01 April 2009

Portfolio Changes - Swinging from FAZ to FAS

The financials were bid up over the last two trading days, much to the chagrin of my FAZ position. I unloaded the remaining shares of FAZ at $20.075, from a cost basis of $29.52, for a loss of 32%. That's what I get for getting cute and trying to swing trade flat-footed against the trend.

With the sale of my FAZ shares, I swung over some of the proceeds into FAS, buying shares at $5.745 and $5.85, for a cost basis of $5.79.

In support of my swing trade from short financials to long...Barney Frank, Chairman of the House Financial Services Committee, wants to retroactively change mark-to-market accounting rules:

A key lawmaker on Tuesday said he would support allowing banks in some circumstances to recoup losses they have already taken due to controversial mark-to-market accounting rules. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support a procedure for firms to make the case that they have been forced to take losses on assets that they are holding to maturity. Mark-to-market rules are an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset. Frank said he would talk to the Securities and Exchange Commission about a rule change.

Casting doubt on my swing trade idea, Joe Weisenthal at Clusterstock thinks the financials will sell off after the mark-to-market announcement:

After trading down in the morning, the major financials are all solidly in the black today. Supposedly, there's enthusiasm over tomorrow's likely relaxation of mark-to-market rules.

Citigroup (C) is up over 5% and Bank of America (BAC) is up over 3%.

One trader we talked to thinks this is a classic buy-the-rumor-sell-the-news kind of deal. You've got retail investors who think a major change is coming, but after it's over, investors will realize there's no there there.

And this evening, Marketwatch joined the chorus singing the sell-on-the-news tune:

For weeks, investors have been expecting regulators to change accounting rules that would allow banks to recoup some losses already taken on illiquid mortgage assets, making Thursday's official decision by the Financial Accounting Standards Board almost a nonevent, analysts said.

But those high expectations are setting the market up for a big disappointment if rule makers actually balk at making changes.

"There might be a little bit of a positive reaction, but the move in stocks has already taken place as regulators already said they were considering changing the rule back in early March," said Fred Dickson, chief market strategist at D.A. Davidson & Co.
But "in the event they recommend no changes, we could see a sell-off," Dickson said.

Guess I'm bucking the analysts' conventional wisdom, this time. Maybe I am just a mere retail investor.

For some technical pros, and one con, click on the annotated chart below:

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