Market Watch – Mar. 10, 2009 – Financial regulatory system change gives futures a boost. Eyes and ears on Bernanke!

Today Federal Reserve Chairman Bernanke will address the Council on Foreign Relations to discuss ‘overhauling the U.S. bank regulatory system’.
[link to www.google.com]

The key point to listen for is any hint from Bernanke that suggests relaxing the of mark-to-market accounting. In other words look for him to grease the skids for this Thursday’s 10:00 AM congressional house subcommittee meeting where they will discuss this issue.
A couple of posters in yesterday’s thread discussed this subject. Here is a good take at what is at stake.
[link to www.todaysfinancialnews.com]

Many investors want to get rid of mark-to-market accounting rules. Sure it will create a one-time trading opportunity. But in the end, it will only make things worse and could cost us all a lot of money.
If you think last week was a big one for the banking sector, this week could blow your mind. The catalyst will come at 10:00 a.m. this Thursday when a House subcommittee meets to discuss the near-term fate of mark-to-market accounting rules.

If the recent surge in calls for temporarily relaxing the market-regulating rules gains traction, we could easily see triple-digit share price gains at some of the nation’s most prominent banks. After all, without mark-to-market accounting, many banks could re-write their balance sheets. Assets that were once written down to nearly zero could be given just about any valuation.

Unfortunately, that is where the trouble and the opportunity lie.

With current accounting standards, banks must account for their assets, like bundles of mortgages and risky loans, at today’s prices. But nobody really knows what today’s prices are. After all, nobody is buying anything. That means banks have been forced to write down many of their least-liquid assets to nearly zero, the only price they know they could get.

But if the accounting rules are suspended, oh boy, banks could value those same assets at just about any price. Because there is no liquid market, finding a true fair price is nearly impossible. If a bank says its mortgages are worth six trillion dollars that is the price its balance sheet will portray. It will not matter if those same assets are listed as just a million dollars of value today.

Investors want to suspend mark-to-market accounting because it will lift valuations by huge proportions. As soon as the regulation is lifted, corporate accountants can start adding multiple zeros to all sorts of assets. And of course, those zeros would find their way to share prices.
With just one change in regulations, investors would go flooding back into the financial sector and send the equities market surging. It would make Washington look like the savior it has promised to be.

The end of economic trouble?

Of course, the gains would only be temporary. Before too long, the newly created bubble would burst and things would start crashing down once again. Even worse, investors would have no way to tell how accurate the new figures are. Without mark-to-market rules, there is nothing stopping a company from flat-out lying about its valuations. Enron’s books would look like a little, white lie.

Remember, mark-to-market is merely an accounting rule. It simply tells us how to price things on corporate balance sheets. It does absolutely nothing to represent cash flows. If banks are not able to rake in the kind of revenue an investor would expect from the newly created balance sheet figures (which is certainly going to be the case with the huge level of foreclosures and loan defaults), a revision in the law will do no good.

An accountant’s books are supposed to be a window into a company’s true value. If we paint a pretty picture on that window by lifting current accounting regulations, the same ugly scene will lie behind the glass.

If Congress starts to show ambition to change current mark-to-market accounting rules, be ready for a major charge in the equities market. But be ready to sell at the top. The gains will not last long. This is a temporary fix at best.
The only way to get out of this mess is to let the free market do its magic. Washington will keep trying to find an instantaneous solution. But we all know it will never work.
This week’s action may create some trading opportunities, but long-term investors should be wary of making any major moves.


There you have it folks! They did not like the way this bubble turned out so the rules will be changed and presto we have our new bubble or in this case the false rally so many of you have been calling for.

Forecasting a closing figure today is tricky. No hints at the subject material from Bernanke and the opening bell rally fizzles out. Hints at said subject material and watch the market take off. Given this dynamic I will post two projected ranges.

Today’s projected closing range:
Hint at mark to market change - 6750 to 6850
No hint at mark to market change - 6490 to 6590