. Almost a trillion dollars, $7,000 per family, will just dissappear do to frivolous spending.
Unreal. That is the only word that I can utter after reading the details of this stimulus package. Might as well burn the 789 Billion. This is going to accomplish nothing. I don't know how else to adequately phrase my feelings on this. I know the market is not going to like this plan, and am predicting, yet another, down day.
First of all, just Monday night, all Obama could keep talking about was how "I don't care how we have to do it but we are creating 4 million jobs!" Guess what? He has ALREADY conceded defeat on his #1 issue, now the stimulus plan, at best, hopes to create 3 million jobs. I guess I could just go over every piece of this bill that disgusts me but that wouldn't be worthwhile, I'm going to pick the largest oversight of this plan:
That is the lack of a tax-rebate for home buyers. Why is that so important? Great question! Because until the housing market finds a bottom America is not coming out of this recession; plain and simple, no amount of debate can change this, and no amount of foolish spending (doesn't matter where your throwing the money) can stop the tailspin our economy is currently experiencing. This was the one part of the package that could not be compromised. A $15,000 tax credit for first time home buyers appeared to be all but a shoe-in to get passage from congress. This would have absolutely put a bottom on the housing market and signaled the bottom of our overall economy. Without this provision the whole package is a waste. Almost a trillion dollars, $7,000 per family, will just dissappear do to frivolous spending.
Wednesday, February 11, 2009
WWE Wrestling
Ok as risk to my credibility I am pushing an entertainment stock as a long term value investment, and not just any entertainment stock but WWE Wrestling!
Why, if you are a value investor, you should buy:
#1 They have no debt! This is always a good thing, and with a price to book ratio of 1.80 that means even if the company went into bankruptcy, which i strongly believe they are in no danger of doing, this means you would lose less than half of what you put into it. They have a Price to earnings ratio of 12.50, which in historical terms is a low valuation. And perhaps the most attractive thing of all is that their dividend yeild is over 15%. Now a prudent investor would say that level is too high and in danger of a cut, however WWE came out today and said that they will not cut their dividend (great if true!). I think that it is realistic that they will continue their dividend as they offer a quality product that people are "addicted" to, people continue to watch their product every week, and they run shows 3 nights per week. The reason that their stock has been battered down over the past year is that they have been hurt just like every other entertainment industry. No one is completely immune, and the biggest losses the WWE has taken our in their Pay Per View buyrates. And this may prove to be their biggest flaw; WWE runs PPVs once a month, and sometimes even sooner, at $30 a clip it is an expensive hobby for most people and one that is the first to be cast off. What they would be smart in doing is cutting back the number of PPV events and raising the price on the remaining one's (creates more of an interest in the product). Their TV ratings have been consistant for the past 10 years, and they have little to no competition (some argue UFC has taken away some of their demographic, I don'y see why, WWE is a men's soap opera, very few people would consider it an actually sport give that its cheorgraphed). This company has alot of things going for them and their is no reason to think that their dominance in the field of "sports entertainment" will change over time. As a matter of fact, with the success of the movie The Wrestler it is possible that wrestling today appeals to an even broader swath of society.
Why, if you are a value investor, you should buy:
#1 They have no debt! This is always a good thing, and with a price to book ratio of 1.80 that means even if the company went into bankruptcy, which i strongly believe they are in no danger of doing, this means you would lose less than half of what you put into it. They have a Price to earnings ratio of 12.50, which in historical terms is a low valuation. And perhaps the most attractive thing of all is that their dividend yeild is over 15%. Now a prudent investor would say that level is too high and in danger of a cut, however WWE came out today and said that they will not cut their dividend (great if true!). I think that it is realistic that they will continue their dividend as they offer a quality product that people are "addicted" to, people continue to watch their product every week, and they run shows 3 nights per week. The reason that their stock has been battered down over the past year is that they have been hurt just like every other entertainment industry. No one is completely immune, and the biggest losses the WWE has taken our in their Pay Per View buyrates. And this may prove to be their biggest flaw; WWE runs PPVs once a month, and sometimes even sooner, at $30 a clip it is an expensive hobby for most people and one that is the first to be cast off. What they would be smart in doing is cutting back the number of PPV events and raising the price on the remaining one's (creates more of an interest in the product). Their TV ratings have been consistant for the past 10 years, and they have little to no competition (some argue UFC has taken away some of their demographic, I don'y see why, WWE is a men's soap opera, very few people would consider it an actually sport give that its cheorgraphed). This company has alot of things going for them and their is no reason to think that their dominance in the field of "sports entertainment" will change over time. As a matter of fact, with the success of the movie The Wrestler it is possible that wrestling today appeals to an even broader swath of society.
