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Farrell: The Times They Might Be 'a Changing

One of my partners here at Soleil, Paul Leming of Soleil/Princeton Tech Research, is the keeper of all good and interesting factoids. He notes that on October 6th of last year the S&P dropped 20% below its 200 day moving average. We stayed at least 20% below that mark for the next 118 days. Last Thursday, March 26, we crossed above the 20% discount to the 200 day. Even with Friday's poor action at the close of 815, we are still ever so slightly above a 20% discount to the 200 day. The 200 day moving average was at 1016.91 as of Friday's close. A 20% discount to that would put you at 813.53 and we closed, as I noted, at 815.94. That's also a bit above the 50 day at 791.93 which we are hoping will be a stubborn support level.

The reason I bring this up is the last horrendous bear market we suffered through anywhere near the intensity of this one was 1974.

Then the S&P index stayed below its 200 day average for all of 35 days. I didn't check all the possible data points but I believe this extended slump rivals anything on record. Maybe the market has discounted all the bad news.

The times they might be 'a changing (I hope !!!).

Baron's had a very good article over the weekend as to why thePublic/Private Partnership(known forever more as P-PIP) could well work. The effort will be two fold. The "toxic" securitized assets, now known as legacy assets, will be one targeted area. Bank loan portfolios will be the other. The legacy assets have been written down in most cases. In fact, there is a thought that as it stands now the banks that own the paper won't sell because they know it's worth more than the current depressed market price. And the potential bidders don't want to pay up. Back to that in a second.

Loan portfolios present another and different problem. Loans are carried at full value as long as they are current on interest payments. Banks will be hesitant to sell at less than face value since that would require additional write downs. That's where the "stress test" comes in. After review under whatever criteria will be used, the Government could force some banks to sell. A market value might already be formed since banks that were acquired (like Washington Mutual, Wachovia) had their loan portfolios written down at the time of the acquisition. Whether the write downs were sufficient or not will be seen, but some of those loans could be sold.

As Baron's points out this past weekend, using non-recourse borrowings from the Feds greatly increases the price you would be willing to pay to achieve a desired return. Forget the arithmetic for a moment and read the example Barron's gives -" ...Goldman Sachs analyst Richard Ramsden...looked at the theoretical price of a potentially troubled bank loan...an investor without leverage might pay just $.24 on the dollar hoping to earn a 25% annualized return. However, an investor with 6:1 leverage (the government's proposed financing for the loan part of the program) could pay $.66 on the dollar and still earn the same 25% annualized return."

Banks are likely to be eager to sell the legacy assets that have been marked down so they can improve their capital ratios, pay back TARP and get out from under the government. They may be reluctant to sell loans that haven't been marked down, but the regulators might force them.

This whole program looks like it's starting to take shape.

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