Dave Wrixon

Capitally Challenged Stocks That Could Be Diluted or Extinguished

Asset based valuation is the only approach that will stop many stocks going to zero.

With the Toxic Asset plan to be announced next week some of the intangibles are about to become a lot more tangible. If private investors do come on board, it is possible that banks will sell distressed assets, but it is likely that in grabbing some of the cash that they are so desperate for they may yet have to face up to write-downs far greater than they have admitted to date. With a huge pile of toxic assets to offload and a presumably limited amount of cash on offer this could trigger another race to the bottom.

More back on topic, the problem with asset valuation is that often it is hard to value the assets and secondly the assets values may in many cases be tumbling. If you could imagine the Dow Jones 30 all be cross-held, which of course they aren't to a very great extent, then a fall on one stock would precipitate falls in others which again would reflect in the value of the first stock thereby setting off a viscious circle of declines. Whilst the Dow Jones 30 is not really linked in this way to some extent the broader economy is. Whilst assets are still deflating rapidly, asset based valuations are extremely problematic. This is one of the reasons that expect the economy and markets to turn on a six pence are totally unrealistic. Even if the good news is out there it will take time to filter through onto Government statistics or corporate earnings. And whether companies are trading profitably or not they are going to have to write down on a broad range of assets that have not even been addressed at some point in time.