Will Najarian's Prediction of a Stock Market Explosion Come True?

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.”

Background

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.

1. 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.
2. 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.

Comments

[Fitz919:]

I remember Jon's Trade Of The Day from First Business. He was wrong more often than he was right.

Could a single hearing be all it takes to change the M2M rule? Not a chance. Palms have to be greased, trial baloons floated, rumors circulated, and most importantly the American Taxpayers have to be screwed again.

Remember it was only last Wednesday when Obama's new Mortgage Rescue Plan was unveiled. And guess what...the new mortgages reset in 5 years, just like Sub-Prime, Alt A, and Option Arms. These people don't have our best interest in mind when they pull this kind of stuff.

Is a change in M2M going to be any better? Not a chance.

Follow the money, not Jon.

Mar 08 02:10 PM

[Mr. Ed, Jr.:]

Suspending mark-to-market would just be an accounting trick. It would do nothing to change the real value of the assets, but it would make balance sheets look prettier.
We have enough problems with accounting trickery like Level 2 and 3 assets.
The current crisis is not an accounting crisis. Any uptick created by changing accounting rules will likely be brief.

Mar 08 02:43 PM

[America1776:]

You guys don't understand the issue "markets are not always rational." The often over shoot to the upside and the downside. Let me give you an example. You bought a 3 family house 3 yrs ago for 300k. The rents are enough to pay the mortgage. Now today the house is only worth 150k but no one makes an offer "does that mean the house is worth nothing". These accounting rules would want you to mark that asset as Zero. Now maybe if the economy gets worse it is worth 120k or possibly the economy gets better and its worth 300k again in the future. As long as the cash flow is there who cares? Now maybe a bank should only be allowed to use 75% of the value if no market currently exists or is currently illiquid but to force the mark to zero is punitive. That is why the banks are not lending. Most importantly it doesn't cost the government a penny of tax payer money!!! This might not be the best example but it give you the idea of what the banks are facing. Also the need for more regulation is just plain silly. The regulators knew about Maddof and subprime lending, and the woes of the auto industry. The government looked the other way as they were getting there campaign donations. The bottom line is the government is not even good at running the government. Imagine the politics and control the government would have if they could decided what companies and individuals got loans. It would be a political fiasco and the end to the American Economy as they guys as so corrupt that they would sell any of us out for there own special interest including the president! Clinton was such a good president because he did not have the House and Senate. He had to compromise. Obama would be a good president if he were in the same situation but because he has absolute power he is going to wreck the economy to pass a social agenda. The key to change in incremental change. For example how would it look if we had a republican president and republicans with majority in the house and Senate. They could not just say starting tomorrow no one will receive welfare it would create anarchy. Same with this president punishing wall street. Wall street and main street are the same street. Wake up all the folks with IRA's, 401ks and pensions are getting wiped out. My question is was that the plan? To make us all depend more on government so they can control more of our lives? Wake up people and open your eyes!!!

Mar 08 02:48 PM

[clearthinker:]

Of course, they could do something "in between"...use marked to market but use a trailing figure that would allow time for recovery and adjustments in policy....wow - kinda like restoring the uptick rule...imagine that.. giving the markets "time" to adust to events that impact value...huh - like maybe Merril would still be around...

Our elected officials and regulators are dopes.

Mar 08 03:30 PM

[Mad Hedge F...:]

To say the market has gone mad is an understatement. The Dow has lost 24% since January 1, giving up $2.6 trillion in value. Other than that Mrs. Lincoln, how was the play? Credit default swap risk premiums now tell you that it is much riskier to invest in Warren Buffet’s Berkshire Hathaway (BRK/A) than Vietnam, and that Russia is a safer bet than General Electric (GE). The Dow is headed for the 4,000, according to ultra bear Felix Zulauf of Zulauf Asset Management in Zug, Switzerland. The rock star fund manager believes that we entered a 10-15 year bear market in 2000. He argues that analysts are smoking something with S&P consensus earnings forecasts at $60, down from $100 a year ago, and that the real number will come in at zero to $40. We may see one more bear market rally to 9,000 in the next few months led by financials, mining stocks, and consumer discretionaries. After that the Dow will drop by half. Day traders only need apply.

