Wednesday, December 31, 2008

Another Nice Day, But For Now Do Not Read Too Much Into This Year-End Action

One of the worst years in market history ended on an upbeat note. Even with the positive action today, I doubt there are too many folks who aren't happy to see 2008 in the rearview mirror.

While the action was favorable today, it is likely that there was some very aggressive window-dressing and end-of-the-year positioning taking place. Volume was quite light, but there were some very strong moves in groups such as banks and oils as well as some individual stocks, particularly some small-caps. This action looked more manipulative than carefully considered accumulation, but that is the nature of trading when we are at the end of the year.

The important thing is to not read too much into the action we have on a day like this. It just isn't a good indicator of how things will play out in the next few days.

I want to wish everyone the very best for the new year. I know the market has been miserable for many, but this is a great time to put that behind you and start fresh. I'm really hoping 2009 is not only a prosperous but a joyful year.

Tuesday, December 30, 2008

A Traditional Holiday, Monthly, Quarterly And Year-End Mark-Up Day

We finally had a little more typical holiday type trading today. It was still quite choppy and you can tell that confidence levels are quite low, but breadth was good all day and there was some obvious window-dressing type action. We had another crazy spike in the final hour of trading, but at least there wasn't a huge whipsaw.

After the year we've had, traders are not feeling a high level of trust. They are being opportunistic especially when it comes to these final hour games, but at least the bias was positive today.

After the close, I'm seeing some big blocks cross the tape. General Electric, for example, has a 4.4 million share block crossing at 15.82. That is to be expected this time of the year but can cause some unexpected moves.

Tomorrow we are likely to see some more of the same, but typically a lot of the big window dressing and year-end adjustments are done before the last day so it's not too blatant. Don't expect too much logic and you'll be fine.

Monday, December 29, 2008

A Frustrating Market, But It Could Be Worse - Or, You May Want To Get Used To This Action....

Even though we did have yet another late-day bounce, it was very blah day of trading. Breadth was better than 2 to 1 negative, even though we did have strength in oil and commodity-related stocks due to the fighting in Gaza. Other than that, there was a lot of poor action on thin trading, and anyone looking for typical seasonal strength was disappointed.

The market has three big problems, which are related to some extent. There is little confidence, there is no leadership, and there is too much random action in the last hour of trading. When you combine those three things, it creates a lot of frustration and keeps market players on the sidelines. The only cure for this is time. We simply have to be patient until conditions change and there is more hospitable trading. The attitude right now is, "We'll wait until next year."

Friday, December 26, 2008

Mortgage Market's Gains Stick

One of the most important developements of the past month has been the stabilization of the mortgage market, which was spurred by the Federal Reserve's Nov. 25 announcement of a plan to purchase $100 billion of agency securities and $500 billion of mortgage-backed securities.

The stabilization, which is evident in the huge decline that has occurred in mortgage rates, will almost certainly help ease what has clearly been the biggest part of the financial crisis. This is already apparent in the recent jump in mortgage refinancings, which last week reached their highest in five years. Homeowners have been enticed by the 1.3-percentage-point decline in mortgage rates seen since earlier November, with the 30-year fixed-rate now at an average of 5.14% in the U.S., a record low.

Gains seen in the mortgage realm have held in recent weeks, and today's market shows more of the same, with mortgage-backed securities trading higher on the day and rates down about 9 basis points, although today's rates are within their recent trading range.

If 2009 is to be better than 2008, the mortgage realm must stay healthy to both help clear home inventories and relieve strapped homeowners. If President Obama brings forth a plan to spur home buying, a major dent can be made in the housing crisis.

Post-Holiday Trading = Means Nothing = A Motionless Market

If it wasn't for a little bounce in oil, it would've been completely dead out there today. Volume was practically nonexistent. Breadth was positive on the NYSE. However, it was so slow that it doesn't matter much. There is no edge at all when things are this dead.

Frankly, I think this is pretty much a waste of time today. It is too bad the stock exchanges didn't simply extend the holiday like they do in Europe, but I guess the folks who make their money off order flow are going to determine how things are done.

Wednesday, December 24, 2008

Holiday Trading = Means Nothing

We finally managed a little seasonal strength, but it was very modest, and traders obviously weren't being very aggressive today. It is just very difficult to have much confidence in this market, even for shorter-term bounces. The history of the market lately is if you let quick gains slip away, you won't have any gains, so fast flippers are ruling the market right now.

