For What It's Worth

As the market recovery reaches maturity any investors and market participants are asking: "What are my securities really worth?" With the equity markets up nearly 50% and corporate bond credit spreads within or approaching historic norms, this is a good question to ask.

During the past year, too big to fail policies, a VERY accommodative Fed and relaxed accounting policies (such as the easing up on mark-to-market accounting) had market participants buying until they could buy no more and investors once again believing that trees will go to the sky. However, reality is setting in. Investors are asking: "What happens when the Fed becomes less accommodative?" What happens if the toxic assets not being marked by banks are not really worth 100 cents on the dollar?" "What happens if businesses have become more productive and do not need to rehire many workers who were laid off?" These are good questions. The answers will probably not be what most investors want to hear.

This is not all bad. Homes were not really worth the prices at which they sold during the height of the bubble. It could be many years before population growth creates sufficient demand for homes to push prices back up to their lofty levels of a few years ago. Corporate credit spreads probably will level off in the near future and, in the case of sectors and companies which have tightened the most. The crises in Greece is not in itself a catastrophe, but it will cause investors to asses risk based on true credit quality and not on "too big to fail" (news out of Europe this weekend is that many European leaders are balking at a bailout for Greece).

Investors should also understand how their bonds and preferreds work. Understand what makes them rise, fall or be called. One may cannot know where rates and spreads will be a few years ahead, but if one knows where rates and spreads must be, one can make an educated and reasonable decision about which securities are right for the, and which securities are not. Of course, I am always available for consultation.