How YOU should be investing
If you are reading this article I assume that you are, or are looking soon to become an investor/trader. In this I will give you some quick do's and Don't's of how to go about the exciting investment game:
For all of you that are not able to dedicate a large bulk of your time to stay current with business and market news, I strongly caution you against trying to play games in the stock market. Be realistic, there are many people who dedicate every moment of their entire lives to outsmarting the market, and most of them sadly fail. If you do not have real time to dedicate, don't think your smarter than everyone else, put 40% of your money in a bond fund such as PIMCO, another 40% in a dow jones tracking fund such as the "diamonds" ticker DIA, 10% in some sort of gold tracking stock such as ticker GLD or a gold mining company like Barrick (ABX), with the other 10% you can take some risks on a company you feel is a winner. This way if your right and you double your money with your pick it drives the value of your portfolio up 10% and if you are wrong your loss is probably canceled out with gains in the other areas.
If you are a value investor, you are probably licking your chops right now because many solid companies have been beaten down so far that they represent great deals that most of us will never again see in our lifetimes. Now would be a good time to buy back into the market with a few solid blue-chip stocks (if there is such a thing), or simply invest any spare money in the DIA or SPY. Don't try and pick a bottom of the market, as I said before, you, like me, are not smarter than the market.
The type of investing strategy that I feel can be most profitable for people who can be very proactive about their investing is that of Swing Trading. Swing trading, for those of you unfamiliar with the term, is a style of trading in which you buy a stock with a reasonable "guess" (I hate to use that term but in todays market that's all it really amounts to) that the price of the stock will go up in the near term; be it 1 day, 1 week, or one month. Swing trading lies somewhere between day trading and value investing in that it requires skills of both styles for you to master it. A good swing trader is watching CNBC, Bloomberg Television, Reading the Wall Street Journal, Following the pulse of the market just like a good day trader; and at the same time is learning everything he/she possibly can about individual companies and sectors much as a value investor would. A person must be fairly intelligent and be able to act on a moments notice to changing events; and most importantly most be emotionally detached from every single position that you open. It gets complicated and is really worth reading more about if you have money and our looking to watch it grow. If you email me or leave a comment I'd be glad to reccomend some books.
Something here that I feel I must mention is that you also dont fall into the trap of getting a "Herd Mentality" following the crowd and doing what you are told. Millions of people watch Jim Cramer's Mad Money everynight on CNBC, not to put it down because it is a very interesting program, but often times when a Guru makes a pick on national television it often times cancels out any validity his thesis held prior to his announcement. I know that sounds a little cock-eyed but it has been proven time and again that anyone, with any kind of a real following, who has made money hand-over-fist in the past, seems to go south as soon as his ideas become mainstream.
Now I'm not advocating taking advice from a person such as myself anymore than I advocate taking Mr. Cramer's ideas. What I am trying to say here is that any information you gather must just be another piece of a puzzle that you must complete on your own. To make beat the markets takes time and dedication just like anything else (sorry if you were looking for some magic formula here). I urge you to go out and do your own research on companies that you here about, that sound promising and logical, and form your own opinions before you ever place a trade.
I hope this has helped you make some decisions about you Trading/Investing choices and if you would like a reading list based on your style of investment don't hesisitate to send me an E-Mail at Cheechfpc@gmail.com and I would be more than happy to help you out.
