Marking To Market

Back to the grind this morning – welcome back. Unfortunately, another two US banks went under this weekend. The US bankruptcy cycle that we’ve been focusing on as of late continues to build momentum – hammering home our theme that ‘Access to Capital’ continues to tighten, as ‘Cost of Capital’ continues to rise. Seven US banks have gone belly up in 2008; 3 of those 7 have had assets exceeding $1 Billion (see our updated ‘US Bank Failure 1’ chart on the portal for perspective).

This side of the investment cycle remains ominous for anything levered. Henry Kravis and KKR seem to agree that bank debt is virtually impossible to raise – they’ve moved to take over their Amsterdam based subsidiary this morning, assuring investors in their 2006 peak private equity cycle IPO that they’ll never see the offering price again. The stock is down -59% from that “deal”, but who’s counting? Goldman Sachs and Morgan Stanley bankers get to pick up the banking fees on this side of this morning’s announced deal anyway!

Marking assets to market here is basically the point. Whether it’s Lehman, KKR, a hedge fund, or your home – it’s all the same. Marking your assets to model is nothing but a listed price that you can choose to believe until you are forced to realize otherwise. The problem, of course, is that this is “global this time.” In the United Kingdom this morning we’re seeing the effects of local marking to market. The UK reported home prices down -4.4% year over year for the month of July – that’s the worst month reported since 2001. No more Lehman “Level 3” quotes on your homes or portfolios folks. Rising interest rates and marking assets to market will remain the “Trend”, for the foreseeable future.

European stock markets do not like the aftershock of this “Trend” either. A deflated US Dollar has equated to an inflated Euro, and decelerating European export growth. From a technical perspective, legacy European markets look worse than those here in the US. The FTSE is flat in London this morning, but faces stiff resistance at the 5448 level, and despite Obama’s rock concert in Berlin, German equities continue to act horribly, trading down another -0.80% this morning on another new low in their local confidence readings.

Asia continues to act better than both North American and European markets. I’m long China for a “Trade”, so I like that. Chinese stocks closed +1.3% overnight, taking their July rally to +9.4% to date. India closed up again overnight as well. India’s BSE Sensex Index has squeezed the shorts for an expedited +14.5% move since July 16th. Malaysian and Philippine equities closed up +1.3% and +1.1%, respectively, rounding out a positive session overall in Asia.

In the aggregate, deflating inflation was last week’s positive “Trade.” The CRB Commodities Index lost another -3.5% on the week, and is -13% from its all time high. Oil and gold were down -4.4% and -2.2%, respectively. Within the 19 components of the CRB Index, selling was broad based.

Reality is that inflation can deflate in tandem with growth here in the US. Most “growth” investors do not like that. Stock picking in this kind of an environment will emerge as king.

Good luck out there this week,
KM



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