4/2/09 (Buy Banks, what accounting standards?)

Traders,

Whip-saw – G20 rally party? I heard the “Buy the rumor, Sell the news!” about going into the G20 meeting – don’t know what to make of it. Obama has got a up-hill battle on the Pro-Stimulus vs. Enforce/New Regulation that Europe is purposing. However, they all took a lovely photo before the meeting – would love to be able to sit in. Protesting was a little crazy – but nothing unexpected.
So now what?
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Get long bank stocks?

Ok – I don’t make recommendations – but we are facing some interesting problems – to free up the credit markets.

Geithner wants his Public/Private auction of bad assets to work. But according to an article in the Economist this week – many banks may not want to sell them at the prices that buyers are willing to pay – because it means permanent capital losses and no upside. It seems that the Geithner plan may never get off the ground or gain any real traction.

So what to do? How about changing the Accounting Standards and giving the bank the ability to market the value of their assets more subjectively – instead of to market prices. Bloomberg and other news agencies have reported this will artificially boost the results of bank earnings by as much (or more) than 20%. But did they REALLY make 20% more or is this just more window dressing?

The other day Huffington and Frank went at it on this subject on CNBC. Huffington rightly said – it’s watering down the rules. Especially if the bank and regulator are able to make more subjective observations instead of market values. Frank – who is a big supporter of lowering the standards was huffing and puffing – completely upset.

While Europe at the G20 meeting is pushing for stricter measures and enforcing regulation, we on the other side of the pond want to inject more money and lower the standards. In the Economist article http://www.economist.com/finance/displaystory.cfm?story_id=13382201 it states the banks still have some serious loans on the books and it questions the value of these loans ($3 trillion) that are on mark-to-market values.

So what next - how about Barney Frank’s new and improved Mark-to-MODEL? It looks like we may be moving in that direction as early as today. These rules coming into affect we could see HUGE returns on bank’s balance (please ignore the man behind the curtain).

Banks rallying in the pre-market (new mark-to-model rules ?)

For a little tongue-n-cheek, Samantha Bunker’s article describes it well – here are a few snippets:

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Right now, the FASB recommends a mark-to-market practice for a majority of financial assets.But Congress wants to mark to model — because that’s what ailing banks want.

Bloomberg offers the take from former Lehman Bros. managing director, Robert Willens: “By letting banks use internal models, instead of market prices, and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20%.”

We note that the April 2 changes will apply to first-quarter financial statements. So I’m assuming that means all the recent earnings announcements will head back to the SEC for restatements in the hopes of attracting new suckers…I mean shareholders. Such a ruling would allow Citigroup to cut losses by 50-70%. Of course, this rule change threat has been afoot since late 2007, but the rush is on as our can-do Congress takes control.

It’s all about swinging those net losses into net gain territory come hell or high water. (Fargo, N.D., for one, is drowning under the Red River as I write).

The industry rhetoric always ends in a rousing “just say no to fire-sale prices.” Funny, I thought Wall Street had an awfully large conflagration going upon which Congress and Treasury are eager to throw more cash. (Well, I’d rather they burn through decimal places than burn books, I guess. But I don’t see the FASB quenching these
flames.)

Newton’s Third Law: For every action, there is an equal, opposite reaction. Chances are you heard that an awful lot in grade school, and have seen this reality break up many a marriage.

Well, in the case of the FASB, Congress, and the bold new plans coming out of Timothy the Timid (who stood firm as a lion on his recent Meet the Press junket), we are left with a big naught.

You see, the new age of mark to model that Congress asks the FASB to inaugurate runs directly opposite to what Geithner fixes to do for the banks. Geithner wants to allow banks to sweep this trash from their balance sheets (and onto our Treasury’s and those of “private” investors tempted in yenta-like matches — whose prospects may be read in that famous attempted union of Citi and Wachovia. If you’ll recall, Wachovia fled at the altar for Wells Fargo).

Right now, fair value is determined by marking these assets to their market price once a quarter. Is that really so much to ask? The sally from the banks is always the same: Some of the banks will hold these assets to maturity, which could be 10 years down the road.

The model, on the other hand, is only the most mathematical guess where the market will be in 10 years. There’s just one flaw. Even holy Goldman doesn’t know the future, and no matter how many ex-execs it puts in public service, we’ve seen it can’t MAKE the future.

When the math guys, fondly called “quants” — short for “quantitative” — modeled these derivatives the first time around, their calculations indicated what would happen 99% of the time, when there would be some measure of profit, and neglected the other 1% of the time, when losses would be catastrophic.

Obviously, Congress would do better by putting a ban on all “black swan” events. But most important of all, some banks could be freed from tapping the government bailout if mark to model rules the day: Wells Fargo, M&T Bank, U.S. Bancorp, and PNC Financial.

