Financial Stocks: Playing the Mark-to-Market Suspension 41 comments
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As everyone following the financial markets knows, every time a "rumor" or "sound byte" surfaces that the FASB 157 mark-to-market provision might be suspended (or modified), the stock market runs like the wind. Recently, for example, rumors led to a giant comeback rally in the financials and other sectors. And, on February 10, more mark-to-market rumors flew in after-hours in regard to a modification possibility to be included in the Obama Financial Stability Plan -- and again, the market was stoked. The market rallied into, and through, the next trading day as the "TARP Accountability" hearing limped onward.
TALF=good. TARP=not so good.
Democratic Representative and Chairman of the House Financial Services Committee Barney Frank recently said, "One of the things I think we should be exploring is the extent to which you can retain mark-to-market but make the consequences discretionary with the regulators rather than automatic."
The next potential mark-to-market rumor catalyst will come shortly, when the House Financial Services Committee holds a hearing spotlighting the matter.
Section 132 of the Emergency Economic Stabilization Act of 2008 "Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors."
Meantime, short-sellers have been pummeling financial stocks with utter impunity. Yet in the front of every short-seller's mind (at least the smart ones), is the dread of a sudden announcement that mark-to-market has been suspended or modified -- causing a fast and furious short-covering stampede, in tandem with longs crashing into the financials with utter abandon.
This has to be causing shorts severe anxiety -- eyes and ears glued to the news, fingers glued to the mouse, trade tickets already filled out -- ready to cover-buy on a dime.
But what if an announcement comes overnight -- or over a weekend -- after the extended-trading session is over, or before the pre-market session begins? Could you imagine the sheer short-seller panic as they get caught with financials opening pre-market at something like a minimum of 20% higher -- and then ratcheting up another 20% in the first minutes of trading?
So, how should longs and shorts play the strong possibility of a mark-to-market announcement coming any day now? Well, for one thing, it's probably not a good idea to be short overnight or over the weekend. And longs would want to get in before after-hours closes, leading into the next trading day.
Of course, there are many shorts who are arrogant enough to believe that getting caught in a massive short squeeze can never happen to them. Not with the media pundits trash-talking financials across the board. But it is obvious that, if a mark-to-market rumor can cause a swift and large pop in the market, imagine what the real announcement will cause!
And, of course, as other details of the trillion-dollar TALF come to the fore over the next few weeks, the markets will lock into incredibly bullish momentum...and not look back.
Longs don't want to get caught chasing financials once the announcement comes, not with all of that Big Money sitting impatiently in Treasuries and Money-Market funds collecting pennies; all suddenly piling into the equity markets for the long bull run. Bank stocks [Citi (C), Morgan Stanley (MS), JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS)] and ETFs [such as the Financial Select Sector SPDR (XLF), and ProShares Ultra Financials(UYG)] are but a few of the beaten-down stocks that will be first out of the gate, leading the charge. Nothing worse than that sinking feeling longs get when they are kicking themselves for not getting in BEFORE the news hits the street.
So these are my Valentine's Day words of wisdom for all you traders:
If you are long on financials -- hold your positions (and ride out any dips). Shorts- don't get caught short-squeezed overnight.
Be long. Be strong. And, be a champion...
Disclosure: Author holds no positions in any of the stocks mentioned in the article above
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1
So who designs the model?
rev's/emplyee vs. GDP and that is only what is seemingly
visible 2nd)M to M..how will "boxes" be disaggregated
to value?
I'll be laughing while watching the shorts cover at huge losses.
Put your money where your mouth is. Otherwise, you are just another fool trying to get attention.
On Feb 15 10:01 AM Jolly_Rancher wrote:
> So you're a shareholder right? You must be. That's the only reason
> you'd want to "keep score." So what has it got you? You're losing
> your entire investment. Maybe you're really short.
Smart shorts should have moved on from the financials- I fully agree with the premise of this article. The Terroristic Bankers have damaged the Real economy, that is where the next big down leg will occur. Of COURSE mark-to-market will be suspended, that's why Bankers and Fixers like Robert Rubin buy politicians.
On Feb 14 01:56 PM Gtarras wrote:
> Expect to be trashed in the comments section by the folks who are
> glued to the financial entertainment gnomes... what are you talking
> about?! we all know that the financials are dead meat (they preach
> it to us on TV)...!!
>
> My view: FASB 157 is the single most important reason the financial
> system, and the economy is down the toilet. without it, we could
> have handled the subprime bust..
On Feb 14 10:17 PM joe from chi wrote:
> I'm not an accountant or a CFA, so how does suspending M2M help the
> banks? They cannot suspend reality. Everyone knows that thier books
> are still full of garbage. I get the day trading angle, but I'd hold
> long for maybe 2 days and then go hard short.
>
> If the bubble went burst in Fall '07, and the underlining assests
> have not been marked down yet, why do we still have problems? What
> good will "playing pretend" do them?
On Feb 15 01:54 PM henarl wrote:
> A safer way to trade this situation is to go long TBT. Nowhere near
> the risk exposure of shorting financials and if MtoM is suspended,
> TBT will soar as treasuries are sold to go long financials.
Mark-to-Market is in fact, very much an accounting issue: but is much more than that! You're right that it may or may not be a compensation issue... I apologize for the following long-winded reply.
E.G.; if my buddy across the street decides to dump his house tomorrow at what I consider to be an outright giveaway; say 50% below what the rest of my otherwise sane neighborhood consider to be reasonable price (as opposed to value), then the marketable price of MY house just fell in the toilet along with his! For now, this is simply an accounting problem, say, if I want an equity loan, or to go whole hog and refinance, or pull out a second mortgage (assuming I can find one!). Or, simply if I want to total up my pennies to see if that long-awaited retirement next year still makes a lick of sense in terms of my vaporized 401K+swan-diving home equity???
