Citi, Uptick and Mark-To-Market

Published on March 11, 2009

Citi, Uptick and Mark-To-Market

March 11, 2009

So we had it finally. The pressurized spring bounced back and shorts were pressed against the wall to cover. Fantastic rally by all means, it was easily qualified as a 90% Upside Day on both the NYSE and the NASDAQ that too on expanding volume. Market breadth was also much more impressive during yesterday’s rally. I had never thought (Probably Vikram Pandit as well) that his letter to Citi (C) employee can spark such a massive global stock market rally. In fact there were 3 things of note yesterday.

  1. Citi CEO’s letter.
  2. Reimpose the uptick rule (An untick rule is a securities trading rule used to regulate short selling in financial markets. The rule mandates, subject to certain exceptions, that, when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected or at the last sale price if it is higher than the last different price) and
  3. Possible “Improvement” to “Mark-to-market” rule

All good till it is not. We’ll find out later if y’day was a bottom and this bull has legs to run or Bears just released ground for a technical rebound from deeply oversold levels to set stage for next down leg.

Coming back to Dow, the short term buy signal expects it to move further up, and once it crosses 7,286 (round it off to 7,300), the low that Dow registered on Oct 9, 2002, the next logical resistance level will be 7,470. We need to see if Bulls has what is takes to penetrate that level with sufficient degree of confidence as demonstrated by volume.

Last year, I made a remark (for fun) that you can probably resolve all the credit crunch by simply “relaxing” mark-to-market rule. And many thought and still think this could pose moral hazards, etc. Here is what Reuters reports-

Rep. Frank also echoed earlier comments from Federal Reserve Chairman Ben Bernanke, who called for “improvements” in mark-to-market regulations, rather than suspending them.

What is mark-to-market accounting? Mark-to-market is an accounting methodology of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments. There are other methods to value like Mark-to-model. Thus, the method you use to establish values for your aseets particularly affects shareholders’ equity. [Shareholders’ equity (SE) = assets (A) – liabilities(L)] That, in turn, has an effect on a bank’s profit and loss statement. And in the current market where asset prices are drifting lower, day after day, it’s eroding SE, in some cases making the institution insolvent when A<L.

So, suddenly, with a stroke of change, balance sheets of major troubled institutions are “improved”.

And the impact of news was amazing, sparking a huge rally in the financials and giving traders great opportunity to play SKF (down 25% or US$62!!) and SRS ( down 26% or US$25). A great day to play those, of course for those who can handle these as it requires more than normal stock trading skills. You may discuss these at InvesCafe or stay in touch with me to know when I play these.

What do you think? Will these changes improve the global economy? Do you think now there are better days ahead for financial sector and is it time to get in?

Trade Carefully, Trade profitably, OP

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