The Two Things Wall Street Hasn't Noticed Yet

There are plenty of dangerous undercurrents that the Street hasn't caught onto yet. We discuss two of them.

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.

The potential losses disguised by accounting tricks could reach double digit trillions of dollars (a detailed analysis of rule 157 and its terrible implications is available in the June issue of the ETF Profit Strategy Newsletter).

Health Care-Related Costs

The new health-care bill wasn't supposed to affect Corporate America. A look at the following numbers, however, shows different.

Caterpillar, John Deere and AT&T already announced non-cash charges of $100 million, $150 million and $1 billion for 2010. This is based on the impact this bill has on forward-retiree health care costs. Again, it pays to put things into perspective. Caterpillar reported profits of $895 million, John Deere's profit was $912.80 million and AT&T's profit was $12.54 billion.

The unexpected healthcare charges make up 11%, 16% and 8% of profits respectively.

These expenses should eventually hit the earnings per share (EPS) and by extension the P/E ratio. Based on the above three examples, stocks could be overvalued by 8-16%.

The above-mentioned charges were for retired employees only. Current employee health-care costs were not considered yet.
Imagine what could happen when investors find out about the billions and possibly trillions of dollars hidden on bank's balance sheets or the full scope of health-care related charges.

Based on technical analysis by the ETF Profit Strategy Newsletter, the market is at a historically critical junction with overwhelming bearish potential. Will you be prepared or wait for the financial media to explain what happened after the fact?

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