For edification, I leave you with a quote from Wells Fargo’s own CEO, John Stumpf: “If you’re a pessimist, there’s a lot for you to like about 2009.”
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Read the article in full at: http://www.whiskeyandgunpowder.com/tomorrow-mark-to-model-returns-with-a-vengeance/
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ECB cuts rates!

The ECB cuts less than forecast - as expectations (or should I say “hope”) that the EU would follow a similar U.S. Fed policy of quantitative easing – that doesn’t seem to be the case. The rate was cut by only .25 point to 1.25% - which is sending the Euro and Pound rallying against the dollar. Expecations were for atleast 50bps and some analyst thought it maybe as large as 75bps – as expectations that the EU wanted to ease the burden as recession hits home.

The debate remains whether to follow the U.S. Fed plan to ZERO interest rates – but the EU is taking baby steps – they have seen what it has done to Japan and their lost decade. While the U.S. argues that lowering rates would bouy the stock market as investors will look for returns – the EU points to Japan and sees that even with interest rates set to ZERO the market continued to fall.

Everyone awaits to hear Trichet at a press conference as to what the ECB plans are and IF there is going to be more “stimulus” type loans. For now the ECB has not taken the steps that the U.S. had hoped for – we wait for Trichet and what he has to say – a monkey wrench could be tossed into the center of this G20 meeting.

Dollar falls against Euro and Treasuries sell off sending the 10 year yeild up – I guess Bernanke will have to come in and buy some more.

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BUY / SELL / HOLD?

Earnings are starting – so what are the firms saying? (from bloomberg)

Abbot Labs (ABT): RAISED to HOLD from SELL by Citi

Amazon (AMZN): CUT to Equal Weight from Over Weight from Barclays

AutoZone (AZO): CUT to HOLD from BUY by Citi

Black & Decker (BDK): CUT to Underperform from Neutral by Credit Suisse

BlackRock (BLK): CUT from Conviction Buy by Goldman

BlackStone (BX): RAISED to Outperform by Credit Suisse

Goldman (GS): RAISED to Outperform by Credit Suisse

Morgan Stanely (MS): Rated Neutral by Credit Suisse

Pepsi (PGB): RAISED to BUY from Hold by Deutsche Bank

Dr. Pepper/Snap (DPS): RAISED to BUY from Hold by Deutsche Bank

Pulte Homes (PHM): CUT to underperform from neutral by Credit Suisse

KB Homes (KBH): CUT to underperform from neutral by Credit Suisse

MDC Holdings (MDC): CUT to underperform from neutral by Credit Suisse

MGM Mirage (MGM) was on the ropes and looked like bankruptcy was in the cards – but it looks to have a second life as buyout firkm Colony Capital is in discussions to help complete the funding of the unfinished CityCenter project in Vegas – stock is up.
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Futures Pre-market

The futures are rocketing following massive gains in Asia and Europe – however the ECB cut (less than expected) has brought the futures off their highs. The spreads are in – expect ARB traders to short futures to buy the basket at the opening. Expect a gap up in the market at the opening.

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Support / Resistance

We are playing ping-pong from day-to-day and intra-day. We are waiting to see IF anything comes of the G20 and also more jobs data.

INDU 7500 / 7750 – 8000 (We closed right at the 7750 with 7930 being the recent top before coming off. We could revisit that resistance area. Expect resistance at 8000)

NDX 1200 / 1280-1300 (We recently broke into the 1280 area last week – 1300 will be some resistance.)

SPX 800 / 835 (Many eyes are on the 800 and 835-850 level – watch the close.)

RUT 400 / 450 (We haven’t gotten all the way down to 400 or all the way up to 450 – but we should visit one or the other soon.)

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Gold 900+ (We saw if fall from 950 and it looked like it could of headed to 900 – but now with the ECB cut are we to get a slight rally?)

Silver 12+ (Flirting with 13)

Oil 50+ (We just broke down below 50 as people were saying that demand had fallen – now they say demand is raising – and oil is back above 50 – get it straight people.)

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Conclusion

People and talking heads are spinning out of control – one side says it’s the bottom and we are now in a bull market – the other side says we are heading back down. Congress is playing again with accounting rules, G20 is playing ping-pong with regulate vs. stimulate, the ECB is wondering if it should follow the U.S. Fed, and talking heads from day-to-day say oil demand is down – oh wait – no it’s up!

Frankly – I don’t think ANYONE has a clue what is going on and it’s all shooting from the hip. That means to me – expect more knee jerk moves – up and down. Yesterday was a crazy example of that down 150 up 150. We are seeing some serious intraday volatility and ranges – as well as short covering rallies that rush in last second.

It’s like herding cats.

Expect more volatility – but don’t buy into the bull or bear market idea yet – just expect more big up and big down days for now.