Tom A's Stock Picks

The Tyrannical Rule of King Market

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Mr. Market, once regarded as a genial, if mentally unstable, partner, has now morphed into King Market, the totally deranged arbiter of all value. Part of this can be blamed on mark to market accounting rules, but an equal if not greater part can be attributed to the vociferous support of those who benefit from his foibles and follies.

As an example, oil recently spiked upward toward 150 per barrel, then just as suddenly tanked to 119. While the upward march was in progress, numerous sage talking heads debated whether the cause was speculation or the beneficent rules of supply and demand. Everyone saw fundamental supply/demand equations as supporting 150 oil, if not 200 oil. Now, an equal number of energy gurus see demand supporting oil under 100, maybe even 70 per barrel.

The attitude of the press and other commentators on mark to market accounting is similar. As financial companies report huge mark to market losses on hard to value assets, they are praised to the extent they capitualte and sell the offending assets for a fraction of what they are worth. There is honesty there, healing, cleansing - going to the confessional, lancing the boil, so on and so forth. John Thain (CEO of MER) is a poster child for this phenomenon.

However, when the whole farcical folderol is taken to its ultimate peak of fatuity, there seem to be dim glimmerings of dissent. Of course I am talking about bond insurance, my dynamic duo, ABK and MBI.

ABK recently reported a surprising profit. After taking mark to market losses on its portfolio of insurance provided in CDS form, the company wound up with a profit because it had to mark down the value of these liabilities to reflect the public perception of their creditworthiness. The situation developed as follows: when ABK and MBI were downgraded by Moody's & S&P, the already astronomical cost of CDS protection on their creditworthiness spiked to insane levels. According to GAAP, the companies are required to use this information when evaluating their liabilities.

Several commentators have published articles accusing ABK of parlaying an accounting technicality into bogus profits. As Ambac made abundantly clear on their conference call, they are simply playing by the rules.

There seems to be this underlying belief that King Market is wiser than Solomon, totally clairvoyant, able to peer into the future with uncanny insight. I am sorry to inform you that this is not the case: by far to the contrary, King Market is a riff-raff, an unruly mob of speculators and manipulators, a vigilante posse armed with the pretext of capital adequacy.

Fortunately, King Market's subjects seem to quietly subvert his idiotic rulings, going on with their lives in a more or less orderly manner while maintaining the pretense that his directives have some basis in fact. An example: ABK has gone from a low of 1.04 to 5.85 at yesterday's close, an increase of of 462%. Nobody seemed to notice too much, but I was watching in wonder as the fruits of what my friendly critic Fernando called a "double down rampage" accumulated in my portfolio.

AIG reported last night - more mark to market - I will listen to the conference call and try to sort it out. MBI is scheduled to report on Friday. No doubt there will be more mark to market idiocy in their financials. I don't know how King Market will respond. But I will look at the adjusted book value, weigh the mark to market against management's estimates of actual losses, and govern myself by reason.