I've heard from quite a few folks who think that we aren't going to see any sort of an end-of-the-year bounce because there is still pressure from redemptions and repositioning. The odds still favor some upside over the next week, but no matter what, it will most likely be a bumpy ride. What I'm really wondering about is the first week of 2009 - If memory serves, the week ending 2007 was benign; then, during the first week of 2008 the selling started and then fed on itself. I'm wondering if 2009 starts the same way. If it does, with relentless selling the first week of the new year, I would think that would be quite an ominous sign.

Merry Christmas and happy holidays. Now is the time to focus on the only investments that you should love for the very long-term: your family and friends.

Tuesday, December 23, 2008

Slow Gooey Churn

Although traders tried once again to get something going in the final hour, each little bounce was met with more downward pressure. The net result was another day of losses. However, probably the most concerning thing is that the major indices failed to hold short-term support levels and are back to the intraday levels from two Fridays ago when the market was surging higher following November’s jobs report.

This time of year is usually defined by some positive action as sellers take a break and traders hunt for pockets of momentum. Unfortunately, given how terrible this past year has been and how consistently those who have chased strength have been punished for their efforts, it shouldn’t be too surprising to see the market unable to get anything going to the upside.

We have a half-day of trading tomorrow, so we expect the session to be completely uninspiring, but Santa still has time for an appearance. Five days of disappointing action leaves room for some action in the opposite direction, but I’d be surprised to see any real progress to the upside in the coming days. I’ll still be looking to see if traders begin moving with some more confidence, but there’s little reason to expect them to change their flippin’ ways.

A Record Drop In Home Inventories - Could This Lead To A Housing Shortage In 2009?

The number of unsold new homes fell by 34,000 in November, the most ever. There are now 372,000 unsold new homes for sale, significantly below the peak of 570,000 in June 2006. The level is approaching normal.

The supply problem is in the existing home market, but the underbuilding of homes relative to population growth will inevitably result in the filling up of those homes, whether through sale or rental -- humans need shelter. I would expect inventories to decline at least 500,000 to 750,000 in 2009 because of the population/underbuilding issue. At least 500,000 will disappear from underbuilding and a further 250,000 (at least) will be sold due to low mortgage rates and incentives from President Obama to spur home buying (4.5% mortgages or tax credits or both).

The math on why this is happening is simple: The construction of new homes has fallen below that of household formation. Housing starts have recently been at about 600,000 annually, which works out to about 400,000 new dwellings each year because many new starts are restarts -- tear-downs and such. Birth statistics and Census Bureau data indicate that household formation will on average run at a pace of about 1.2 million in the current year and immediate years ahead, owing to population growth of about 3.0 million.

This means that home inventories -- new and existing combined -- could fall by 600,000 over the next year, depending on the extent of household formation (it slows during recessions, although it is only a delay in the inevitable -- kids won't live at home with their parents forever and roommates go their separate ways eventually). Shelter is obviously a basic need, which makes the inventory call a bankable top-down theme for 2009.

Monday, December 22, 2008

An All-Day Post-Options Hangover?

We kicked off the first of two holiday-shortened weeks with a perfect example of just how frustrating this market has been over the past couple of months. Despite three days of disappointing action, decent technical conditions and indications for a positive start to the day, buyers failed to step up to the plate early in the day. As the action developed, the indices languished and traders showed no interest whatsoever in rooting around for any pockets of momentum. Moreover, the few stocks that showed so promise right after the bell simply rolled right back over.

However, news that Moody’s had placed AA under review for a possible downgrade sent the market to fresh intraday lows mid-day, and for the next 90 minutes or so, the indices moved sharply lower. But just as we dropped under the lows from 15th, buyers finally made an appearance, triggering a late spike that would allow the market to finish well off the worst levels of the session. These are the exact sort of whipsaws we’ve been seeing for months now that has made dealing with this market so difficult, as it’s impossible to think that stocks are going to behave in any sort of rational manner.

While we were able to hold above support levels, but today’s action was just a reminder of just why it’s not going to be easy for this market to make progress, no matter how favorable the seasonal factors may be. Day traders continue to be in hog heaven, but the action will only get trickier as volume begins to dry up even more. I continue to think that buying a $1.00 for about .90 or so via closed-ends like AOD make alot of sense here.

long AOD

Saturday, December 20, 2008

Choppy On Friday

We completed the last full trading week of the year, and while we didn't get any upside traction, we didn't fall apart either. The action was directionless today with a few spikes that failed and a few dips that were bought. It was random and very hard to trade.