It will not become a compensation issue FOR ME unless I choose to copy my buddy's stupidity (or brilliant market foresight) and sell my house!
This is all rather academic, as my house does at least have some intrinsic and market valuation. Most importantly, the Mark-to-Market debate is not really about marketable assets. After all, if the 'assets' could be assigned a reasonable market price, we wouldn't be having this debate in the first place! Right?
Okay, now consider my cherished baseball card of Tommy Diddler that I bought back in his 1994 rookie year, who promptly hit 499 and went on to break all home run, RBI's and Grand Slam records 5 times over the next 10 years. In 2007 I had this mounted and framed card assessed by Moody's, Standard & Poors (a famous auction house famous for their accuracy) at a cool $5.5 mil, as there was a very limited run as Tommy was drafted 219th that year. I spent a week on a Johnnie Walker Blue Label high sawing through 2.5 inch Rib Eyes (yes, with Lobster tails & Scallops).
But.... my luck was holding, and on a Dismal Tuesday of 2008last the news hit. Good old Tommy was found to be an habitual user of steroids, cocaine, hashish, meth, and MaryJane, and was photographed in a disgusting variety of uncompromising positions with a bevy of middle-school cheerleaders; both male and female, along with the mascot; a non-consenting sheep.
My cherished card now has a value of what? A Price of what? Future value of what?
The debate about Mark-to-Market as it applies to banks that the long-suffering taxpayer is (or is not) about to bail out is simply this: many of their CDO's and other 'toxic assets' (an oxymoron if ever there was one) are now rated about as worthless as my stupid baseball card!
Is this an accounting issue? Yes. (I used the @#%*& thing as collateral for another loan for upgrades to my extreme Chopper Soft Tail, and it also covered my 401K loan which was for the basic bike in the first place. My wife thinks this was for a down payment to a landscaper for a goldfish pond, waterfall and a custom-designed exotic shrubbery garden in the back yard. My wife does all the accounting at month end. Is this an issue?)
A compensation issue? Yes. (Larry the loan-shark behind the 7-Eleven who made me the loan took the card as collateral. He then bundled my loan with several others, wrangled an AAA rating, and sold the whole she-bang to the Russian Mafia. Larry agrees with you, and is very convinced that this is a compensation issue. Do you want to talk to him for me? Please?)
On Feb 15 09:57 AM Jolly_Rancher wrote:
> An alternative? It's not an accounting issue. It's a compensation
> issue.
On Feb 14 06:59 PM User 357161 wrote:
> No fear here from this short. I feel confident enough to hold SKF
> and FAZ over the weekend without even thinking about it. Treasury
> and SEC pretty much has shown that they are on our (the shorts) side.
On Feb 16 10:45 AM RReagan wrote:
> Cockeyed - Sometimes the government just doesn't know what is best,
> or sometimes they just answer to their constituencies. They don't
> take pleasure, they just don't seem to care unless its best for them.
> If they were doing the right thing, why haven't they suspended mark
> to market already? Just remember, Obama has ZERO executive experience
> so don't expect a great decision maker anytime soon.
Surely no one here is so naive to imagine that Geithner would really screw his old buddies??? The more things appear to change, the mare they stay the same!
The fine print of the 'CEO pay cap' makes for some fine reading, and I hope will spark some lively debate!
Barry Ritholtz has a link: www.ritholtz.com/blog/.../
or: seekingalpha.com/artic...
On Feb 16 12:53 PM RReagan wrote:
> I agree gtmcduffy - That way, congress wouldn't do really stupid
> things like limiting the pay of the top bank executives. In this
> country, people are most responsible for themselves and their families.
> Why work 50-60 hours and only get paid a fraction of what you are
> worth? Who would blame them if they all walked away and got higher
> paying jobs elsewhere. Maybe some of them were to blame for this
> financial mess, but the congress and others were to blame also.
> No talent left in the banks is another reason to short these stocks!
On Feb 14 10:17 PM joe from chi wrote:
> I'm not an accountant or a CFA, so how does suspending M2M help the
> banks? They cannot suspend reality. Everyone knows that thier books
> are still full of garbage. I get the day trading angle, but I'd
> hold long for maybe 2 days and then go hard short.
>
> If the bubble went burst in Fall '07, and the underlining assests
> have not been marked down yet, why do we still have problems? What
> good will "playing pretend" do them?
Furthermore, while the govt is trying to figure it all out- including the public/private partnership, some have also recommended suspending M2M.
There is nothing wrong with M2M bringing transparency to investors as to a company's position- but, true transparency has proved to be quite complicated (and unfair in many cases) in the real world.
www.cfo.com/article.cf...
The powerful Paul Volcker, now one of Obama's key advisors, is a big advocate for modifications of the current M2M- which if made- would be a major game changer. And, financial stocks, for example, would not be a place to be short selling.
So when you hear certain finance TV anchors (who have very limited or no economic cred) say that suspending or modifying M2M won't "do anything"- take it with a grain of salt. In fact, at very least, there will definitely be some "tweaks" made- which will be game changers in themselves- assuming that Obama really wants the game to change...
On Feb 20 04:17 PM PDT wrote:
> Well said!
Companies need to get back to 5 % Growth and Executive pay in a ratio that is in line with a line worker, a teller for instance.
Company Leaders don't need to make as much as the sales staff,
they don't take the chances.