When I usually see something like the article below, I run for the hills and immediately expect a Web 2.0 long tail sales page to pop up telling me about a “loophole in Google” or “a Facebook backdoor secret”.
So I was pretty shocked when I came across the following article on CNBC, buried in a slew of headlines.
Investors such as Jon Najarian are hopeful that stocks could soar next week. They say we could see an explosion to the upside after a meeting scheduled for March 12th.
On that date, a 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.
Karen Finerman has long been an advocate of putting these rules on hiatus for a while and “letting the banks breathe.”
If that meeting results in the government relaxing mark-to-market rules, optionMonster Jon Najarian thinks the stock market could explode. On Wednesday he told us, “if the government relaxes mark-to-market for 12 to 18 months you could see financials move 100% in a matter of hours.”
And he went on to say, “In fact, I hope you’ll replay the soundbite because if the government relaxes mark-to-market accounting a number of banks stocks will be unbelievable values at these levels.”
U.S. industry groups have urged the SEC and FASB to significantly alter or suspend the accounting rule, saying it is undermining the government’s multibillion-dollar effort to stabilize the financial sector.
Mark-to-market accounting requires assets to be valued at current market prices. Some banks say it forces them to mark down assets to artificially low prices in the current financial crisis, even when banks intend to hold the assets past the current reporting period.
What’s the trade?
Jon Najarian suggests a higher risk play – he suggests long the Financial Bull 3x ETF [FAS 2.64 -0.11 (-4%) ] which is triple long ahead of the mark-to-market hearing.
Now, I didn’t bring up this point to create a “CNBC is terrible and don’t watch it” kind of conversation. I was more interested in the idea behind it and why it isn’t the lead story on every news site in the world.
- This seem to me like an almost “knowable” outcome. The members of the house service committee must be public knowledge. These senators must have given speeches, interviews, and public statements about the current economic crisis - in fact, I bet a lot of them, over the last few months. If you looked at the transcripts of these statements it must be pretty evident how each member stands on financial topics, and mark to market accounting. This can either be a direct quote or inferred based on other comment and opinions on the financial crisis.
- With the use of options, you could make tens of millions of dollars. Image controlling a few hundred thousand shares of GS while making a bet it will double in 48 hours.
If the market is efficient, then this hearing is already known about and is already priced into the market. That either means no one expects much to come of it, or there must be a few more steps to that have to happen for this event to come to fruition.
I am not espousing that we all ride FAS to our financial dreams, but I find the article more of interesting talking point. It plays on the “financial dream” that we can know the future of massive stock moves ahead of time and play them perfectly. The use of leverage in options makes it even more enticing as we can control chunks of shares for pennies on the dollar.
What do people think of the upcoming hearing and the movement of stocks based on the theory that Najarian lays out? If you were a Vegas bookmaker, or offshore bookmaker for that matter, what are the odds you would put on this type of scenario playing out and people being caught off guard?
Disclosure: Long GS Bond.