I'm still somewhat optimistic about the way the market is setting up. We have a good base and continue to hold up, but we need a spark to light a little fire. I'm seeing some better charts, particularly in health care and even a few small-caps, but it has been treacherous to hold any sort of size because of the whippiness of the trading. While the overall volatility has slowed and we are in a trading range for the week, the intraday movement is still very hard to navigate.

Next week volume is going to slow quite a bit, and the random movements will likely be even greater. However, the good news is that trading around holidays often has a bullish bias. So even if we are choppy, there may be some upside potential for the quick and nimble.

Thursday, December 18, 2008

So We Get The Options Week Bad Day Today

Although we were holding near the unchanged mark for the entire morning, reports that GE had its credit outlook downgraded to Negative from Stable by Standard & Poor’s pushed the market to fresh intraday lows as the afternoon got under way. The bulls were unable to gain a foothold, and the major indices steadily lost ground for the remainder of the day, finishing the day with losses, on average, of 2.11%.

The so-called defensive areas, staples, healthcare and utilities, were the only sectors to finish in the green, while energy showed the biggest loss on the day as oil continued to fall off a cliff. Meanwhile, the recent momentum groups, including steels, solars, precious metals and shippers pulled back sharply as traders took some recent gains.

Unfortunately, each of the averages are back under their respective 50 day moving averages, but are still above the closing lows from the 15th. We’ll see if the dip buyers will step up to the plate again as we finish out the week tomorrow.

Wednesday, December 17, 2008

Encouraging That Options-Week-Wednesday Was Not A Big Down Day - But Lots Of Churn

Usually options-week-Wednesday is a bad day. But not this time. Although things got choppy mid-afternoon and a bout of selling in the final few minutes pushed the indices back towards the morning lows, all in all it was a pretty good day for the market. Investors stepped up to buy the initial weakness, the averages were able to climb into positive territory early in the afternoon, traders hunted aggressively in some pockets of momentum (including steels, bulk shippers and solars), and both the Dow and the S&P 500 held above their respective 50 day moving averages.

Why in the world should solars trade like they did today with oil down so much, and what in the world is going on with treasuries? – equities are seeing some decent pricing action. I suspect that it has a lot to do with the time of year, and that may be why volume is drying up, but it’s been a while since we’ve seen groups of stocks act well as a whole and do so for several days in a row.

Regardless of the reasons, that’s what the market is doing right now, and even if we don’t put a whole lot of trust in it – okay, we aren’t putting any trust in it – that doesn’t mean we can’t play along while it lasts.

Tuesday, December 16, 2008

Fed Pulls Out The Really Big Guns

Investors finally got an excuse to do some buying today after the Fed delivered a larger than expected interest rate cut. Never mind the longer-term implications of such an unprecedented move – the Fed now has a target range for the Fed funds rate of between 0.0 and 0.25%... just in case you hadn’t heard. Investors are looking to put some lipstick on the pig that the stock market has been this past year and the bears are more than happy to let them have some room in a seasonally positive trading environment.

The big question, of course, is if we can see some follow-through. The market has had such an annoying tendency to reverse moves on a day-to-day basis and to see huge intraday swings that it’s hard to put a whole lot of trust in anything it does right now. That said, the indices have made more short-term technical progress by moving above their respective 50 day moving averages and by putting in another short-term higher high. Meanwhile, there are, for the first time in quite a while, some better individual chart set-ups, and that is encouraging.

We’ll have to see how things play out, but at least in the near-term, things look good for the bulls. They have the ball, and now they just need to run with it. The recent volatility has been very annoying, but it’s not likely that there are many folks out there who are positioned for any sustained strength, and if we can start generating some upside momentum, then that could start sucking in some money off the sidelines.

very soon, we'll be experiencing a housing SHORTAGE of epic proportions

a housing shortage - yes, shortage - is coming. we are building the same number of houses in this country that we were building in 1959. we had 179 million people in this country in 1959. we have 310 million people now.

for better or worse, the fed has been given a green light, via the consumer price index, to take rates down to nothing. the banks should be eager to repossess and sell homes at these prices. not that i want that: i want people kept in their homes. but it is too late for that.

what matters is that supply will not be able to keep up with demand given that build, even with foreclosures. there are just too many households being formed. too many people who need homes. and too few new homes.

don't forget the inventory of homes that are unsold is really going to come down when people realize that they are looking at what they can get and nothing more. at this pace, the homebuilding complex of len, dhi, phm, kbh, ctx, spf and tol cannot be maintained.

it is NOT so low due to prudence. fdic chairwoman bair simply doesn't let defunct banks give more loans to builders. that's why it is shrinking, as the major homebuilders wouldn't know how to stop building to save their lives.

this housing starts number is thrillingly positive for the economy and the markets. it alone is enough to drive the market higher.

