Still Headed Higher... Thanks FASB
Tuesday, March 31, 2009 at 03:07PM MARK TO MARKET ACCOUNTING CHANGES
Could the wheels be coming off of the bear market rally already? It’s certainly possible, but I think it’s more likely that either late Monday…or certainly sometime on Tuesday we will begin to see the markets head higher again. Here’s why:
MARK TO MARKET ACCOUNTING CHANGES!
The rally will be dependent on the financials ability to continue in their recovery. The BIG positive for the financials is the proposed change in the mark-to-market rules.
Banks are holding their breath that the mark-to-market rule changes proposed by FASB under Congressional mandate will be approved, and it looks like they won't have to wait long. The rule changes would suspend the mark-to-market rule for "assets in distressed markets" and widen the definition of "temporary impairments" of troubled assets. This would allow banks to write-up the value of bad assets and remove the additional capital requirements the TARP/TALF were created to solve. This could eliminate the need for the TALF in all but the worst-case situations.
This rule change, if it is approved, is expected on Thursday. The FASB issued the proposed rule changes two weeks ago after Congress grilled FASB officials and almost demanded the changes be made. There was a two-week public comment period, which ends on April 1st, a fitting date for changing the accounting rules to allow the results of this financial crisis to simply be ignored. Not accounting for them doesn't make them go away, but it may cause some temporary bullishness in the markets.
FASB has already said the changes would be effective immediately, even prior to the full board approval on April 2nd. This pre-approval allows banks to make adjustments in their financials before they report earnings for this cycle. The vote is technically in Q2 but the pre-approval directive in March allows it to be applied to Q1 financials so earnings for the financial sector this quarter could show quite an improvement. Even though the improvement is just on paper it's liable to create quite a positive buzz as the financials typically lead the rest of the markets higher.
So…the actual economy is still on the ropes and this Friday's unemployment report is liable to prove it…in the meantime traders have been putting money to work and the financials could easily catch fire once again if the accounting rules are relaxed…and to make sure things are nice and dicey the markets are totally due for a pullback after a whopping 25% gain in just three short weeks.
Kip Herriage
Editor, VRA
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