John Pitera's Market Laboratory Message Board

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Strategies & Market Trends : John Pitera's Market Laboratory

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To: Hawkmoon who wrote (10010)	9/25/2008 10:50:03 PM
From: John Pitera	3 Recommendations Read Replies (3) of 33421

Hawk, I've got news for us all... when the dotcom, B2B, telcom Nasd and other stocks peaked on March 10th of 2000, I believe we witnessed 4 to 5 Trillion of market capitalization that evaporated into the Oct 2002 lows. I wish I had set up a thread (I had considered it) back in late 2000-early 2001 to have SI contributors point out the top market capitalizations of companies and how much wealth destruction there was in that bear market. So many companies witness billions and in many cases hundreds of billions of market capitalization shrinkage. The market capitalization loss in this credit debacle is not greater than the 2000-2002 event is NOT larger. The Amount of contraction in the value of debt instruments is 10 to 17 times as great as the bear market of 2000 to 2002-03. That bear market was not a credit market event; it was wealth destruction in equity (shareholder) wealth. This 3 century event has been the withering implosion of the vastly larger credit and structured credit/ CDO / Credit Default Swaps market. No one on this planet seems to have a workable model of what Credit Default Swaps are worth/ what is the legal environment where they are to be paid or can be voided. And...... the most supremely disconcerting aspect to this is that the issues of CounterParty Risk who has it, who is liable in outright bankruptcy defaults is undetermined. Now the Government has stepped in and created ambiguities in exactly which firms failed and who was bought out by and what the criteria is for the valuation of those contracts has become opaque and is totally up to multiyear court disputes and/or governmental decrees of how this will be settled. Obviously the Government will come in and rewrite the rules to assuage the concerns of the most cohesive advocacy groups, but this is the next step in the Brazil model where US Capitalism changes the rules in mid stream.... because there is absolutely no politically obvious solution. The worst part of this nightmare is that Bernake, Paulson and an army of valuation experts can not mathematically calculate the way to unwind these products. There are so many darn variable parts to these highly complex structured products, that it's like solving an 8 variable math equation; where you don't know the values of 5 of the variables. You can solve for any unknown if you know the value of the other equations.... you can even solve for a few if you know the rest and have standard distribution tables and statistical estimates of what you are modeling/solving for. In this case, I don't think it's a question of solving for the unknown..... it will come down to governmental decrees; as to how much of this stuff will be valued and paid off. John

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