Monday, December 15, 2008

For Friday, 12/12/08 And Monday, 12/15/08 - Dip Buyers Helped On Friday And As Usual Disappeared On Monday

The good news on Friday was that the dip-buyers consistently did their thing. The opening gap down following some bad news was bought, and every dip during the day was bought as well, and we went out not too far off the highs.

The bad news is that is continues to be extremely choppy trading. It is very easy to be stopped out if you don't give positions a little room. You can't trade too big or you will get in trouble very fast as this market whips around.

Despite the irritating choppiness of the action, there are some other positives in addition to the consistent dip-buying. Breadth was good, semiconductors showed some leadership, there are some promising charts developing, and I'm seeing an increase in speculative interest. Traders are being more aggressive in certain limited sectors such as infrastructure and metals. They are looking harder to find some action, and that is good, because it tends to broaden out.

It is still quite a difficult trading market, but there will be some pressure for many fund managers to try to put some gains on the books to take the sting out of an ugly year. We obviously are shrugging off the bad news, and that tells us that buyers are anxious to get something going, at least for a little while.

Since these things tend to be self-fulfilling, I would not be surprised to see the S&P 500 attack its 50-day simple moving average, which is around 910. I suspect we can take that out and get a bit more upside going, but I'm not sure that would hold for long. If the bulls are going to get things moving, next week will be their chance to go to work.

As for today, these wild swings we’ve seen recently have made it exceedingly difficult to navigate this market. Although the action was weak for most of the day, things were rather slow, but once again, we had a couple of severe swings in the final hour that took the Dow off its intraday low to the tune of about 150 point in the span of 15 minutes, back down about 100 points in the next 15 minutes and back up about 35 points in the final 3 minutes. In the end, the indices were able to finish off the worst levels of the day, but with losses of 1.37%. Breadth, meanwhile, was worse than 2:1 to the negative, and volume was quite light, which will also help exacerbate the already random action.

Despite the losses and the volatility, this market continues to be in a position to make a decent run into the end of the year. The Dow, for instance, is about 150 points from its 50 day moving average, and tomorrow’s FOMC interest rate decision as well as an earnings report from GS could very well be the catalyst that pushes us past those levels. A strong move past that important technical measure could very well bring in more buyers.

These crazy swings certainly are not supportive of a better market; and oh, by the way, now we've got this little 'ol $50 billion fraud (alleged) to contend with. What a year.

Thursday, December 11, 2008

Now We're Down Again; Let's Blame Dimon

The market got into trouble today by testing the dip buyers once too often.

They have been doing a good job of jumping in every time we pulled back during the last few days; however, the more often we pulled back to support, the less likely that support was going to hold. They would simply run out of juice after a while.

The main catalyst for the breakdown this afternoon was probably comments made by JPMorgan CEO Jamie Dimon. His comment that credit deterioration was probably worse than expected scared off the dip buyers who just couldn't keep on buying the bad news.

The important thing now is that we find support. The key levels starting the day were the highs we hit last Friday following the "buy the bad jobs number" rally. For the S&P 500, that level was 879; and for the Nasdaq, it was 1510.

We ended up closing slightly under those levels and volume wasn't too heavy so it was not a decisive technical breakdown. The bulls can still rescue the situation, but they are gong to need the financial sector to start acting better. Weakness in banks is the big sore spot right now, and they are going to drag down other groups like retail and home builders.

Leadership today was in precious metals due to a weak dollar. The weak dollar was helping to drive oil higher as well, but that faded badly this afternoon. Bonds stayed strong and market players were also looking for some safety in pharmaceuticals and HMOs.

Overall, it was not a good day and we are now in precarious position. The biggest negative we probably have is that too many folks were thinking an end-of-the year rally was a slam dunk. We may still have one, but we need banks to start acting better here very soon.

