Day Trading Thoughts For Tues. Mar. 10

Discussion in 'Trading' started by erikrkolodny, Mar 10, 2009.

  1. erikrkolodny

    erikrkolodny ET Sponsor

    Mark-to-market accounting utilizes a principle in which a value is assigned to a position held in a financial instrument based on the current price for said financial vehicle. The practice of m-t-m accounting became common among futures traders in the 20th century which eventually spread a bit more universally. In fact, most equities day traders should employ m-t-m accounting as it is advantageous in many ways (no ‘wash rule’ for instance) and allows any positions held at the end of a calendar year to be valued at the Dec. 31 closing price for tax purposes rather than a cash basis which would mean that a swing trader could hold positions rather than sell them if that was his/her primary business. The major disadvantage of m-t-m accounting of course is this: what happens if you have illiquid assets? Think in terms of an inactive stock. If you own 25,000 shares of a stock that averages 600 shares of trading volume a day, the closing price is not necessarily a fair value for said shares of stock because it is highly unlikely you’d be able to sell all 25,000 shares on the bid. That disadvantages notwithstanding, The Financial Accounting Standards Board (FASB) issued a decree via FAS Statement 157 on November 15, 2007 which requires American companies to use the m-t-m method. Ergo, the aforementioned problem of what to do with illiquid assets has snowballed during this financial crisis which has exacerbated the severity of the morass. Thus, if, say, a particular loan/equity has a notional value of 10 (because although hit hasn’t traded in eight months, the last close was 10), they are oftentimes forced to be valued close to zero because nobody knows the true value. Thus, the process of conservative accounting is taken way too far here. The assets may well be worth, say, 7, but they are forced to value it close to zero on the books. This in turns causes more losses for banks which leads to more panic which begets more selling which further impedes a recovery. I bring all of this up not to bore all of you this early in the morning, but rather because this dense concept is very relevant to day traders this week. On Thursday, a US House panel will begin the process of investigating mark-to-market accounting with the goal of striking a balance between correct disclosure and the overwhelming craven need of banks/financial institutions to properly value their illiquid assets. Many industry groups have requested that the SEC modify at a minimum the practice of mark-to-market accounting. Now, it is highly unlikely that the SEC is going to permanently suspend the practice, but understand this much: if the process is indeed suspended for a period of time or modified radically, it will set off a massive short covering rally. Why? Because things on the banks books go from being ultraconservative to as liberal as they can get away with. For instance, in the aforementioned example discussed in this piece, that illiquid issue was not worth 2, but it is not worth 10…yet banks would be allowed to reprice those assets at 10 instead of 2 (even if it is worth 7)! In the long-run, this can only be bad because the assets would have to be marked down anew over time. Yet, in the immediate-term, it makes every financial institution worth more even though nothing ostensibly changed. Thus, what this will do is make every financial equity worth more in the immediate-term as well…short-term benefit, long-term consequence. So, keep your eyes peeled on the March 12 panel meeting along with any Congressional discussions about mark-to-market accounting because these talks will have a direct impact on what and how we trade over the next few days if not weeks.

    Markets in Asia were mixed overnight with Tokyo down slightly, but Hong Kong up 2%. However, sentiment changed when an internal memo from C’s Pandit leaked indicating that C was having its best quarter since the last time the company turned a profit. Now, whether this is real ‘news’ per se is not for me to say, but I can say this: the European bourses are up over 2% on average as of this writing and futures are strong state-side with banks once again leading the charge. Bernanke gives an 8:30AM bulletin today so the market will likely take its cue from that, but overall, if financials are strong, look for the strength to hold overall in a quieter day than in recent sessions. I will emphasize it is pivotal for these banks to hold because if they don’t, the ensuing damage may be darn near climactic today as the financials have been acting better the last two days so the last thing the market needs is for that progress to be impeded.

    Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea.
    If the whole story is not there -
    If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-

    Good- The following stocks have good news and/or a strong technical pattern

    CASY- solid earnings

    USB- closed near a high, but worth noting that banks as a group were relatively strong all day long

    LINC- closed near high of day

    JRJC- posted great earnings

    SPG- very strong REIT yesterday in closing near high of day

    ROH- to be acquired by DOW for 78 in cash

    DUK- on “Mad Money” last night

    banks- as a geneal rule, trading higher...use as a benchmark for the market all day

    Bad-The following stocks have bad news and/or a weak technical pattern

    AVAV- abominable earnings

    TXN- lowered earnings guidance

    WGOV- closed near a new trend low; looking to short thru 8

    JCI- announced share offering to raise capital

    DOW- going through with acquisition; market does not like it in early indications

    GMXR- closed near low after posting terrible earnings

    FDP- closed near low

    ENER- closed near new trend low

    LBTYK- closed near day’s low

    DKS- beat earnings for quarter, but warned on guidance








    Good luck today.

    Erik R. Kolodny
  2. Boise


    Thanks for taking the time to expaine M to M in simple terms. Its not that complicated but most web sites think they are spelling it out for accountants