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August 8 Market Commentary: America’s Margin Call

Posted by Larry Doyle on August 8, 2011 7:59 PM |

That was not a lot of fun.

The 6% selloff in the market we witnessed today is obviously tremendously unnerving.

Professional traders and active managers who monitor market moves on a minute by minute basis will have their their own opinions as to what did happen and what will happen.

For those in the audience who appreciate and embrace the true spirit of ‘sense on cents’, while we listen to the spin provided by market mavens, esteemed economists, political pundits, and Washington wizards, let us not lose sight of the real fundamental issues which remain at the core of our American foundation.

What are these issues and why have the markets exacted what I would define as a margin call on America the last two weeks? Not that Wall Street, Washington, or our media would care to tell us but my ‘sense on cents’ tells me that the market has enacted a major market call given the massive breaks in our economy and political fibre.

Is that right? Yes, sir. That is right. Let’s navigate.

1. The health of our financial system remains seriously challenged.

How so? Have you looked at the price action of Bank of America recently? This bank, ticker BAC, was down approximately 20% today.

The markets are telling us that the bank needs capital. I highlighted this reality in writing, Bank of America Shareholders: How Long Can You Tread Water? in mid-June. The stock is down almost 40% since the date of that commentary. What is the issue? As I highlighted then and reiterate now,

We all know banks have fabricated their accounting and reporting over the last few years. Is there any doubt that the regulators have given them a wink and a nod in the process? The Wall Street Journal indicates as much in its lead story this morning, Regions Financial Probes Executives,

The board review comes as regulators step up scrutiny of methods banks use to classify loans, which can make banks appear healthier than they are. Investigators are looking at so-called extend-and-pretend cases—where a bank gives a borrower more time and delays reclassifying a souring loan—as well as at “troubled-debt restructurings,” where a bank breaks up a nonperforming loan and labels a portion of it as performing.

What all these cases have in common is “a tendency not to want to report bad news,” said Bert Ely, a longtime bank analyst based in Alexandria, Va.

Add this all up and the smoke and mirrors in many a banking operation today continue to cloud the real health of these organizations.

What don’t we have here? The truth. Today’s market price action was effectively a margin call on this front.

2. The health of our regulatory system remains seriously challenged.

While Mary Schapiro and team can and will whine and moan about the lack of funding to implement the necessary changes and execute plans embedded within the Dodd-Frank Financial Regulatory Reform, the charade that defines the regulatory capture—that is the Wall Street-Washington incest—within the financial industry remains firmly in place.

What is the result? A lack of real truth in terms of meaningful investor protection and a resulting lack of confidence by retail investors specifically. I believe that today’s price action was also a margin call on this front as well.

3. The health of our political system remains in serious question.

You do not need to read Sense on Cents to know this. The fiasco on display in Washington may be viewed by some as ‘business as usual’ and/or American politics on display. In my opinion, both the process and the result were reflections of a lack of real leadership over a very long haul.

The pols remain wedded to those who line their pockets and campaign coffers and the public interest comes in a distant second. Our children and their children have been screwed as the Ponzi-style financing which Uncle Sam has embraced disguised the truth, inhibited meaningful transparency, and violated the integrity of our nation.

Don’t believe me? Just ask S&P. They referenced as much in so many words in their downgrade of our nation’s credit. Another margin call. A big one.

4. Our nation lacks leadership.

Regrettably, at our time of greatest need we have an inexperienced and ineffective President and administration. The price action in the markets during and after President Obama’s speech to the nation this afternoon was nothing short of a massive vote of no confidence.

I do give credit to President Obama for highlighting the need for meaningful entitlement reform and tax reform but referencing Warren Buffett and pretending that we can “imminently” solve our issues showed that he was once again pandering.

He needs to appreciate that style costs him whatever credibility he may possess with investors. Obama’s lack of meaningful command of the issues and the total absence of any meaningful economic policy have been integral in the market selloff.

Another margin call, perhaps? Are you kidding me? A huge margin call on this front.

I am no Republican apologist. The crowd on the right also lacks meaningful credibility in terms of fiscal prudence and incestuous relationships. Will a current Republican candidate rise up and embrace the truth that America so badly needs and wants in order to move our nation forward?

Only time will tell.

In the meantime, what will tomorrow bring? Will the Federal Reserve and foreign central banks enter the markets, prop them artificially, and attempt to convey a sense of normalcy? Perhaps, although the impact of these collective and effective margin calls may overwhelm the central banks. That reality is a daunting prospect.

The simple fact is, though, our American form of capitalism is on life support given that it was so heinously abused. Until the Federal Reserve, the US Treasury, the administration, the banks, and the regulators come clean, embrace the truth, promote meaningful transparency, and protect the American public and retail investors, our system will not meaningfully recover the confidence necessary to move forward for a very long time.

Can this process happen? If it does not, I think our country will pay a much steeper price than that which it has paid to date. I am deadly serious. These issues which I highlight are that important.

The crowd across the pond is also suffering from the pain inflicted by many of the same maladies. Our markets and economies are intertwined.

Term limits, anybody? I continue to believe that term limits are the only real medicine that can exorcise the demons involved in the incestuous relationships that are suffocating our precious form of capitalism.

Navigate accordingly.

Thoughts, comments, constructive criticisms encouraged and appreciated.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.



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