Readings: Level 3 jackpot, Fixed Maturiy Plans, Legg Mason letter
Here’s Rule No. 1 from Wall Street’s public-relations playbook: If the company you run has big losses on hard-to-value assets, scream your head off about the accounting rules.
And what if the squishy values result in huge gains instead, as they have in the not-so-distant past? Rule No. 2: Stay mum about it for as long as the rules allow.
Under the rules known as Financial Accounting Standard No. 157, Level 1 means mark-to-market. You look up a market quote — say, a stock price on the Nasdaq — put it on your balance sheet and run changes through earnings each quarter. Level 2 is mark-to-model. Quoted prices don’t exist. So you estimate values using other inputs observable in the market.
Under FAS 157, Level 3 means the value of a given item includes at least one significant “unobservable” input, reflecting a company’s “own assumptions about the assumptions market participants would use in pricing the asset or liability.” Or, as I like to say, mark-to-make-believe.
Fascinating. Eventually, all this b.s. will come to light - but hey, we’ll worry about it then!
- Economic Times: Fixed Maturity Plans are back in fashion this summer
Thanks to the sudden hardening of the interest rate scenario and possibility of RBI going in for another rate hike in its upcoming policy review, FMPs are back in fashion in the summer of 2008.
More than a dozen FMPs of three-months, half-year and one-year durations are currently open. Fund officials said in case the RBI actually hikes rates at its April 29 meeting, investors can hope for some more offerings in the coming days.
. . . funds that invest in bonds of the shorter duration, say of three months, can fetch good yields for investors, because of the central bank’s hawkish stance on interest rates.
Momentum strategies typically dominate when there is perceived distress, such as the past year or so in credit and financials and this year in equities globally (in the first quarter, not a single S&P sector was up), or there is euphoria, such as tech in the late 90s or commodities and materials today, or when valuation spreads between industries are narrow, as has been the case for most of the past two years.
So it’s been a great time for momentum and a lousy time for value. According to Birinyi Associates, the single worst strategy you could have followed in the first quarter would have been to buy the worst stocks of 2007. Momentum in action, just negative momentum.
It is not the price of credit that is the problem, it is its availability. If the Fed stopped cutting rates, that would help the
dollar, which in turn ought to stall the commodity price rises, and thus also help the inflation picture.
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