I-Banks Will Continue to Sweep Their Problems Under the Rug

Didn't we cover this ground already? If one ever wondered what kind of investors dominate the market these days (momentum investors), Thursday was a great example of what happens when "momentum" becomes the most important fundamental. One commentator said it well when he suggested that one analyst downgrading his rating on Citibank (C) was like the butterfly flapping its wings that eventually led to the creation of a hurricane that forced the market down 2% by the end of the day. Chaos theory at its best... or worst, if you will.

Did fundamentals really change all that much from Wednesday to Thursday? Isn't the Fed easing a good thing for stocks. One comment I read from the media (these reporters really should take a capitals markets or economics class sometime) stated that the market was down because the Fed was going to stop easing and that the economy was slowing down. Seems to me if the economy continues to worsen, the Fed would be inclinded to continue to ease. The scenario stated by the article as the reason the market fell, in my opinion, seems to be the least likely one imaginable.

Regarding banks and brokers, we all generally admit that because we cannot see the loans and other assets and liabilities on their balance sheets, analyzing them is a bit tricky. The balance sheets often take a "black box" nature.

It is however clear that many of the SIVs and CDOs that went bad back in August are still on the balance sheets listed at values which may not reflect their true worth. Merrill Lynch's CEO may have tried to mark to market some of these assets with a nearly $8 billion write down. This honest disclosure of the underlying reality cost him his job. Do you think it likely that other financial institutions will want to follow his lead now?

I suspect that most of the owners of these foul assets will try to quietly sweep them under the carpet and hope that they will go away. Unable to do this, I suspect they will pop up every once in a while in the earnings reports. I think the worse case scenario - everyone marking to market these assets and taking the huge write-downs this will require is unlikely to happen.

For me and my portfolio, many stocks that I have been looking at are now cheap enough for me to buy. I have maintained a bit of cash just for this kind of weakness and hope to "pull the trigger" on a few of these names in the near future.