For all of you that are not able to dedicate a large bulk of your time to stay current with business and market news, I strongly caution you against trying to play games in the stock market. Be realistic, there are many people who dedicate every moment of their entire lives to outsmarting the market, and most of them sadly fail. If you do not have real time to dedicate, don't think your smarter than everyone else, put 40% of your money in a bond fund such as PIMCO, another 40% in a dow jones tracking fund such as the "diamonds" ticker DIA, 10% in some sort of gold tracking stock such as ticker GLD or a gold mining company like Barrick (ABX), with the other 10% you can take some risks on a company you feel is a winner. This way if your right and you double your money with your pick it drives the value of your portfolio up 10% and if you are wrong your loss is probably canceled out with gains in the other areas.
If you are a value investor, you are probably licking your chops right now because many solid companies have been beaten down so far that they represent great deals that most of us will never again see in our lifetimes. Now would be a good time to buy back into the market with a few solid blue-chip stocks (if there is such a thing), or simply invest any spare money in the DIA or SPY. Don't try and pick a bottom of the market, as I said before, you, like me, are not smarter than the market.
The type of investing strategy that I feel can be most profitable for people who can be very proactive about their investing is that of Swing Trading. Swing trading, for those of you unfamiliar with the term, is a style of trading in which you buy a stock with a reasonable "guess" (I hate to use that term but in todays market that's all it really amounts to) that the price of the stock will go up in the near term; be it 1 day, 1 week, or one month. Swing trading lies somewhere between day trading and value investing in that it requires skills of both styles for you to master it. A good swing trader is watching CNBC, Bloomberg Television, Reading the Wall Street Journal, Following the pulse of the market just like a good day trader; and at the same time is learning everything he/she possibly can about individual companies and sectors much as a value investor would. A person must be fairly intelligent and be able to act on a moments notice to changing events; and most importantly most be emotionally detached from every single position that you open. It gets complicated and is really worth reading more about if you have money and our looking to watch it grow. If you email me or leave a comment I'd be glad to reccomend some books.
Something here that I feel I must mention is that you also dont fall into the trap of getting a "Herd Mentality" following the crowd and doing what you are told. Millions of people watch Jim Cramer's Mad Money everynight on CNBC, not to put it down because it is a very interesting program, but often times when a Guru makes a pick on national television it often times cancels out any validity his thesis held prior to his announcement. I know that sounds a little cock-eyed but it has been proven time and again that anyone, with any kind of a real following, who has made money hand-over-fist in the past, seems to go south as soon as his ideas become mainstream.
Now I'm not advocating taking advice from a person such as myself anymore than I advocate taking Mr. Cramer's ideas. What I am trying to say here is that any information you gather must just be another piece of a puzzle that you must complete on your own. To make beat the markets takes time and dedication just like anything else (sorry if you were looking for some magic formula here). I urge you to go out and do your own research on companies that you here about, that sound promising and logical, and form your own opinions before you ever place a trade.
I hope this has helped you make some decisions about you Trading/Investing choices and if you would like a reading list based on your style of investment don't hesisitate to send me an E-Mail at Cheechfpc@gmail.com and I would be more than happy to help you out.
Ford
Is now a good to to be investing in Ford? I think so. Ford is in the best financial shape of the big three auto companies, which is alot like claiming to be the world's tallest midget, i know, but it does mean something. Now the headlines are say that Ford is trying to become classified as an "Industrial Loan Corporation" in order to access cheap financing because they are burning through cash at an alarming rate.
