Tuesday, March 10, 2009

Citigroup, uptick and mark-to-market rule the day...

This rally has held up well so far, but I think the end of the day will be interesting. One only needs to look back to yesterday or Friday to see a sharp intraday reversal as big investors aim to be flat (ie, own almost nothing) overnight. If you've been lucky enough to get a 30% gain in Citigroup today many traders will see that as a win and may sell out before the markets close. Alternatively, people on the sidelines might see this as the beginning of a big bear market rally and rush to get in before the close. The last 30 minutes will tell the story today.

One question I've had today is "What exactly did Citigroup say that fueled this run?".

Here is the link to the full disclosure to the SEC....

"In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion."

Importantly, this speaks to the operations of Citigroup. I don't think that anyone is concerned that their operations are losing money. The market's concern lies with the assets on their balance sheet and future charges that my come from the balance sheet. Many of these charges won't be incurred until the end of March.

The second little pop to the rally today came after Rep. Barney Frank suggested that the government might re-institute the uptick rule as a way to stop people from shorting a falling stock. Many studies have been done to indicate that this has little real value but it gave the "let's rig the system" crowd something to cheer about.

Finally, the mark-to-market bashers have been out making the rounds lately and that seems to be getting some traction again. Without getting too detailed, mark to market says you must value an asset at its market price today - not what you think it's worth - but what someone will pay. No one had a problem with Mark-to-market accounting when asset prices were soaring over the past decade, but when they fell suddenly it became an archaic rule that needs to be washed off the books.

Mark-to-market is one of the key principles of accounting and removing it will false hope in the financial sector. For a really good analysis of the mark-to-market issue see John Tanny's piece at realclearmarkets.com.

Thanks to all the visitors today from wwnytv.com and newzjunky.com

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