Sunday, March 8, 2009

Private Client Commentary - tone from Washington

Dear Clients,

There's been no love affair between Washington and Wall Street thus far in '09. And while surely none of us would blame our new administration for a 6% (annualized) contraction in last quarter's GDP or for the current 8.1% unemployment rate, I bet we can agree that policy recently passed and proposed could have been a bit more investor friendly. Although the tone coming out of Washington has been somewhat more inspiring the past few days (referring to President Obama's more upbeat comments on the economy).

In a recent commentary I suggested that our policymakers have two major opportunities to give the stock market a much needed lift. One being the "Bad Bank" concept, where the government establishes an entity that would purchase the so called "toxic" assets off of bank balance sheets. The other being a suspension of mark-to-market accounting, which requires banks to value assets at current market prices. As you might imagine, there's virtually no market for these mortgage assets currently. Therefore banks are forced to mark them down (by the $billions) to what many believe are artificially low prices while their intent is to hold them past the current reporting period.

A House financial services committee has schedule a hearing for this Thursday on mark-to-market accounting rules. If indeed Washington were to suspend mtm, I believe Wall Street would be very pleased.

While there's nothing yet on the calendar regarding the "Bad Bank", supposedly Treasury Secretary Timothy Geithner and company are working on the details of a "public-private partnership" which would bring private distressed debt investors into the mix. Word has it that we are to receive some detail on this within the next couple of weeks.

No predictions here, just giving you a heads up that the next few days and weeks could bring some interesting developments. And in the meantime, expect that while emotions run high (leading to reactionary investment decisions), short-term traders will continue to rule the stock market (i.e., lots of volatility).

At this stage, rather than wondering how low the market will go, the more important question for the long-term investor becomes; how long can it stay at these (or lower) levels?

Stay tuned,

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