Wednesday, December 10, 2008

Up, Down, Up, ....

Although we finished the day well off the highs and the trading was very choppy, buyers showed up several times throughout day to give this market some strong underlying support. Things were looking pretty dicey there early in the afternoon, but ‘tis the season for the bears to give the bulls a little room to do their thing. That means that traders will typically go hunting for momentum, and that seems to have certainly been the case as the resource sectors led to the upside once again.

It will be interesting to see how the conflicting influences resolve themselves in the days and weeks ahead. The volatility we’re seeing makes it difficult for investors to feel comfortable not booking their gains where they have them, and that’s going to make any upside progress we see in a seasonally positive environment difficult.

Still, the major indices look to be resting just under their respective 50 day moving averages, so perhaps this is just the type of back and forth action that will prepare this market for a run at those levels. We’ll see how it goes, but even though it won’t be easy, the ball is still in the bulls’ court.

Tuesday, December 9, 2008

Yeah, Turnaround Tuesday Again

Although the bulls tried to put their rally-caps on mid-afternoon, sellers quickly shot yet another bounce attempt down, and the major indices spend the end of the day limping into the close with average losses of 2.19% on breadth that was a little worse than 2:1 to the negative. That said, volume was pretty light, and given the fact that both the Dow and the S&P 500 have essentially waltzed right up to their 50 day moving averages over the past couple of weeks after hitting fresh lows, it’s actually encouraging to see some consolidation today.

I've been thinking that the market may see a decent run into the end of the year as seasonality acts as bear-repellant, and we’re still in a position to see that happen. The averages have put in a higher low and a higher low, and if they can hold here, have the potential to make more technical progress to the upside.

That’s the optimistic scenario. We’ve been down this road plenty of times before, and those who trusted the market to deliver some upside follow-through have been sorely disappointed.

Monday, December 8, 2008

Good Start To The Week

Although they finished off the highs of the session, the major indices kicked off the new week by posting solid gains and moving past short-term resistance levels. By the close, the indices were able to add an average of 3.8% on breadth that was just better than 3:1 to the positive. Financials and materials led to the upside, and while each of the major S&P sectors closed in the green, the so-called defensive areas lagged.

Last week’s encouraging response to a bevy of bad news had put the market in a position to make some technical progress, and this weekend’s announcement of Obama’s stimulus package helped to make that happen. The test, however, will come once we get a pullback. Will investors continue to buy weakness? So many times over the past year, every instance of strength has been used as an opportunity to sell and/or short, and I’ll be watching to see if that tendency changes.

I'm optimistic that we could see some upside follow-through into the end of the year, but that doesn’t mean to go hog-wild.

Suspend Mark To Market Now

Complex policy issues typically require input from experts with different backgrounds and viewpoints. Somewhere there is a decision-maker -- where the buck stops. That person must evaluate the information and reach a wise conclusion. It is no good to have a group of "yes men" who rubber-stamp the viewpoint of the boss.

It is even worse when the boss is missing in action! Such is the case with mark-to-market accounting: For the health of our equities markets, SEC Chairman Christopher Cox needs to wake up and dump this rule now.

A Dash of Background

Scientists on the team typically thought that the right amount of pollution was zero. They favored regulatory approaches to put a stop to polluters and any aggressive action to minimize impacts. Political scientists looked to industry representatives who fought these approaches, with emphasis on jobs and economic impacts. Economists thought in terms of incentives. They looked for approaches that reduced pollution. They thought in terms of an "air basin" that had a certain level of acceptable pollution, seeking to find cost-effective methods to achieve a target.

Policymaking requires an evaluation of differing viewpoints, with a view to the practical consequences.

The Current Failure

A major problem in government reaction to the financial crisis has been the failure to balance the viewpoints of different experts. The nature of our current government structure is to cede important market regulation to an independent agency, the SEC. This insulation is designed to prevent partisan manipulation of market regulation, an idea that is good in theory.

The SEC further cedes accounting authority to the Financial Accounting Standards Board (FASB). This second layer of insulation is also good in theory, avoiding manipulation of accounting rules. In the post-Enron era, everyone wants increased transparency and accurate valuation of corporate assets.

Why This Went Wrong

At the worst possible moment we as a nation chose to alter the way financial assets were evaluated -- through something called FAS 157. We required financial institutions to mark holdings to forced trades in illiquid assets -- mark-to-market accounting.

