“Mark to Market” is No 1 in Bubble Making!

We all know that a business has no value without a projected positive cash flow.  It makes no difference how much steel and concrete has been poured if the positive cash flow is not in the pipeline the business has no value. 

The new buzz-word  “Mark to Market” valuation of everything is an illusion of real value as markets can be easily manipulated by the pundits who control most of the news Media.   Fortunately these pundits can not manipulate the cash flow for a business without spreading false rumors or creating a boycott!  The first one is actually in constant used in a subtle ways.

The demand to use “Mark to Market” valuation for the loan collaterals was a huge mistake as everybody suddenly wanted to get rid of all securitized mortgages.  All of them were not bad though more than a usual number of the underlying debts were not performing.  As the books were not clear it was not obvious how to connect the actual properties with the mortgages.  With this the whole packages became suspect and nobody wanted to buy them and “Mark to Market” made them all almost worthless – even if they have lost value but not that much.   Anyhow, whoever had these unwanted hot potatoes in their hands would hear instantly that they needed more collateral to stay in business.

FED is now using the same method for analyzing the corporations claiming that in orderly market conditions the price that the investors are willing to pay for the shares of a company is a fair value for that company.   This is a fast process as anybody with a PC and a brokerage account can download even the whole US stock market data much faster than they can make a local phone call.  FED uses now just the current share value to evaluate the value of a company at the moment.  This is a highly unreliable way to determine real value for any company.  But it is fast.  With this FED has abandoned the laborious calculations and fact finding missions to check the quarterly and annual reports for income and costs and their future projections.  Each company must do this all just  to survive and the tax authorities use these same numbers to determine the tax liability. 

Only a positive cash flow in the future pipeline can ever make any real money.  At any given moment this all can be condensed to a numeric value as current dollars in form of Net Present Value (NPV) using any desired interest rate that the owners want to earn for their investment money -  something around 18% is common.  If we just continue behind that and divide this number by the outstanding shares we get an exact value for the share price at that moment.  If done manually it is a hard task but any PC will do it all faster than you can think.

We must also remember that we buy everything with current dollars, not inflation corrected ones that are used to hide the facts from the voting cattle on the street.   It is kind of trick used when reporting a 30% increase in export value during the past year.  A reason to be proud of course but don’t forget that Euro rose much more against the dollar during that same time period.  It looks that we got the shorter stick.

FED claims that during ordinary markets the company share price will reflect it’s real value at reasonable accuracy.  Good luck!   After reading countless analyst reports and listening countless conference calls one has started wondering the amount of total garbage we see in far too many of these reports.  It is no wonder that already a large number of major international conglomerates have stopped informing the analysts and not just by whim.   They have let the independents to analyze these reports and the impact of the comments to their businesses and all have concluded: NO MORE.  They have told bluntly to all their analysts: ‘from now on you must read our web pages like our shareholders, you will not get any direct information. In the past we have told you our plans and schedules and anything you have asked but you hardly never print them correctly and with that you have done more harm than good to our businesses.’

The analysts are financially competent but often lack the ability to understand all the technologies that are involved, some of which will in due time be the most pervasive new technologies impacting our lives.  

This is not the case with the pundits from above – they are continuously searching for these special companies as they will in due time be the for a while the most lucrative businesses on the planet – like Microsoft, Google, etc.  

The pundits have created an illusion of market segments that rotate continuously allowing each others a short dominant position during the more dominant 4-5 year business cycle.  We still have to hear a water tight explanation why these business cycles must exist and why they last 4-5 years at the time.  It would be equally interesting to hear also why the pundits occasionally predict a W bottom for a business cycle and voila – it happens!  Then why do they not see that we are already in a recession when every sole on the street can separate it as easy as they can separate the day from the night.  They also have to explain why the same sector have several peak performance during the economic cycle, etc.

in real life we now have stock markets moving several percent points up or down in a day.  This is was not that common earlier and certainly this does not support the claim of “ordinary markets” that FED is looking for. 

It is also interesting that lately the share price swings of individual companies are now almost always more than 10% up or down after the company reports their latest results  and the analysts who have been combing their books continuously express their disappointments or positive surprises to the Media.  How come these smart guys and gals did not notice these changes while doing their work.  With grey hair one has become more and more cynical as having just a call and put round the stock one can not avoid making money with this kind of share price change – GE was 13.4% lower at on point on April 11^th.  This is in sane, the total value of GE did not change 13.4% regardless what their quarterly result was – somebody simply stole money from someone else during that day, specially from all those who panicked.

