Wednesday, March 4, 2009

Looking For a Rally....Somewhere

Been scanning the horizon for a true multi week multi month bottom with 15% plus type of rally that seems almost inevitable after weeks of stock selling and it is still not clear that it is coming. I thought it could start this week with some positive resolution coming out of Europe. That dd not happen and instead the reverse occurred and the market has gotten creamed (even after factoring today's rally).

You need something for traders to latch onto for this type of rally. I thought the two most likely candidates would be an European solution (really it would just be a band aide) or a change in mark to market accounting. So far neither have materialized and may not materialize but there is growing evidence that we may be moving that direction.

Europe is working painfully slowly towards there band aide. I think this will get resolved by the IMF not Western Europe. All it will do will be to buy time. It won't fix anything.

This was reported today and got a little buzz.

http://www.reuters.com/article/managementIssues/idUSN0454048120090304

A U.S. House Financial Services subcommittee plans a hearing on mark-to-market accounting rules, which have been blamed for forcing banks to report billions of dollars in write-downs, a source briefed on the matter told Reuters on Wednesday.

The subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.

This is a subcommittee and it isn't until next week. I don't think this will develop into anything quickly.

However, one obstacle is gone and that is the recently departed chief accountant for the SEC who stood strongly opposed to the removal of FAS 157.

http://www.reuters.com/article/americasRegulatoryNews/idUSN0453163720090304

"I think that mark-to-market does help the investor," Hewitt continued. "Mark-to-market brought to focus the problems we have had in our financial institutions much faster."

That describes why the realization of Europe's mess is still ahead of them. Our accounting revealed more than their accounting earlier. American banks raised something like $400 billion in capital before the private markets closed shut. Europe raised very little because "they didn't have a problem." Article continues:

Under the Troubled Asset Relief Program, the U.S. Congress mandated the SEC to complete a study of fair-value accounting.

However, Hewitt said Wednesday the SEC's recent study of fair value accounting was done as "a compromise," and that he believes that politics should be kept out of accounting standard setting. The study, released in December, concluded that mark-to-market accounting was not a major factor in 2008 bank failures.

Influential business groups like the Business Roundtable and the American Bankers Association continue to urge the SEC to suspend or significantly alter mark-to-market accounting.

The coming hearing is probably a direct result of some of those influential business groups.

So I am scanning the horizon for something to call an interim bottom on but not seeing anything yet. Just spec's. Of course it could come from something I am not looking at (alot of buzz on China recently).

10 comments:

Anonymous said...

Guess who?

Even if they suspend mark-to-market, I think the cat's out of the bag. No self respecting analyst (read short timer) is going to ignore distressed values.

I had a conversation with a valuation firm who claims it is the auditors who are causing the issue--they apparently are taking an approach of last transaction price equals fair value. Let's say you bought 1M bonds at 85 cents. Then in October when markets were at bottom, you picked up 10 bonds in the same security from a distressed seller at 45 cents. The valuation guys said the auditors are making the companies mark their 1M+10 bonds at 45 cents. The CFO of this company then confirmed that if he were able to sell 1 bond for $1.10, the auditors would support him marking the entire position up.

FASB/SEC are clarifying what makes an active market, what makes distress, etc. in new rules to be out by Q2 (lightspeed for FASB). Maybe it will help the auditors come to their senses--

http://fasb.org/news/nr021809.shtml

Every day this whole mess gets crazier. But if you get rid of mark to market, what on earth do you put in its place?? Politicans getting involved is really dangerous for investors.

Market Seer said...

Oh, believe me, I know changing mark to market isn't going to change anything. In fact I think it will make it worse. I do think it could cause a massive rally. In fact I have told several people that shorting financials is over with (for the most part for me) but if they suspend mtm it will be the last great shorting opportunity for financials.

What causes rallies and something that changes fundamentals that you actually want to buy for the long term is two different things. Look at the ban on short selling. Caused a massive rally.

You have so many people who trot on CNBC who say mtm accounting it the problem that if it got suspended there will be hundreds of bottom callers and I think it will cause a massive rally. A rally that will be a great opportunity to short.

I would argue that even the situation you describe is a small small part of the problem (there are many more examples the other way). The problem with the financial system is level 3 assets and those assets are marked to model. Also my understanding is that loans for regular brick and mortar banks are not marked to anything resembling market.

Anonymous said...

Totally true--lol. Look at GE.

There are some crazy things that go into L3--a lot of banks, etc are moving assets from 2 to 3 and therefore, those "models" can duck out of the current, albeit distressed, market. I know of a private fund that is marking loans that trade as L3 assets---that is nuts!

you buying anything on dips like today or still too bearish overall?

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Госдума приняла сразу в трех чтениях поправку, касающуюся ответственности государства по банковским вкладам



31.07.04 15:32



МОСКВА, 31 июл - РИА "Новости". Госдума в субботу приняла сразу в трех чтениях поправку, касающуюся ответственности государства по банковским вкладам.

Закон "О внесении изменения в статью 49 федерального закона "О страховании вкладов физических лиц в банках РФ" исключает субсидиарную ответственность РФ в отношении договоров банковского вклада. Эта норма распространяется на все договоры, заключенные после вступления в силу данного закона.





rian.ru/rian/intro.cfm?nws_id=644497



Госдума приняла в первом чтении и в целом поправку в ст. 49 закона "О страховании вкладов физических лиц в банках РФ", отменяющую государственные гарантии на вклады в Сбербанке, открытые с 1 октября 2004 года.



По словам председателя профильного комитета Госдумы по кредитным организациям и финансовым рынкам Владислава Резника, "в этом нет никакой опасности для вкладчиков Сбербанка".



Депутат отметил, что на вклады, открытые до 30 сентября 2004 года продолжает распостраняться субсидиарная ответственность РФ про требованиям вкладчика к банку. Резник подчеркнул, что по существу, государственной гарантии для вкладов в Сбербанке "никогда и не было, поскольку этот вопрос нигде не прописан".



С 1 октября 2004 года на новые вклады в Сбербанке будет распространяться действие закона о страховании вкладов физических лиц в банках РФ. Правительство не имеет замечаний к данному документу.



newsru.com/finance/31jul2004/sber.html
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