Insolvency Risk Growing: Fed ~ The Risk Averse Alert

Tuesday, August 10, 2010

Insolvency Risk Growing: Fed

Well, one might conclude that, at least the Federal Reserve is being honest about conditions at the macro economic level (which is more than can be said about the preponderance of interested observers).

To wit the Fed acknowledges reality that, a mountain of illiquid claims — insolvent securities — still threatens a complete breakdown of the financial system. This inconvenient truth otherwise is looked upon with trusting eyes by a pig set unswerving in its conviction that, time, indeed, heals all wounds. According to this group, what are counted as "assets" on corporate balance sheets far and wide are being fairly valued. The Fed, however, evidently fears otherwise.

None of this ever is mentioned by those who talk up "improving" corporate balance sheets. Nor is the fact that, at the market's peak a few years ago upward of 40% of reported earnings were attributed to financial operations (as opposed to those physical).

And of those companies whose balance sheets are fairly in order, it truly is a pity mom and pop investor are not the movers and shakers of these shares. This distinction rather belongs to extraordinarily large (and still much too leveraged) weak hands with exposure to such toxic crap whose [grossly inflated] value is vulnerable to being called out in a run on its holder (a la Bear Stearns and Lehman Brothers).

What then will become of today's darlings and their "pristine" balance sheets? Shares of these, too, will be sold in a desperate scramble for capital. Indeed, the likes could be the first to go, as a myopic captive audience might be expected to offer a greater measure of support amidst this larger need to raise capital. In fact, one wonders whether Google's performance this year is a representative case in point demonstrating this very dynamic...

company chart (GOOG)

Most conspicuous is Google's lag from February bottom to April peak, relative to the broader market's better performance. If you look again at NASDAQ's cumulative advance-decline line presented yesterday, you will note the February - April period witnessed a marked expansion in advancing, NASDAQ-listed issues.

So, Google was lagging while a broader swath of NASDAQ-listed issues were leading NASDAQ's advance into new high ground, post-March '09 bottom. Google ... the cash generating monster ... the darling of many ... lagging ... while other minions of the Pump and Dump carried NASDAQ beyond its January (2010) peak.

Thus is my conclusion that, in Google capital was being raised, whereas in a broader array of NASDAQ-listed issues suckers were being played.

You could look at Goldman Sachs and conclude much the same.

The Fed's roundabout confirmation that, financial conditions are anything but sound surely must bedevil those presently benefiting from such fantasy's furthering as feeds a consensus belief that all, relatively speaking, is well (how many times a day do we hear blind guides assuring us there will be no "double dip" recession?). Judging by what seems a pickup in volatile price swings affecting major indexes, some apparently are becoming increasingly sensitive to such fundamental vulnerability as these days separates from the pack suffering blind faith disease a Fed that, out of necessity, must speak honestly. Evidently, I am not alone in thinking those still choking on much toxic crap are at risk of soon being called out...

Fast Money
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