All kinds of news have been hitting the fan lately.
It seems like the financial media's favorite past time is to explain today's market action with whichever piece of news matches its own views best. A few months ago, Greece's troubles were the best-suited scapegoat to explain with what's become known as "flash crash" along with the general price weakness.
The truth was, the market had been crusin' for a brusin.' A couple weeks before the flash crash, the ETF Profit Strategy Newsletter noted an extremely low CBOE Equity Put/Call Ratio and predicted the following ramifications: "Once prices do fall and investors do get afraid of incurring losses, the only option is to sell. Selling results in more selling. This negative feedback loop usually results in rapidly falling prices."
No doubt, the financial media will have no troubles explaining whatever comes next after the fact. However, we'd like to look ahead and identify what can, and likely will, cause trouble before stocks head south.
There are plenty of dangerous undercurrents Wall Street hasn't caught on yet. Let's discuss two.
Accounting Tricks
A revision to accounting rule 157 on April 2, 2009, allows banks and financial institutions to hide losses, in particular real estate related.
In essence, the new rule 157 allows financial institutions to hide losses based on current prices and allows them to value a portfolio (such as real estate) at what it would be worth during a normal market (in essence a pre-2007 market) not current prices.