This has been a horrible year for the auto industry the world over. When's the last time you've heard of an auto company that is making money? I didn't think so. The problem with the American car companies is that they are too quick to react to the ever changing American attitude at the expense of their long term viability. SUV's have been all the rage for the last decade, our American attitude of "I'm a big shot and I'm gonna show it by driving the biggest, most fuel inefficient car I can find; yea I got money to blow!" Unfortunately when gas prices shot to obscene levels, thank you speculators, people simply couldn't afford to drive SUV's at such incredible levels in the price of gas. (A relative of mine drives and Escalade and could not fill up his tank, literally, because the gas station pump won't accept a bill over $100) So what happened, American's, intellectuals that we are, immediately blamed the auto companies for all our woes; "You have been making products that use way too much gasoline; You should've known we'd buy whatever you were selling, we can't be held responsible for our actions!" This and a growing liberally "Go Green!" movement (thank you Al Gore) has lead to big auto trying to switch over to more fuel efficient vehicles, all well and good if we had these things when oil prices where at $150 a barrel, but as all bubbles do, the oil bubble finally popped sending the price of gas back down to earth, and guess what Americans are willing to purchase "regular" cars again. These car companies cannot keep switching back and forth their plants based on the whim of the American public and as a result of this, of course many other factors as well, car companies have lost a tremendous amount of money (yes people are not willing to buy any vehicle now because of the recession, but we'd be foolish to think that mentality is going to continue forever.).
Car companies should try a little clairvoyance and predict what consumers are going to want one year from now because that is when people will be buying.
Anyways, Ford is a good buy because the are going to be the sole survivor here, its going to be the Big 1! They have enough cash and their brand still has enough Cache that is should attract foreign investors, the Chinese will do nicely (and they would love to a foot in this American company). What does this mean to you as an investor? I think it means your getting a big name company at a fire-sale price that if: A. The Chinese buy them out you make money on the takeover or; B. they become the sole survivors in Detroit and gobble up the Market Share that was once held by GM and Chrysler!
This has been a horrible year for the auto industry the world over. When's the last time you've heard of an auto company that is making money? I didn't think so. The problem with the American car companies is that they are too quick to react to the ever changing American attitude at the expense of their long term viability. SUV's have been all the rage for the last decade, our American attitude of "I'm a big shot and I'm gonna show it by driving the biggest, most fuel inefficient car I can find; yea I got money to blow!" Unfortunately when gas prices shot to obscene levels, thank you speculators, people simply couldn't afford to drive SUV's at such incredible levels in the price of gas. (A relative of mine drives and Escalade and could not fill up his tank, literally, because the gas station pump won't accept a bill over $100) So what happened, American's, intellectuals that we are, immediately blamed the auto companies for all our woes; "You have been making products that use way too much gasoline; You should've known we'd buy whatever you were selling, we can't be held responsible for our actions!" This and a growing liberally "Go Green!" movement (thank you Al Gore) has lead to big auto trying to switch over to more fuel efficient vehicles, all well and good if we had these things when oil prices where at $150 a barrel, but as all bubbles do, the oil bubble finally popped sending the price of gas back down to earth, and guess what Americans are willing to purchase "regular" cars again. These car companies cannot keep switching back and forth their plants based on the whim of the American public and as a result of this, of course many other factors as well, car companies have lost a tremendous amount of money (yes people are not willing to buy any vehicle now because of the recession, but we'd be foolish to think that mentality is going to continue forever.).
Car companies should try a little clairvoyance and predict what consumers are going to want one year from now because that is when people will be buying.
Anyways, Ford is a good buy because the are going to be the sole survivor here, its going to be the Big 1! They have enough cash and their brand still has enough Cache that is should attract foreign investors, the Chinese will do nicely (and they would love to a foot in this American company). What does this mean to you as an investor? I think it means your getting a big name company at a fire-sale price that if: A. The Chinese buy them out you make money on the takeover or; B. they become the sole survivors in Detroit and gobble up the Market Share that was once held by GM and Chrysler!
Tuesday, February 10, 2009
Marked-to-Market Acounting
Senator Dodd of Connecticut has been quoted as saying that as part of the financial bailout plan the government will be getting rid of mark-to-market accounting. If this is in fact true, the stock market will jump many hundreds of points when this news is officially released.