The most powerful critic of this approach is William Isaac, the former head of the FDIC. His viewpoint is that the entire financial crisis -- the destruction of major financial firms, the huge bailouts, the destruction of retirement accounts, the socialization of private companies -- all could have been avoided with a more measured approach to the needed reducticon in leverage.

This rule could not have been changed by Hank Paulson, or Ben Bernanke, or even by the president, who cannot fire SEC members.

Here is an extended quotation from Isaac's participation in the SEC roundtable on this subject. Participants in this excerpt include Issac, Vin Colman of PricewaterhouseCoopers and John White of the SEC Division of Corporation Finance.

MR. ISAAC: Of course. That's what I'm all about is trying to protect our banking system and our economy, and our investors. Nobody ever talks about the hundreds of billions of dollars that pension funds have lost because of these rules, that my aunt has lost because she had her money conservatively invested in banks that were a stable source for an investor to earn dividends and have values that would creep up. She wasn't a dot-com investor. She got wiped out in banks, a conservative bank, she thought. And that's what I'm concerned about, are the investors. And I'm concerned about our economy and all the unemployment we're going to cause. It's senseless.

We had one hand of the government, the Treasury, handing out capital, just about as fast but not quite as fast as the SEC and the FASB are destroying it with mark-to-market accounting. It doesn't make any sense to me as a taxpayer that these rules are destroying capital and then you're asking me as a taxpayer to spend money to put more capital in banks, to replace the capital that we're destroying senselessly -- not because there are real losses, but because there are paper losses. When you market against some computer model, it doesn't make any sense. We keep on hearing about 35-to-1 leverage. Our banking system doesn't have 35-to-1 leverage? A couple of investment banks did that failed. But our banks are the best-capitalized banks in the world by far, and we're destroying them with these losses that are being run through the income statement that are not real losses. They're paper losses. They may never be realized.

And I want to take back the words "fair value." You can't have those words. You can't own those, because I am for fair-value accounting. So we're arguing about what is fair value, and I'm telling you that I don't believe that marking to a computer model or fire-sale prices based on distressed sales is fair value. Fair value is to take a look at the assets, look at the cash flows on them, look at the probability of default, look at the probable losses if you have a default, and then value those assets.

Let's take the 1980s. I said the money center banks were loaded up with third-world debt, and they were. And if you could sell it, you would fetch about 10 cents on the dollar. If we had made them mark that to 10 cents on a dollar -- which we did not consider to be a fair value for those assets -- if we had made them mark that to 10 cents on a dollar, we had a plan in place that we were going to nationalize all the major banks in the country, because they couldn't have survived that mark.

Now, did you want us to do that? Would that be right for investors? Would that be right for the economy and the country? Did you really want us to put the country into a depression and all the stuff that comes with that? I'd say no. So what we did is we looked at those assets and we said, "What's the income off of them? What's the likelihood there is going to be a default? And what's the likelihood that these countries are going to renounce the debt and never pay it back?" And we factored that in, and I don't remember what we marked them to, but let's say we marked them down 25%, and then a year later we would look at them again and say, "Was that mark OK, or should we mark them down more?" And that's what I'm asking, is that we use some judgment. We let the bank examiners do what bank examiners do best, and we let the auditors get involved in that process as well, and mark these assets to what is their fair, their true, economic value, not some arbitrary value based on computer models. So I have my investor hat on and I have my taxpayer hat on and I have my bank regulator hat on, and I think this is an issue we all ought to care about very deeply. Well, we do care about it, so that's why we're all here.


MR. COLMAN: Tom [Linsmeier] is here from the FASB, but I just want to clarify a more technical point. I mean, first of all, what the FASB and SEC in the press release put out was your comment around agreeing with judgment. I absolutely agree.

We need more judgment in the system. But one of the things that was tried to be clarified in the guidance that was out just recently was the concept of distress sale or distress market. To make it clear that those transactions are not determinative, they are input in the current market. But you should not be writing to distressed values, necessarily ...

MR. ISAAC: But we have been.

MR. COLMAN: ... and, lastly, I just wanted to comment on it again, to repeat maybe from my opening comments, the difference when you said, you know, and then we go to regulators. To separate the accounting and information for financial reporting of an investor to the information that you're giving to regulators for capital purposes, because those discussions get gray and they come together.

