Friday was the Financial Follies — which means that most of New York’s financial journalists descended on the Marriott Marquis for the evening. The joke going around was that Friday afternoon would be a great day to bury bad news, a la Jo Moore, on the grounds that even fewer people would be around to cover it than would normally be working on a Friday after the markets close.

But Overstock, it seems, took the joke literally, waiting until 4:02pm on Friday to announce that it had received a delisting notice from the Nasdaq. (And the wait was a long one: they received the letter the previous day.) Naturally, the headline of the release (”Overstock.com Announces Receipt of NASDAQ Notification Letter”) gives no hint as to the importance of the contents.

Gary Weiss, of course, noticed; I suppose we’ll have to wait until Monday to see whether the news has any effect on the stock.

What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations? I think we all know the answer to that one. But unbelievably, after such shenanigans contributed enormously to the greatest financial meltdown in living memory, the SEC is now set to allow more or less exactly the same thing in the oil industry.

Otto points to a stunning report by oil consultant Alan von Altendorf which spells it all out. Up until now, oil companies needed to actually prove they had reserves before they reported proven oil reserves. Now, however, the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).

Von Altendorf goes into great detail about how such numbers are useless and meaningless, and how the “proven reserve” rules should probably be tightened, rather than loosened, given the number of enormous write-downs in proven reserves which have taken place across the oil industry in recent years.

So what’s the SEC thinking here? Frankly, it’s not thinking at all: this is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution.

Berkshire Hathaway has a lot of equity: its book value is about $125 billion. And since equity is forever, it makes sense for Berkshire to have a very long time horizon when it comes to buying assets. But still:

Berkshire Hathaway Inc.’s Warren Buffett, who agreed to buy Burlington Northern Santa Fe Corp. in his biggest takeover, said the railroad’s results in the next 100 years will justify a $26 billion bid that’s “not a bargain.”

“It’s a good asset for Berkshire to own over the next century,” Buffett said in an interview with Charlie Rose.

It’s refreshing to see the 79-year-old Buffett taking such a long view. But the fact is that Berkshire Hathaway is not going to exist in anything like its present form in 100 years’ time. It’ll probably last no more than 10 years after Buffett dies before it’s broken up into various component parts. And when he gives quotes like this to Charlie Rose, it seems as though he’s somewhat in denial about what his legacy is really going to be.

The minute that Buffett dies, Berkshire becomes a large conglomerate, and will trade, like all conglomerates, at a discount to its sum-of-the-parts valuation. Sooner or later, Berkshire’s CEO will be persuaded to monetize the difference, and the storied company will come to its natural end. That’s no bad thing: it’s intrinsic to the nature of capitalism, which Buffett loves. But it does mean that buying companies on a 100-year time horizon is somewhat unrealistic.

Dshort and Clusterstock both have eye-catching stock-market charts today:

These present two very different views of the recent rally. The first shows it to be a strong bounce off a deep low, which brings us back to a point which is perfectly normal for a recession. The second shows the bounce to be smaller, and largely a function of the weak dollar.

My feeling is that looking backwards at charts of where we’ve come is never a useful way of working out where we’re going. But the first chart does a good job of explaining why we’re all breathing so much easier now than we were in March, and the second chart does a good job of keeping us sober. And raises the question: if the euro weakens against the dollar, could that precipitate a broad-based stock-market fall?

Via Otto, a letter from the head of market supervision at the New Zealand stock exchange, to the company secretary of NZ Farming Systems Uruguay Limited, a company listed there:

Note 3 to the Financial Statements, regarding depreciation, included the comment “fudge this to equal depn in FA note 11 $2391 - via no ca” (“the comment”). The comment has caused NZX, and the market, concern that the Financial Statements may not be accurate.

Oops.

A bear market is commonly defined as when you drop more than 20% from the high point; in Shanghai, stocks — which fell 6.7% today alone — have managed to drop more than 20% just in the month of August. But the other major Asian indices didn’t seem too perturbed — none dropped more than 2%, while Kuala Lumpur and Taiwan both rose — and the crazy volatility of the Shanghai bourse should really be put down to Shanghai-specific factors, including the monster run-up the index has had this year.

It both makes sense and is reassuring that global stock markets don’t seem particularly susceptible to contagion from China, either in terms of direction or just in terms of volatility. Traders see the data coming from Shanghai, and essentially ignore it: neither the level of the Shanghai stock index nor its first derivative is a useful piece of information for anybody not directly invested there. The Hang Seng, in Hong Kong, is much more grown-up.

That said, virtually all global stock markets, including that S&P 500, are looking pretty frothy these days, and in this kind of an environment you never know what will set them off. I’m not holding my breath, but at some point a relatively innocuous piece of data will be blamed for a massive global sell-off: while it might be something domestic and macroeconomic, it could equally easily be a movement in some foreign market. Stocks worldwide are going to remain very volatile for the foreseeable future; Shanghai is just the most extreme example.

Paul Kedrosky finds this chart in a Bloomberg story: it’s the kind of thing which really reinforces one’s belief in the wonders of data-fitting.

The story isn’t actually particularly clear on exactly what the graph is showing, and specifically what “adjusted for currencies” means:

The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

So it seems that the BofA analysts who came up with this chart first converted the Nikkei to dollars, only to then convert the S&P 500, which was in dollars all along, out of dollars. Hm. And they chose pretty random start points: what makes 1980 in Japan analagous to 1990 in the US?

