Profit and Cash; Opinions and Facts. Chapter I.

Dear,

When in 1996 I was studying Corporate Finance in my MBA at the ESADE Business School in Barcelona www.esade.edu , our professor used to remind us “Profit is an Opinion, Cash is a Fact”.

Valuation of results has been a very controversial topic on the last 3 years. If we just look back to some news of December 2007 we could read the following “Lehman's 2007 Bonus Pool Rises Almost 10% on Higher Revenue” http://www.bloomberg.com/apps/news?pid=20601087&sid=ajI8xAslBPLc

Let me also recommend you to watch the video http://www.bloomberg.com/avp/avp.htm?N=video&T=Smith+Says+Lehman+%60Exceptional%26%2339%3B+in+Managing+Credit+Risks+&clipSRC=mms://media2.bloomberg.com/cache/vjeCn6L0zIDg.asf

Just 9 months later, on Saturday September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.

Obviously something was wrong on the “Official Opinion” of the Lehman profits of 2007.

If we look at an “external-market valuation”, we will see that the Dow Jones Industrial Average index fluctuated from 13,365 on December the 28th 2007 to 6,547 on March the 9th 2009 (nearly 50% in 15 months).

The fluctuation was so high that the common opinion was that Mark to Market valuation was not correct, as the main Banks and Financial Institutions had those “toxic assets” in their balance that the market didn’t want at any price, preventing them to get liquidity. And consequently they couldn’t fulfill their function of financing companies and individuals, and finally damaging seriously the economy.
http://www.time.com/time/business/article/0,8599,1884290,00.html

By the way, as The US Economic Emergency Act of 2008 allowed the SEC to suspend mark-to-market accounting rules and increasing liquidity was injected on the System we saw the “Big Rebound” on the Stock Market and the valuation (common market opinion) moved the Dow Jones index to 11,204 on April the 23d 2010.

Today, as the priority becomes the “Fiscal Consolidation” and the illiquidity is moving to the Sovereign Debt Market, the valuation of the assets is falling again (nearly 10% in the last month).

In my opinion, if the Valuation is the determination of the "current worth of an Asset" we're doing something wrong

What do you think?

Kindest Regards.

Ferran.