Anyone picking up a newspaper recently has read about the quick turn of events unfolding in the sub-prime market. Two leveraged Bear Stern funds have wiped out all their investors capital, while the ABX index tracking sub-prime loans has fallen sharply and keeps hitting record lows. With every new low the market keeps trying to shrug it off as the new "bottom", yet I believe this is just the beginning of things to come. Here are two things that haven't been mentioned frequently that you should know about.
1. Accounting Tricks
There was a recent change in accounting rules that allows companies to mask investment losses and keep them out of their earnings statements, even though the balance sheet and equity will still be negatively impacted. Well, we are beginning to see the first signs of companies using this policy. In my opinion, investors should look unfavorably on any company that tries to hide their true results using an accounting rule which makes no sense. But this isn't the first accounting rule that has seemed illogical.. remember the time when options didn't need to be treated as an expense?
2. Inverted Yield Curves
We've all heard about the recent inverted yield curve in the United States and its usual indication of recession. Well, what you might not have known is that it is a common phenomenon worldwide. A look at the Economist's interest rate statistics shows that 13 other countries (of the ones listed) currently have inverted yield curves, also.
So, in short, be careful.