MR. ISAAC: OK. Well, let's deal with that, because that's a very important point. I don't understand how you can have applied these rules to a bank holding company that has publicly traded securities, the mark-to-market rules, and then say, "But regulators can do whatever they want with the banks," because when you are reporting that Citicorp (C) , let's say, loses $20 billion in the year, nobody stops to ask, "Well, what do the bank regulators think about that?" And so I don't think that works. And I'm also not trying to hide any disclosure.

I think all the disclosure ought to be there, as it is under the historical cost basis. You have footnotes. You have tables that show all the market depreciations. Anybody can look at it.

I just don't think it's appropriate to mark something arbitrarily to an index or to a market price when the market's not functioning and destroy value, run it through the income statement, and take it out of the capital accounts of the company. Because then the rating agencies pile on, the short-sellers pile on, and they destroy the company.

And it doesn't matter what the regulators think. I don't believe that a regulator would have wanted to close down Wachovia (WB) , but the market was sure closing it down. I don't think a regulator would have wanted to have closed down WaMu, but the market sure wanted to close it down, because of these reports we're forcing them to make about their losses and the depletion of their capital. So nobody even asks what the regulators think.

Isaac is far from alone on this topic. In August I described this as a self-inflicted nightmare. Former Fed member Bob McTeer writes as follows:

While spending and investing billions of dollars -- or is it trillions? -- trying to heal the sick credit markets, the government continues, inexplicably, to ignore the low-hanging free fruit of suspending or modifying mark-to-market accounting. We are hoisting ourselves on our own petard by adhering strictly to accounting rules that unnecessarily threaten to put thousands of viable financial institutions out of business.

Financial institutions will fail, not because of actual losses, but because of rules requiring drastic writedowns of securities that could be held to recovery or maturity because the market for them is temporarily frozen.

What Next?

As part of the TARP legislation, Congress required the SEC to do a study of these rules. This is a 90-day process, dragging on as markets move lower. The result will be announced on the last possible day, Jan. 2.

Meanwhile, by the time many of you read this column, Cox will give the first hints of the SEC's thinking in a speech before an accounting group. He speaks on this topic this morning at 9 a.m. EST. The Wall Street Journal reports in a story today that mark-to-market accounting will remain, according to a source familiar with the matter. The source goes on to say that the SEC will investigate tweaking the rule's application.

This policy will eventually be changed. I predict that the new approach will provide visibility about illiquid assets on balance sheets without actually requiring financial institutions to mark the assets lower. When the change takes place, it will be the single most bullish event possible for U.S. equities.

Friday, December 5, 2008

Bad News Got Bought Today

The bulls were extremely anxious to buy the bad news today. In fact they were a little too anxious to start the day, and that resulted in some of them being trapped when we didn't go straight up after the very ugly jobs report. However, after fumbling around for a while, the dip-buyers got things going, and once we made a new intraday high, the rush was on.

It is obviously a positive that market players are so anxious to add long exposure when the news is so terrible. It certainly lends much weight to the argument that the worst has been priced in. On top of it, we have positive seasonality into the end of the year kicking in, and the charts are looking better.

The biggest negative continues to be this wild volatility. I think the DJIA had an intraday swing of more than 300 points every day this week. That just does not invite prudent speculation. However, the volatility was mostly on the positive side. The bulls were bailed out on every dip, and that should boost confidence.

The primary bullish argument here is that we have priced in the worst. We'll see how well confidence in that assertion can hold as we digest today's jobs report. Nonetheless, the bulls have the advantage and are in good shape to build on it next week.

Thursday, December 4, 2008

Will Stocks Test Their Lows After Tomorrow's Employment Data?

Of course, as soon as the proclamations started hitting about how all the bad news has been priced in and how we have seen the lows, the market sold off hard. Obviously there is a lot of nervousness in front of the jobs report tomorrow, with talk that we could see 500,000 or more jobs lost. That is frightening, and even though we have been buying the bad news lately, traders still want to see how bad it is before they jump in.

On Wednesday the market sold off very sharply as we awaited the Beige Book report. The buyers piled back in as soon as the news hit, and we went straight back up to the day's highs. Many traders are looking for a similar reaction to tomorrow's job report. The only problem is that so many are looking for it.

The good news for the market is that even with the selloff today, we are still holding above the lows we hit on Monday and Tuesday. That level is 815-818 on the S&P 500 and is being watched very closely by technical traders.

