Yesterday, financial stocks went quasi-crazy because of a change to accounting rules which allows some assets to be valued at a theoretical price based on what they would sell for in a hypothetical liquid and orderly market. As a result of this change, balance sheets look a lot better and the banking activity that's based on asset ratios loosens up. Those are both good things, right? If so, why do I call this a fool's rally?
First, there is no hypothetical or real liquid and orderly market for all of the CDO/MBS/alphabet soup of the day crap that's hanging out on balance sheets. The only liquid market for these things was created by speculative value. Once the speculative value left the party, liquidity did too. There simply was never any order to the market. It was either breaking down the doors on the climb up or rushing for the exits on the way down. So the allowance of the provision of a liquid and orderly market is idiocy.
Second, this is an accounting rule change that was transparently designed to produce a result, which it did. That result was to lighten the discipline burden on valuation of assets in order to create seemingly better balance sheets, and thus free up some banking activity. It's not all bad; making credit happen is necessary to the world working. The problem is that no fundamental change occurred. Things are not better than they were on Wednesday, we're just being told that they are.
Imaginary and speculative valuations were the fuel that fed the bubble for so long. I can not be convinced that they are also capable of restoring order and soundness to the economy's fundamentals. "If there were a liquid and orderly market for these assets" sounds a lot to me like something I'd answer by saying "if Grandma had four wheels she'd be a trolley cart."
I did take the opportunity to rebalance some things on what I assume will be a temporary top. Of course I'll be wrong on that but there's always hoping. At one point in the not distant past my account was down as much as 42%, now it's down around 8%. A lot of this is due to putting more money in while things have been down, so cost averaging effects are significantly to blame for my success - the "more" money I've put in hasn't lost value, which dilutes the loss that the money that was in there a year ago took. But some of the positions I'm in are a lot less down than they once were. I'm moving up through the pack somehow. Trying to make sure some knucklehead doesn't crash me out.