Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:


With the S&P about 22% off its low tick and seemingly hanging in without too much of a giveback, conversations are in full swing regarding whether or not this is “the bottom.” As I have repeated ad naseum, these same people trotting themselves out on TV and in print declaring that this is the bottom are the same exact people who said that the bottom was the last time the market bounced, and the time before that, and the time before that.

Quite literally, nothing is stopping these people from showing any restraint whatsoever given the mauling their reputations (should) have taken.

At the same time, we have seen the market showing some strength off the bottom with the current rally in which we find ourselves being the strongest of the entire bear market. Unfortunately, one negative has been the low level of volume that we’ve seen here in the most recent days of the rally. But in either case, as the first attached chart shows quite clearly, the rally has built on previous moves higher with a series of successive higher lows. I have been saying for months now that the market is in a “bottoming process,” I have outlined why I think we’re in a bottoming process and have provided graphical evidence comparing the current situation to previous situations to demonstrate why this bottoming process is, in many ways, no different than others.

With that in mind, adding to already established positions remains the order of the day, however I believe it is time to remove covered calls from one’s strategy while maintaining the use of protective puts.

This will allow us to exploit further upward moves in the market while still owning insurance as the market retraces some of the current rally. While I continue to believe the market has room to rally in the very short term, in the medium term, the threat of a GM bankruptcy and/or the need for additional capital at a major banking institution has the very real ability to exert tremendous downward pressure on the market and the economy more broadly (in the case of GM). In either of those instances, the aforementioned protective puts will prove invaluable in insulating investors from further losses.

Sometime around 11 AM, I expect news to be released concerning the proposed changes to FAS 157. I have detailed my feelings on the situation but I will briefly reiterate some important points:

FASB is an independent organization and their kowtowing to Congress, specifically Robert Herz, is shameful. I understand the amount of political pressure that has been put to bear on these men, but the fact remains that THEY are the accountants and not the members of congress who wouldn’t know a balance sheet from a piece of sheet I cannot fathom why investors would cheer less transparency and more involvement by management in the pricing of assets that they own. I have garbage pail kids cards from 1987 that I still think are worth $20 each. Does that make it so?

By allowing institutions to carry assets and loans at higher values, the government is effectively undermining its own program to purchase assets. If I am a bank and I believe asset X is worth 80 cents if held to maturity but the market is pricing it at 40 cents, FAS 157e gives me even more room to carry said asset at 80 cents which reduces the necessity of selling it in the meantime.

To be clear, mark to market accounting hasn’t caused this issue. It has exposed it. The cause of this issue is the overleveraging by banking institutions as they invested not in the vast array of entirely liquid markets that would facilitate their exit from any position necessary in a moment’s notice but rather an opaque and infrequently traded market that generated an extraordinary amount of fees and relied on economic assumptions that have proven to not only be wrong, but have proven to be almost diametrically opposed to what is actually occurring.

All around the world

Foreign markets riding our coattails today with the Nikkei up 4.4% and Europe up incredibly strongly, led by Germany’s near 4.40% gain. Beginning in Japan, Nissan, Honda and Toyota are all up yet again as the market begins to place its bets that the removal of Chrysler and the bankruptcy of GM will obviously improve the sales environment for the remaining car markers. This is, of course, how it should work. Survival of the fittest. Over in Europe we’re seeing the same action continue in Porsche, BMW and Daimler. In the UK, home prices rose for the month, the first such gain since October 2007. We all know the absolute disaster that is the UK housing market so a gain in prices of .9% should rightfully be celebrated. At the same time, one month does not a trend make but again, it plays into the belief that the broad economic slide is at the very least slowing its rate of decline as we see leveling out in a number of indicators. But like anything else, we must not jump to “getting better” from “not getting worse.”

The UK guilt auction, while better, still didn’t reach a bid to cover ratio of 2.

The ECB reduced rates LESS than expected, cutting only 25 bps. This is quite a shock but its worth noting that Trichet has been dragged kicking and screaming down to 1.25% and if this moderation in economic contraction continues and sticks, I cannot imagine that as of right now, Trichet has any plans to cut any further although he has obviously left himself some room by cutting only 25 bps. As always, we’ll have to wait until his press conference to get his thinking on a number of issues including the potential for the ECB to buy corporate bonds or other forms of QE.


As always, weekly claims figures are out with expectations for a figure around 650K, about in line with where we’ve been in recent weeks. Continuing claims are expected to rise a touch to about 5.6 million, a new record. Im a broken record at this point but 650K claims per week is terrible by any stretch of the imagination but this is the last number for March, not the first week of April. With respect to tomorrow’s employment figure, we know its going to be terrible. The hope is that with the moderation in economic contraction, April starts off a bit better. We will of course have to wait another week to find out about that. Factory Orders are also out today expecting to show a 1.9% decline. As a reminder, Durable Goods orders are part of factory orders so we have some information to plug in already. We are just looking for new info on NON durables. That said, we should also keep an eye out on the inventory to shipments ratio which indicate that there is still an extremely high level of inventory that needs to be worked off before any progress can be made on the production front.

Dan Greenhaus

Category: BP Cafe, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Mark-to-Make Believe Rally”

  1. MRegan says:

    Very clear-eyed assessment, thanks.

    You say: “That said, we should also keep an eye out on the inventory to shipments ratio which indicate that there is still an extremely high level of inventory that needs to be worked off before any progress can be made on the production front.”

    As a layman, trying to learn, please tell me what the best source for tracking the ” inventory to shipments ratio” is.

  2. Rajesh says:

    The mark-to-market issue comes up for banks because there are two sets of rules that they follow. One set of rules is for illiquid assets: whole loans primarily, the other set of rules is for liquid assets: bonds, stocks, etc. The whole point of securitizing assets is to turn illiquid assets (mortgage loans, credit card receivables, etc.) into liquid assets (tradable securities). That works fine when the market for the securities is still liquid, because the bid reflects the markets view of the probable value of the security. However, when the market is risk adverse, the securities may become illiquid, but the rules still treat them as liquid assets. If the market for the security completely disappears (no bids), then they are level 3 assets and the rules allow them to be priced based on projected cash flows. But if the market for the security exists but the bid in the market is a lot lower than the value of the security based on projected probable cash flows, current rules require marking to the low-ball bid, even though the hold to maturity value may be higher.

    The market is not always right (see Dow 15000) but trying to figure out if the market is right or the bank’s internal valuation is more correct is a dangerous exercise.

  3. bdg123 says:

    I too repudiate mtm accounting. I have valued my house at a lower level to pay the appropriate taxes, have valued my outstanding debt at a level that guarantees repayment during distressed times and have marked my income to what the hell ever I wanted.

  4. jc says:

    With the Fed underwriting below market rate mortgages there’s no reason that banks can’t create a model that values their assets above 100%.

    With the Fed underwriting enough below market mortgages that becomes the market and then the toxic mortgages become better than market, and the holders of these toxic mortgages won’t be able to qualift for the cheaper Fed subsidized mortgages so that model could justify pricing above 100%, how about 120%?

    As a taxpayer I just hope Tim’s private partners don’t chase these toxic assets up using out 12:1 not recourse funding because when hyperinflation kicks in and mortgages rates zoom to double digits these toxic mortgages will go hypertoxic on the taxpayers dime.