But the most breathtaking claim of all is right there in the Bloomberg headline: “S&P 500 May Surge 40% in Duplication of Japan”.

In other words, the people who came up with this chart are not saying that the US is going basically nowhere over the long term. Instead, they’re saying that there could be a big further rally in the S&P 500 over the short term. On the basis of the fact that the Nikkei rose sharply, in dollar terms, at the tail end of the last decade.

I feel quite safe in saying that of all the years to compare 2009-2010 to, 1999-2000 are probably not the most useful. And looking at what Japanese stocks did ten years ago will tell us absolutely nothing whatsoever about what US stocks are going to do now. No matter how many clever charts you come up with, or ridiculous justifications for the conclusions of your silly exercise in data-fitting:

“Even in economies overcoming credit booms, rallies can be powerful and last much longer than you think,” Bank of America’s Sadiq Currimbhoy, Arik Reiss and Jacky Tang wrote.

Well yes, if you’re caught up in the exuberant tail-end of a global stock-market bubble, maybe. But that spike in the yellow line that BofA thinks we might repeat on our orange line? Was basically a function of excesses like Softbank having a market capitalization of $200 billion. If you want to bet on that kind of thing happening in the US over the next year or two, feel free. But I’ll happily bet against you.

Update: Henry Blodget has the original Merrill report; it seems to admit how tortured the numbers it’s using are, and doesn’t go so far as to actually predict a 40% rally from these levels.

From Bespoke Investment Group, via Abnormal Returns:

Stocks are now trading at p/e ratios not seen since 2004. This is more than pricing in a recovery — this looks very much like pricing in a return to the status quo ante. Does anybody really still think that corporate profits are going to be able to rise faster than US GDP indefinitely? It seems from the level of the stock market that, yes, they do.

According to MBIA’s latest quarterly report, the insurer has a book value of $2.8 billion, or about $13 per share. JP Morgan analysts Andrew Wessel and Daniel Kim beg to disagree, quite violently: in a note issued this morning they said that MBIA’s tangible book value is actually negative, to the tune of about -$40 per share. Downgrading MBIA to “Underperform”, in an action which has helped to send MBIA’s stock down 14% today, they write:

Although we believe it will be some time before cash at the HoldCo runs out, it is difficult to envision a scenario where there is much capital remaining for shareholders given expected future losses at the consolidated operating company.

The report comes with three pages of disclosures and fine print, including three “Important Disclosures” about the fact that MBIA (a) is or was a client of JP Morgan; (b) will or might pay investment-banking fees to JP Morgan in the next three months; and (c) has paid non-investment-banking fees to JP Morgan in the past 12 months.

The report also covers the substantial legal risk facing MBIA:

Purchasers of credit protection and insured bond holders are suing MBI due to its good bank/bad bank split, which left structured and international obligations with significantly less capital to cover future claims. The plaintiffs argue they purchased protection based on consolidated capital levels, and the transfer must be reversed, as that would no longer be the case. We believe the outcome of this suit is also highly uncertain, and could have serious negative impacts on MBI if it were to lose.

It’s definitely a little weird, then, as an MBIA spokesman pointed out to me this morning, that nowhere in the report do JP Morgan’s analysts disclose that JP Morgan itself is one of the plaintiffs in that suit.

This is why disclosures — especially in a rules-based system like the one we’ve got — are never going to solve anything. There’s a whole slew of things wrong with them:

• They’re almost universally ignored by people reading the reports.
• They’re used by banks as a CYA mechanism, rather than as a way of imparting important information.
• They’re written in a legalistic and deliberately uninformative way: there’s no way of telling, for instance, whether JP Morgan’s fees from MBIA are significant or not.
• They leave out the kind of information which any disclosure written in good faith by a human being would put front and center — like JP Morgan’s involvement in the lawsuit against MBIA.

I’m not accusing Wessel and Kim of acting in bad faith here — after all, the lawsuit was filed in May, and their downgrade came only in August; what’s more, the downgrade doesn’t really help JP Morgan’s cause. But there is a certain lack of transparency to their report, which could be (and is, by MBIA) viewed as a conflict of interest. After all, a lot of the arguments they make in their note are substantially identical to the arguments made in the JP Morgan lawsuit. Especially since they specifically cite the lawsuit as a risk factor facing MBIA, would it have killed them to have noted that JP Morgan was one of the plaintiffs?

What happens when companies engage in fraudulent activity? Short-sellers get wind of it, and, by selling the stock of the company in question, depress the share price and save uninformed investors some of the loss they would otherwise have suffered had they bought in at an undepressed level. How much is that worth? According to Xiaoxia Lou and Jonathan Karpoff, somewhere between 0.2% and 1.5% of the firm’s market cap.

But what if the short sellers have it wrong, and the company in question is not engaged in fraud? Well, in that case the uninformed investors have just been given the opportunity to buy into that question at a discount, thanks to the shorts. They win again!

Is there any downside to short-selling? Not really: the authors say that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

So thank you, short-sellers, for saving us from buying in to fraudulent firms at inflated prices, and from giving us a nice discount on the share price of non-fraudulent firms. You rock!

(HT: Marr)