Mar 08 04:48 PM

[sunny12945:]

Abolishing the M2M is like taking away of a blind man, so that no one discriminate against him/her for their handicap.

I can claim my house XXX million dollars as long as it is not in the Mkt. Now suddenly I need some emergency money, I go to the bank HEL on the basis of my belief that the house XXX million $ but Bank will put a stress test to see what my house sell in the prevailing and 'fire sale' in case of worst scenario. The Bank will conclude my house is worth less- YYY dollars under the prevailing conditions.

Here the Bank will rely on M2M NOT my fantasy value if they accept my house as collateral.

M2M is an imbecile idea but we appear to have become a Nation of collective INSANITY!

Mar 08 05:04 PM

[sunny12945:]

Correction to first paragraph above:

Abolishing the M2M is like taking away of a blind man's dog, so that no one discriminate against him/her for their handicap.

Mar 08 05:07 PM

[The Pragmat...:]

Changing M2M is a non-issue. Changing the rule is like not opening your account statements. It doesn't change the fact that these assets are severely depressed and could remain depressed for years to come.

Changing the rule is a clever way of hiding the problems the banks have. What we need is for the banks to deal with their problems NOW rather than encourage them to continue riding out the storm hoping that their cancer cures itself.

This is more of the Japan syndrome. We need to deal with the problem rather than continuing this ridiculous approach of hoping things recover.

If the market rallies sharply on this change it will be nothing more than the greatest bear trap ever and will create a superb shorting opportunity for those who know that the bank's balance sheets are as impaired as they've ever been.

Mar 08 05:14 PM

[abcde_98:]

Re "Mad Hedge Fund Trader" comments:

1. The Swiss hedge fund manager who says we entered a bear market in 2000? I think that hedge fund manager got his info from the same source as RBC Global Asset Management who indicates we are in a "secular bear market which started in 2000. Secular bear markets last about 18 years".


2. S&P index valuation. P = Earnings x p/e we all agree on that. About 6-8 weeks ago, investment community was anticipating Earnings of $50 to 60 for the S&P500 companies, and anticipating a p/e more towards the norm of 10 to 15.

IF we take the maximum of those anticipated ranges we get S&Pindex = $60 earnings x 15 p/e = 900.

Quick aside: many insurance companies indicated when they reported Q4 numbers, that they assumed the S&P500 would AVERAGE 900 to 950 in 2009.


Now the reality: actual p/e = 8.03 and Earnings i could not locate but let's, conservatively, say are $55.... then we are at S&P500 index = 55 x 8 p/e = 440

Based on the actual results, sure seems the S&P can go lower from 700. Insurance companies which sell Variable Annuities and assumed 900-950, whoa, it sure seems they have under-estimated the AVERAGE for the year.

Mar 08 08:19 PM

[dondon:]

You say this news of the congressional meeting is old therefore the stocks affected already have been priced accordingly. If that is how the market works then why did several stem cell stocks explode the day after Obama took office and explode again when it was announced that Obama would reverse Bush's stem cell rule. It was known by everyone that Obama would overturn Bush's ruling yet the stocks moved only after certain events occurred. I think that the day of March 12 will bring a jump in financial stocks just as Obama's stem cell reversal moved the stem cell stocks.

Mar 08 09:12 PM

[Stock Marke...:]

I do have to chime in Prudent Man. That headline is not mine. Seeking Alpha changes the headline of your story as they see fit. I had a headline that said "1000% ROI In One Week?"

I don't like when they change the headlines so much because most of my opening paragraphs relate to my headline, but not the one Seeking Alpha makes up.

You can see my headline at stockmarketsage.com


On Mar 08 12:07 PM Prudent Man CFA wrote:

> Which prediction? He has one a day. I hope he saved his NFL pay.

Mar 08 09:35 PM

[Tas1974:]

For all those who object to the modification of Mark to Market I must ask, did you also object when the current version of Mark to Market was unleashed on this market in November, 2007?

I have just a few comments regarding Mark to Market.

First, if our banks are reporting BILLIONS of dollars in losses for loans on United States of American real estate then something is truly wrong with the regulation. Have you been to Russia? I'll take Florida real estate, as an investment, in a heartbeat.

