Xyrus

Easing of Mark-to-Market Rules: Good for Banks, Bad for Investors

Really? Lazy investors?

Does anyone have a problem with me putting my net worth at $1 billion even though my assets are worth $1 million thanks to the market?

Can I walk into a bank and ask for a $1 million loan using my house as collateral because I think it's worth at least $2 million even though the market says otherwise?

No. And the reason why is because an asset is worth only as much as someone is willing to pay for it. Period. End of story.

I can't say my stock holdings are $10K if the market is only willing to pay $5K for them. I may think their good investments and that they're worth $10K, but the market says otherwise.

It doesn't matter if a bank thinks its collection of MBSs is worth $X. If the market thinks it's only worth $Y, then that is what they're worth.

To put this another why, how comfortable would you feel about putting your money in a bank that uses an asset that the bank itself valuates. What happens if a financial crisis begins and that asset value plummets? What happens if the bank needs to liquidate those assets? The value of those assets are what market will pay for them, and if that's ten cents on the dollar you're screwed.

Allowing banks to put on their own valuations onto their assets is giving the wolf keys to the hen house.

I wonder how long it will be before we get another MCI or Enron.

~X~

Closed-End Funds: The Preferred Way to Play the Financials

Not to second guess your investment decision, but there are some things to consider before investing in something like JQC.

First and foremost, JQC (like a number of other closed end funds) has a managed distribution policy in place. For those who don't know, a managed distribution policy means the fund pays out a regular amount at whatever interval they specify (monthly, quarterly, etc.). The good part is that you get income you can count on every month without any fluctuation. The bad part is, if the earnings of the fund are less than what is required for the payout, they return capital. That's not necessarily a bad thing (like for retirees), but before you follow the sweet dividend yields make sure you're not just getting your money back. According to CEFA, the income only yield was 6.99% but the distribution is over 10.7%.

Second, XLF has an expense ratio that is 0.75% less than JQC. That should be factored in as well.

Third, XLF has outperformed JQC over the long haul, though JQC has only been around a couple of years so that may not mean much.

Lastly, there is at least one ETF that invests in preferred securities. PGX is a fairly new ETF that invests in a bucket of preferred securities, many of them in the banks you listed off. It currently yields around 7.3%, which isn't too shabby for an unleveraged ETF. Plus it doesn't have any hidden gotchas that closed end funds can have.

~X~

Calling It Quits on Gold, Platinum - It's Time to Go Financials!

The rally in financials are investors speculating a bottom.

It seems that many people are breathing a sigh of (semi-relief) because the sub-prime mess seems to have peaked. But sub-primes were only a part of the problem.

Defaults in everything from credit cards to car loans have been increasing, even with prime rate borrowers. A good portion of homeowners cashed equity for credit and spent it. Now the bills are coming due and people don't have the resources to pay them.

All you ever hear in the news is sub-prime this and sub-prime that. But the real problems are of a much larger scope. It's credit in general causing issues with financials. The extent of the problem won't be known for awhile.

This is a short term rally, one which probably has some basis in the fact that people will be getting those idiotic checks from the government. In a couple of surveys, most said they would use the money to pay down debt. That's good for financials, except for when you consider US consumers owe a trillion dollars to credit cards, and over 3 trillion in total debt (search around on the web, it's absolutely amazing how much credit we tapped). Those checks will hardly make a dent in that.

I think the financial sector is still in for some pain.

~X~