Is it all just a blip or something else?   

This share price manipulation processes run by the pundits is very efficient. 

SEC has helped streamlined all further when the so called “up-tick” rule while shorting the stocks was removed last summer.  This rule was put to work after the 1929 depression to protect the investors from at the time obvious share price manipulations that contributed to the overall market crash.  

The pundits have mastered the play with human fears and made the fear their closest ally.  To play the game they don’t need to be as rich as Mr. Soros, Mr. Gates, or the Oracle of Omaha.  However, some wealth is necessary and a discipline to follow the proven path:

1.       When they have zeroed in to their next target they start the play with relentless short selling of shares of the company.  They keep pressure on day in, day out, as long as it takes – and it does not take that long at all to take it down (they don’t need to own the shares of the target company to sell short, they just “borrow” these shares from the brokers).

2.       The small shareholders see a sudden high volume and sinking share price.  After a few days they start calling the company asking explanation.  Of course the company has no idea and can only try to calm their shareholders – all plans and financial numbers are solid

3.       The selling does not stop and one by one the shareholders will invariably lose their faith, panic and then sell to save at least some of their life long savings and soon enough the full panic sets in  The share price plummets to almost nothing while some strangers are still buying!

4.       The pressure increases fast if the company has any debt.  The largest debtors will stop the game demanding instant bankruptcy proceedings as the collateral is now almost gone.  

5.       Then a miracle, a “White Knight” rides to surface from nowhere and is hailed as the savior for the company.  The Knight has enough cash to rearrange all debts and even to make an offer to pay all still outstanding shares.  This is the reality out there even if this story is simplified.

6.       During the past few years we have seen increasing numbers of these almost criminal takeovers where good solid companies are stolen in full daylight from their powerless shareholders.  Some call this to be capitalism but during the Hammurabi’s rule these thieves would have found a swift verdict.

There is only one way to fight these semi-criminal gangs.  But unfortunately, the people at large do not understand the math, and companies are not always willing to reveal the inner finances and plans in public.  Perhaps they do not realize that very smart consultants are doing nothing else than combing the industries around the globe for opportunities.  Often these specialists know more of the companies and especially their future opportunities than these companies themselves.  They don’t always dwell on tiny details of the business but rather look them in context of their survival through the ongoing global changes. 

The pundits know this all  too and are already plotting battle tactics against their next victims.   If they time it well, like they will, they launch the attack before the protective shields are up.  When that happens the company has no change to survive the short selling especially when combined with a smartly executed suggestively  campaigns.

The only protection is openness and publicity of what is going on in the company.  The internet has become a tool in this and it must be used:

• The company must keep a continuously updated projection of it’s past and future revenues, operating expenses,  investment s, taxes,  financing costs, administration, sales and all other costs clearly visible and understandable form on the company’s web site.  
• The company must show the current Net Present Value (NPV) projection of the company using 18% discount rate – a rate that some old money in the world is using as their cut of rate for new investments. 
• They must show their major shareholders and shares outstanding.   They must divide the NPV with the shares and show a number indicating the real value of each share as these numbers tell.   No more no less, just a simple number.  

The shareholders know now the facts and can act as they see best fit for them.  They should only know that this would be a value of the share if everything would go as planned and also know that everything will only rarely go exactly as it was planned.

Could this ever kill the crooks?   Just look our presidential campaign.  It used to be clear to everybody that the Elephants would have money to spend and the Donkeys would struggle to get any.  Something has happened?  The internet is suddenly creating more than enough money for the most appealing candidates - and all comes in small donations.   The Elephants are more than worried as from now on whoever is the most appealing as a candidate will have no shortage of the funds.  The Sun King of France once said:  “The one with most money will win the war!”

So, why would this kill the pundits.  It is all so similar.  When a shareholder knows the value of a share of the company like it is, perhaps not as solid value as the money in the bank but still it is a solid number, the pundits have no alternative but move away.

FOR more with the US$ 500 Trillion global derivatives bubble (info from BIS Switzerland) check:

www.galacticwind.com/eternity/index.htm