Regarding our trading position in the financial sector, I wrote to subscribers last Sunday: "We need just the faintest glimmer of hope to see our investment move higher." With the new administration marching double time on the economic front, the odds of getting such a glimmer seemed good, and indeed worth a trade.
We got that glimmer Tuesday and after hours on several fronts:
- New Treasury Secretary Tim Geithner issued new guidelines Tuesday aimed at eliminating the influence of lobbyists on the $700 billion financial bailout program by restricting their contact with officials who are reviewing applications for money and deciding how to disburse it. Maybe we can avoid the fiasco orchestrated by the former administration, wherein $350 billion of your tax revenue vanished into bank vaults without the slightest help to the economy.
- The Federal Reserve is talking about new initiatives to get the old economy on her feet in this cold winter night. They include buying consumer loan-backed securities to boost auto, student, credit card, and business loans; buying up mortgage-backed securities to steady that market; and possibly buying Treasuries.
- There's a whisper on the breeze that mark-to-market accounting may finally be stopped, which would greatly improve bank balance sheets. This is not a new idea, it's just taken more competent people in charge to make it possible. In How to Cure This Sick System, Steve Forbes wrote way back in September:
Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline.
Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.
Absurd? Obviously. But that's what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.
- President Obama and Congress are hurrying to get the $825 billion stimulus package passed.
- The bulk of financial companies have already reported their dismal earnings for last quarter, so now attention can turn to the future, which includes the above positives.
This sent the financial sector up 3.7% Tuesday. Our position in it gained 7.5% during the regular session and another 13% after hours.
Let's keep it going today!