10 March 2009

Mark-to-Market Trading Opportunity?

This Thursday, the House Financial Services Committee will hold a hearing on mark-to-market rules, which are credited with exacerbating the deterioration of the banking sector's balance sheets.

Jon Najarian suggests going long FAS, the 3X-Bull Financials ETF ahead of the hearing. I did just that last week based on the early word on revisiting mark-to-market, as well as the grossly oversold state of the financial sector.

Here are a couple of CNBC videos covering this topic and trade:

This fine blog from the L.A. Times pointed out some of the industry firepower pressuring Congress to back off mark-to-market:

31 industry groups and financial institutions called for "immediate action" to halt the "spiral of accounting-driven financial losses."

In other words, end mark-to-market as it is now broadly applied to the banking industry.

The letter’s signatories included the American Bankers Assn., the Independent Community Bankers of America, the Mortgage Bankers Assn. and the U.S. Chamber of Commerce.
From the letter:

"Let us be clear, real economic losses should be recognized and are necessary for orderly markets. However, the recognition of losses that do not have a basis in economic reality is unsustainable in any environment. Appropriate changes in mark-to-market accounting should not wait until mid-year or year-end. This will only allow the spiral of accounting-driven financial losses to continue."

Andrew Snyder at Today's Financial News is skeptical of the long-term benefit of suspending mark-to-market, but he does recognize the potential short-term trading opportunity, which is all with which I am concerned:

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.
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.

Inner Workings
is another blog with some interesting analysis in favor of junking mark-to-market.

Finally, Trader Mike reviewed today's lackluster market action and is decidedly pessimistic about mark-to-market sparking much of anything:

The banking sector had a rare good day but that wasn’t enough to keep the entire market up today. While the S&P 500 made an inside day — a sign of a possible reversal — the Nasdaq made a new low. Volume dropped way off on both indices and the VIX barely budged, so those looking for panic were left disappointed today. The market is very oversold (T2108 is way down at 5.97) but it’s been lacking any positive catalysts to get buyers interested. Perhaps the mark-to-market hearing later in the week will do the trick… but I’m not holding my breath.

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