10 Things Not To Worry About

There are many that cover the markets who try to get you to worry about things that aren’t real problems. Here’s a sampling:

1. Changes in accounting standards, or ineffective/opaque accounting standards. Take Goldman Sachs and level 3 assets as an example. The accounting standard is fine, so long as you understand it. In general, the higher the level of level 3 assets, the more opaque the valuation of assets is, and a valuation haircut gets assigned to the stock. This is proper, because it happens to all companies with high or cloudy accrual figures. It makes it hard to estimate free cash flow.

Should we move from US GAAP to IFRS, it should not affect the valuations of stocks on average, though it will make it a little harder to do financial analysis. What does not change is free cash flow, which is not subject to accounting rules. The money that can be withdrawn from a business without harming its current prospects (free cash flow) is the key metric for understanding business value.

2. Counterparty risk. In derivatives, for every loser, there is a winner. So long as the appropriate margin levels are maintained at the main brokerages, and the main brokers don’t experience conditions that dramatically change their credit quality, counterparty risk is not a problem. (Or maybe, I should say, worry about the brokers, not the other counterparties.)

3. Investors moving to cash. Money rarely leaves the market. When funds raise cash (also here), others buy their shares at a discount. Typically, they are stronger holders than those that sold. I wouldn’t be too bullish over stories of investors moving to cash, but I certainly would not be bearish.

4. Rating agency downgrades, unless they trigger a debt covenant. For the most part, market spreads and yields are set independently of debt ratings. Sophisticated investors dominate the market, not the rating agencies. As an example, suppose the US were downgraded to Aa1/AA+/AA+. After a week, I doubt yields would change much at all, because the fundamental view of the US would not be changed by a change in its rating.

5. High credit spreads. Those are a reason to be optimistic, because it means pain has been taken already. Spreads can’t get higher than a certain level, or companies start delevering, because it is profitable to do so. So when you see spreads near record highs, that is a buying signal, at least for the debt.

6. Retailers in trouble. Some retailers are always in trouble during hard economic times. It’s a tough business model, so expect some defaults; it is normal and healthy for the economy as a whole.

7. Collapse of a large portion of the auction rate securities market. Most borrowers will refinance. In the interim, speculators are driving down the rates that get paid.

8. Downgrades of the major financial guarantors. The market has priced it in, and perhaps we just run off MBIA and Ambac.

9. Tranche warfare in CDOs. Read your prospectus with care, but when the seniors grab hold of a deal after and event of default, that is a step toward normalizing the market, though the mezzanine holders may ineffectively object as they end up getting nothing.

10. The ABX indexes, etc.. I’ve written about this before, but the various synthetic indexes — ABX, CMBX, LCDX, etc. — are very hard to arbitrage against the cash market bonds that they represent. The indexes should not be used for pricing as a result. Whenever the synthetic market gets too much bigger than the cash market, it becomes a bettors' market, and becomes incapable of delivering pricing signals to the underlying cash markets.

There are enough real things to worry about. Perhaps I will write about those tomorrow.

Comments

[bluesmoke]

Please do. Thanks.

[mwi]

Not sure I buy the lack of concern re: counterparties. If a counterparty to a complex structured deal, or even a straight up deal, fails or is unable to perform, the settlement may not be collectable. Who makes party #2 whole then? And does one such failure or slew of failures set off a chain reaction in the system? I thought this was the root of the Fed intervening in salvaging BSC from the brink.

[punk_ash]

ok, is there anything that one should worry about then. May be I should have bough Nasdaq in 2000 and not worry, stop mis guiding people

[ericinNE]

Well, don't stop there. Let's also not worry about:

11: Gov't. number juggling for inflation, trade deficit, budget deficit, unemployment, and monetary supply reports. What the heck, it's been going on for 35+ years, and we're still ok. If the general population knew the truth, they'd just do something stupid, like demand their Social Security checks (increases tied to inflation, and all,) be raised accordingly, thereby hastening the insolvency of the Soc. Sec. trust fund. Idiots.

12: Being a debtor nation is working out way better than anyone could have thought. New debt is what makes for real economic growth, right? Math and logic are just psuedo-sciences, and those "house of cards" alarmists must have some sinister agenda. Bastards.

13: Peak oil is just a bunch of hooha. Brazil found a whole bunch of oil. We're good to go.

I could go on, but what's the point. Any assertion regarding things to not worry about that includes "the fundamental view of the US would not be changed by a change in its rating" isn't worth the ink it took to print.

