Every bear market has one.. Every Great Depression has one. While I admit that there is limited evidence on the latter, there is certainly plenty to support the former. Every bear market has its own rallies, and countless times investors will be suckered into thinking these rallies are the start of a new bull – and nobody wants to be the one that missed out.
I have talked on my weekly radio shows for some time now about two potential rallies in this bear market. I am not looking at technical indicators to make that statement, but rather two potential occurrences that could trigger rallies within this mega-bear market. It has been my opinion that policymakers would use these occurrences to either touch off or maintain the current bear market rally. As it turned out, the markets provided their own bottom of sorts in terms of selling exhaustion and a wave of euphoria about economic prospects from Washington. Now we get to our possibilities – and the rhetoric and symbolic changes are already taking place.
1) The Uptick Rule – The uptick rule, put in place to prevent predatory short-selling was for some still unknown reason removed in the summer of 2007 – just a few months before the peak in the DOW and S&P500. The SEC claimed that the uptick rule in the age of instant (and in their opinion, perfect) information was irrelevant. This incredibly foolish move paved the way for institutions and hedge funds to cannibalize each other from November 2007 through the present. The net result of this cannibalization was an unprecedented and historic consolidation in the financial sector.
It seems the SEC has finally found its common sense and there have been hearings about re-instituting the uptick rule. This serves to send the signal to opportunistic banks and hedge funds that the coast is clear to start buying assets at fire sale prices, which will lead to further consolidation. Even mere talk of bringing back the uptick rule will impact investing decisions. Keep in mind that this arena is not one occupied by Ma and Pa Podunk, but rather multi-billion dollar hedge funds and banks.
2) Revisions of the Mark to Market Rule – This is the equivalent of allowing financial institutions to play ‘Alice in Wonderland’ with regard to the value of otherwise worthless derivative securities and non-performing mortgage tranches. While the arguments for mark to model are plentiful, and in some cases legitimate, the bottom line is that an asset is only worth what someone is willing to pay you. Following the current logic, homeowners should be able to pretend that their homes are worth 40% more than the market price and behave accordingly. See another bubble possibility here?
We will present a much more in-depth analysis of the ramifications of the uptick rule and the changes recently made to ‘mark to market’ accounting in this month’s edition of The Centsible Investor. For more information, please click here.
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[...] Original post by My Two Cents – Extemporania [...]
[...] Original post by My Two Cents – Extemporania [...]
[...] Original post by My Two Cents – Extemporania [...]