I expect some wild trading on the jobs number tomorrow, but I'm feeling optimistic that we may have some decent upside trading into the end of the year, and today's dip actually makes for a better setup as long as we hold those lows.

Wednesday, December 3, 2008

All This Before A Probable Disappointment From The ECB Tomorrow?

The intraday swings in this market continue to be absolutely crazy, but the overall action is quite positive. We shrugged off a bunch of bad news, and the dip-buyers pounded on the sharp intraday drop. We went out at the highs on good breadth, with financials, homebuilders, biotech and chips all making a good shortage.

The most encouraging thing about this market is that we finally are seeing some stocks that are holding lows, building bases and turning up. That, combined with the inclination of the market to buy bad news and positive seasonality, bodes well into the end of the year.

The biggest negative is this crazy intraday volatility. When things swing to such a huge degree, it is extremely difficult to build a position of any size. The risk of a big loss on a quick whipsaw like we saw intraday today is going to prevent the sort of accumulation that supports big sustained upside moves.

Things are looking brighter; let's hope it stays that way after the ECB disappoints us yet again tomorrow (they should cut by AT LEAST 75 bps, but will probably only cut by 50 bps again - still a lookin' for that inflation I guess).

FAS 157

There exists a big problem implementing FAS 157. Like many other critics of the death spiral induced by the implementation of this plan, I strongly embrace market pricing when it generates accurate values.

The problem is that these values do not accurately portray the actual performance of the underlying loans.

Many others have noted the liquidity issues, so my comment takes a different approach.

I hope that the SEC will examine carefully the interaction between trading in the Credit Default Swap market and the resulting marks for "innocent" financial institutions. Some of the marks, including the ABX, are drawn directly from the CDS markets. If these markets are flawed or manipulated, the widespread implications should be considered.

I have noted a pattern of trading. This pattern targeted various firms through the CDS market, included the purchase of put options, and probably included short sales in the targeted financial stocks.

There are two problems:

1) The trading in the specific companies, possibly involving manipulation. I can only observe what I see. The resources of the SEC can investigate this.

2) The implications for "innocent" institutions, whose holdings are marked down, despite performance of the loans and the ability to hold to maturity.

The failure to accurately evaluate assets of financial institutions is a contributing cause for the massive, and possibly exaggerated, de-leveraging in financial markets.

It is possible that these factors have contributed to a misplaced loss of confidence in the entire financial system. The cost to the average retirement investor is enormous.

I understand the principle of mark-to-market, but the implementation must be done accurately. A wise accountant told me that if this had been introduced fifteen years ago, there would have been no problem.

Perhaps it is time to suspend this process while we learn how to do it right.

Tuesday, December 2, 2008

Bounceback, Of Sorts

Although the road between the bells was rocky, in the end, the bulls were able to make a decent stand and regain some of the ground they lost yesterday. Breadth was an acceptable 2:1 to the positive, each of the major S&P sectors closed with strong gains, and most importantly, volume, while on the light side again, was higher than it was yesterday. However, treasuries were up once again, suggesting that investors are still very wary of taking on risk.

It was encouraging to see investor step in after the opening gap higher was sold, and again buy the mid-day dip back towards the unchanged mark. Of course, a lot of that has to do with the reflexive nature of this market lately and the propensity for traders to try and ride these extreme swings. At the same time, though, the news out of GE did give the bulls some ammunition during the day. Good news out of a bellwether stock like that can really give a market something to build on. We’ll see if the buyers can keep it up, hold on to key levels in the averages and start to make some progress to the upside as the end of the year approaches.

Stay patient.

Monday, December 1, 2008

And Now Comes The Post-Holiday Trading

About the only thing positive to say about today’s trading session is that the volume was actually quite light. Other than that, though, the market kicked off the new month on a decidedly downbeat note. Of course, after five straight days of gains on decreasing volume which had taken the major indices straight into overhead resistance, it’s not surprising at all to see some selling, but the absence of any selling pressure last week was replaced by a complete lack of any buying all day long. I for one (stupidly) thought that this cascading - type action in the last hour or so was over. Uh, no.

The action for most of the day made it clear that what we saw last week was nothing more than your standard bear market bounce, but it really started getting ugly in the final hour when the bottom simply fell out. Although, we are still well above the lows from two Thursdays ago, almost all of last week’s gains have been completely erased. Time and price, I guess.