What is marked-to-market? Essentially it is an accounting technique that allows you to value your assets based on the going market price. huh? Let us suppose you buy 1000 shares of company A for 10$, it subsequently rises to 20$, you get to mark it on your books as $20,000. Thats great as all of you day traders out there know, your margin gets increased and you have more buying power. the same thing happens with big banks. Lets say that a bank has a bond for par (even) at 100 (lets say its a mortgage for a home worth $100,000). As the prices of homes had kept rising in previous years, the price of the bond kept rising as well, say to 150. This meant that banks had on there books $150,000. Now the same principal you use on your day trading was being applied to big banks, when their investments went up they were able to use more leverage (margin) to make more loans, which in turn increased in value....etc etc. in a neverending cycle. and all this was well and good when the price of homes kept rising. (obviously this is an oversimplification but you get the picture).
So now home prices have fallen off a cliff because too many people bought too many homes with fake money that banks loaned them when they really didnt have the money either. So the market collapses and now that same bond we were talking about early's value is now say 50 ($50,000). Now the bank has to right the loan down on their books to reflect that they only have $50,000 from said bond. Imagine getting a margin call but on a massive scale and with much more leverage than us lay people could ever get; yea its not pretty but that is exactly what has been happening and is what has been causing the collapse in the financial system.
So basically the banks used this marked-to-market accounting princple to their benefit in the good years but it has absolutely killed them in the past few months. Imagine now that said accounting princple is repealed, guess what these banks can now value these loans at a higher value than what the market is currently willing to pay for it (and actually closer to the true value of the bond; the market tends to get overly pessimistic just as easily as it gets overly optimistic). So basically the banks will get to use another accounting trick to pump up their assets but no one is going to argue that this does not need to be done. It must be done, even though these financial institutions absolutely brought all the troubles on themselves without them this country would be cast into another depression. Marked-to-market must be suspended immediately, and it appears it will be, and this will do wonders for the values of financial stocks as soon as it happens. When you hear "Marked-to-Market is being suspended" i can gurantee you are going to see a tremendous upsurge of stock prices.
What is marked-to-market? Essentially it is an accounting technique that allows you to value your assets based on the going market price. huh? Let us suppose you buy 1000 shares of company A for 10$, it subsequently rises to 20$, you get to mark it on your books as $20,000. Thats great as all of you day traders out there know, your margin gets increased and you have more buying power. the same thing happens with big banks. Lets say that a bank has a bond for par (even) at 100 (lets say its a mortgage for a home worth $100,000). As the prices of homes had kept rising in previous years, the price of the bond kept rising as well, say to 150. This meant that banks had on there books $150,000. Now the same principal you use on your day trading was being applied to big banks, when their investments went up they were able to use more leverage (margin) to make more loans, which in turn increased in value....etc etc. in a neverending cycle. and all this was well and good when the price of homes kept rising. (obviously this is an oversimplification but you get the picture).
So now home prices have fallen off a cliff because too many people bought too many homes with fake money that banks loaned them when they really didnt have the money either. So the market collapses and now that same bond we were talking about early's value is now say 50 ($50,000). Now the bank has to right the loan down on their books to reflect that they only have $50,000 from said bond. Imagine getting a margin call but on a massive scale and with much more leverage than us lay people could ever get; yea its not pretty but that is exactly what has been happening and is what has been causing the collapse in the financial system.
So basically the banks used this marked-to-market accounting princple to their benefit in the good years but it has absolutely killed them in the past few months. Imagine now that said accounting princple is repealed, guess what these banks can now value these loans at a higher value than what the market is currently willing to pay for it (and actually closer to the true value of the bond; the market tends to get overly pessimistic just as easily as it gets overly optimistic). So basically the banks will get to use another accounting trick to pump up their assets but no one is going to argue that this does not need to be done. It must be done, even though these financial institutions absolutely brought all the troubles on themselves without them this country would be cast into another depression. Marked-to-market must be suspended immediately, and it appears it will be, and this will do wonders for the values of financial stocks as soon as it happens. When you hear "Marked-to-Market is being suspended" i can gurantee you are going to see a tremendous upsurge of stock prices.
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