Mark to Myth

by Larry Levin

The market was an early roller coaster today, and then turned into a rocking chair - some action, but not much. The S&P opened lower on the bad employment news and found some buyers. However, those early buyers were taken out with a strong smack down to the 817.00 level where it finally made the low and then it was off to the races. After the violent reversal, the major indices settled into the rocking chair for the rest of the day: the market churned for four solid hours into the close.

The early gap lower was actually caused by a double whammy of bad news. The weekly unemployment and factory orders data were real stinkers. New jobless claims jumped far more than expected last week in an already miserable labor market.

The Labor Department reported this morning that the number of newly jobless workers seeking benefits rose last week to a seasonally adjusted 626,000, from the previous week's upwardly revised figure of 591,000, which makes it the worst since October 1982. The latest total is far more than analysts' expectations of 583,000.

As a proportion of the work force, the number of people receiving unemployment benefits is at the highest level since August 1982. But that doesn't include an additional 1.7 million people receiving unemployment insurance through an extension of benefits (up to 33 additional weeks beyond the normal 26 weeks at the State level) that Congress approved last year, which brings the total to about 6.5 million! Said another way, the government is cleverly underreporting unemployment by at least 35%.

Factory orders fell for a 5th consecutive month.

This terrible news was quickly forgotten when the government manipulators ramped up the rhetoric and caused the reversal. Today it came from Chris Dodd, the Senate Banking Committee Chairman. You know, he's the guy who refused to believe that FNM and FRE had to be reigned in. He's the guy who would get visibly angry if someone suggested greater controls on the housing market. He's the guy who got a "special deal" form Angelo Mozillo at Countrywide - the poster boy for horrible lending standards. In Countrywide these sweetheart deals were referred to as FOAs, or Friends of Mozillo's. I guess the Chairman of the Banking Committee, that looked the other way during the housing boom, just happened to be a FOA.

Yes sir, ole' Chris Dodd didn't see anything wrong at all. But now that the fit has hit the shan, he has the answers. He will allow banks to go back to their obfuscations and outright mendacious balance sheets.

Mr. Dodd wants to remove the mark-to-market rule that forces the banks to mark their loan portfolios to the market price. You know what it's like; if you buy a stock at $100 and it drops in a week to $50, it is only worth $50. Although you may believe it will be worth $100 again by the end of the year, that doesn't matter, it's only worth $50 today.

It works the same way with banks today. Their toxic assets are worth what the market will pay for them, which is hurting their business. Tomorrow (metaphorically speaking) they may be allowed to mark them to whatever level they like, which is why I call it mark-to-myth! If this corrupt Senator, Mr. Dodd, gets his way, the banks will surely mark the value of their assets to 100%.

Will you be able to remark your $50 stock back to $100? Will you be able to remark your whole portfolio say to the high of 2007, or 2000 for your technology stocks? Of course won't be able to do that, you're not a friend of Dodd (FOD).

Moreover, will this accounting gimmick be able to change bad loans to good? Will this make your CDOs, CDO squared, MBAs, CLOs etc, make like Lazarus and rise from the dead? I think not!

Those that argue for the accounting change gimmick say that it will stop the need for more bank bailouts. I can't argue that not throwing good money after bad into the banks is a good idea and could be persuaded to support it but only if; ALL of the executives at each of these firms are fired, ALL of the boards of directors are replaced, and off balance sheet shenanigans are never again permitted under any circumstances. Off balance sheet BS should now and forever be illegal.

Next Monday we will get more news. The Treasury's new man at the helm, the tax cheat, will unveil his plan to save the banks in particular and the economy in general. I hear Mr. Geithner's plan makes it legal to cheat on your taxes. He's going to call it the Daschle deduction.

Previous Day's Trading Room Results:

Trade Date: 2/5/09

E-Mini S&P Trades*
(before fees and commissions):

1) Pivot (S1) buy @ 8:50am at 820.50 = -1.75 (1 lot)

2) VA sell @ 9:40am at 828.75 = b/e (1 lot)

3) Engf sell @ 10:15am at 835.75 = b/e (1 lot)

4) *** Three trades were not filled again today - all big winners.

5) Algorithm positions (2)...combined SofT and Algo total...-3.25


Electronic (YM) Mini-Dow:


1) No trades today



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