[dectra]

The biggest reason not to worry?

The a$$ in the white house that enabled the collapse of the housing sector with his 'no-regulation' mindset will be GONE in 278 days, 3 hours and 49 minutes.....

[CrossProfit]

ericinNE,

So you're talking about "worth the ink it took to print" for a web article.
Very realistic indeed! :-)

In any case, in order to get the full flavor of Merkel's frame of mind, you have to read his previous articles on SA.

You can choose any three from here and get the picture;
seekingalpha.com/author/david-merkel

Or you can just read these three that we would recommend in order to understand how the author thinks;
1) seekingalpha.com/article/71972-6-themes-...

2) seekingalpha.com/article/71506-fourteen-...

3) seekingalpha.com/article/70153-ten-notes...

In a nutshell, Merkel tends to call anything that is solvable a non problem. Only problems that the author deems as totally insolvable are problems.

It's just a question of terminology!

CrossProfit

[CrossProfit]

"Only problems that the author deems as totally insolvable are problems. "

Correction: should read - "Only problems that the author deems as totally insolvable or the solution is complex are problems to varying degrees."

[Bonanza60]

This reminds me of the one hit wonder: "Don't Worry, Be Happy"

[gobsmacked]

i'm not worried because gordon brown is running our country!

i'm not worried because my money is in the bank!

i'm not worried because the market is not being finessed!

i'm not worried because government figures are honest and true! and inflation is low and oil is cheap and food is getting cheaper all the time!

i'm not worried because you're not worried because they're not worried nor are we.

[QualifiedBuyer]

I'm worried. Give me the kool-aid.

[ValueInvestor]

I have a big problem with #1. Don't worry about Level 3 valuations? Are you nuts?

There is a reason Level 3 valuations are called "Mark-to-Make-Believe" valuations. They could be massively inflated and nobody would be the wiser. It would be very easy for management to value these assets at 100% of the mortgage value when realistically they are only worth 70% due to the housing downturn and foreclosures. Then the big write-off of these assets will happen resulting in a multi-billion dollar loss of book value and this author has the balls to say "don't worry about it".

He also says "(free cash flow) is the key metric for understanding business value." Maybe in the case of a merger or aqcuisition, but since most individual investors don't have millions lying around to acquire these companies the only thing we can worry about is the stock price, and the last time anyone on earth checked, its earnings not FCF that moves a company's stock price.

[TIRED]

DECTRA THE A$$ IN THE WHITE HOUSE IS NOT THE PROBLEM
CONGRESS IS THE A$$ TO BLAME THEY DRAW A FAT SALARY AND DO NOTHING THINK ABOUT THAT

[HilBily]

The ass in the White House is most certainly to blame for enabling the housing meltdown. Not only has his admin closed its eyes and pretended the market needed no regulation, but Mr Bush actively jawboned Greenspan into keeping interest rates low in 03 and 04 so that he could keep spending on Iraq.

[TIRED]

YOU ALL BLAME BUSH FOR EVERYTHING, THAT IS SO STUPID. CONGRESS, AND THE SENATE, ARE 90% RESPONSIBLE FOR THE SHAPE THIS COUNTRY IS IN. BUSH IS GUILTY 10%. WE PEOPLE ARE JUST AS GUILTY BECAUSE WE ELECT THE FOOLS IN CONGRESS, AND THE SENATE, AND THEN KEEP THEM THERE, TO DO MORE DAMAGE, TO THIS GREAT NATION. AS FOR BUSH SPENDING IN IRAQ. THAT IS BULL. HE IS SPENDING TO SUPPLY OUR TROOPS. I AM SO HAPPY THE BLOODY PART OF THE WAR IS THERE, AND NOT HERE IN THE USA. IT IS BAD ENOUGH WE HAVE ILLEGALS HERE, WE DO NOT NEED TERROISTS.

[User 178607]

Well, TIRED, if Bush is only 10% responsible and Congress is 90% responsible, then since each voting member of the House and Senate is 1/535th (100 senators and 435 congresspeople) times 0.9, if my math is correct then each legislator is only 0.168% responsible vs. Bush's 10%. And yes, history will further document the tremendous harm he and his cohorts in the executive branch have caused our country.

[z06kenny]

User 178607 - I am so relieved that you know what history will tell us about today's events. Since you know it all, you must be rich! (Or, are you a really smart college professor?)

[evilphoton]

I just found this site and judging by the RESPONSES here, most of you people sound like narcissistic children stuck in an eternal pissing contest playing blame game.