Second, the current version of Mark to Market only makes our "short term" focus on quarterly earnings reports even more short term. I would suggest a 10 year moving average be used to value real estate on the banks balance sheets.

Third, we reward companies that have predictable earnings reports. This Mark to Market craziness makes predictable earnings almost impossible. The day before end-of-quarter a "distressed" sale of assets could take place causing billions of dollars in losses overnight.

Finally, its easy to see how this method of accounting will continue to drive the world's markets into the ground. It creates a very certain negative feedback loop that will not end. This loss of value in all tangible things is something the world is not prepared for. If our companies can lose 60, 70, 80 , 90 percent of their value in a matter of months then what is the dry cleaner down the street worth? What is your car worth? What is your house worth?

Sadly, one of our greatest exports to the world was our ability to raise capital and manage money. I'm guessing those days are over.

Mar 08 10:31 PM

[bigloser:]

To me this seems like suspending the law of gravity...I wonder if my bank will accept my non-M2M house value for a refi?

Mar 09 10:58 AM

[momomiester:]

Your forgetting the shell shocked factor. You really think with this administration and how they change midstream anyone is going to buy Citi or any of those assuming something is going to happen? They have been crushed and major institutions can't gamble that event is going to happen. So does mark to market get pulled? Who knows. It is out there but nothing is a done deal in this market so it is a sweat gamble.

Mar 09 11:19 AM

[H. T. Love:]

On Mar 08 01:57 PM abcde_98 wrote:

><snip>

> M2M is an emotional item being made into a scape-goat, and is not
> the cause of the situation, it is just the rules for presenting financial results.

However, it is possible that it is flawed. That is, it forces reporting which *may* not match reality in some/all/most cases. As a reporting device attempting to correct past deceptions, maybe the pendulum swung to far in the other direction? I seem to have heard that is a typical reaction to everything in the market. I don't really know, but just positing.

> Only way it gets suspended is on politics which seems
> to be against Obama's theme of cutting through red-tape, etc.

Counting on Obama's theme? Hmmm, "no earmarks" (the 8567 so far are "last year's business" and so don't count).

Right.

>
> This appears to be more hype than of substance. There goes more
> tax-payer money on involving and debating with Congress.
>
> The technology exists for quick referendums with voting rights available
> to all people. Why not use it on issues such as bailouts? So much
> time/money/GDP wasted by politicians.

Good suggestion except that it goes counter to the goals of TPTB (The Powers That Be). They *never* want to give power to others. They only do so when forced to by circumstances. Their goal is always accretion of more power.

HardToLove

Mar 09 07:01 PM

[paultheprofit:]

Come on people let's get it CORRECT...these TWO are BOTH WRONG...

""Correction to first paragraph above:

Abolishing the M2M is like taking away of a blind man's dog, so that no one discriminate against him/her for their handicap."""

What you should say is: Let's BLIND a man and then GIVE him a DOG!

Now that's the CORRECT way...

Mar 09 08:35 PM

[thannagan:]

Remeber, accounting (like economics) is an extension of philosophy, not physics. Whether it attempts to represent earnings performance or asset value, accounting is nothing more than a highly complex and concocted opinion. M2M isn't per se a necessarily correct or particularly accutate method of denoting asset value. This is similar to the false hopes associated with the convolutions of Sarbanes Oxley, whcih has done little to improve the quality of earnings reports - other than to diminish them by the added expense of "compliance". There is nothing sacred about M2M. It may or may not be better than other methods of, or opinion of, asset valuation. What the stock market does tomorrow is even furhter removed from the hard sciences.

Mar 09 10:25 PM

[ArtfulDodger:]

Getting rid of MTM at this point will probably not help much immediately, but will some later.

If the government had done this in January, I believe it would have helped quite a bit.

Mar 09 11:06 PM

[Stock Marke...:]

Oh well...

Today's headline..

SEC Not Planning Suspension of Mark-to-Market Accounting: Reuters (breaking news)

Mar 10 09:15 AM

[jason_fund:]

Sold my FAS for a 56% gain in 2 days. Not bad. Not bad at all.

Mar 11 09:42 PM