Financials Weigh Down Market


It’s always fun to get wrapped up in a mystery. That is, unless you’re reading the books kept by America’s banks.

That’s a mystery that you don’t want to get caught up in. Because it involves Level 3 assets and the increasingly opaque nature of our financial firms.

Unfortunately it might be too late for all of us. According to reports in the Financial Times banks have reported a sharp increase in Level 3 assets (or so-called hard-to-value assets) during the third quarter, “raising concerns about the hidden dangers on balance sheets.”

And increases in Level 3 “have prompted concern that banks are going to report even larger write-downs than expected,” adds The New York Times.

As you might know the value of level three assets can not be determined using observable measure. Typically they are difficult to value or trade.

News that banks had increased levels of Level 3 assets sent the financial services sector tumbling on Thursday.

“The banks have a whole big stack of ugly out there and they’re going to dump it into Level 3 assets and classify it as garbage,” bristles Jeff Macke on CNBC's Closing Bell.

If that's the case then what should you expect when Goldman and Morgan report earnings next week?

“I expect to hear bad news from Goldman and Morgan and it could be crushing to the market," Macke responds.

What's his advice? "Stay liquid and stay nimble and when we get big rallies reduce your position.”


And if you’re curious about the difference between Level 1, 2 and 3, it’s perhaps best explained by the website NakedCapitalism.

“Level 1 are ones where there is a market price. Level 2 are those where there may not be much of a market, but they can nevertheless be priced in reference to similar assets that have a market price. Then we have Level 3… colloquially called mark to make believe.”

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