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INM September 2011 - What You Can Believe In
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
Mark-to-market accounting is not a topic of frequent discussion at the dinner table in most households, but everyone has been impacted by the unexpected economic ramifications of well-intended changes to the mark-to-market rules companies must follow. Investors might feel reassured if they believed that the markets were better regulated today than before, and if they believed that all publicly traded companies were fairly and fully disclosing all important financial assets and liabilities. Unfortunately, for all of the trouble and pain they have endured in recent years, and despite the light that has been shed on the industry's dealings, investors are still somewhat in the dark about potential troubles still lurking.
Following the controversial and destructive implosions of companies like Enron and WorldCom, policy-makers and financial industry regulators scrambled to make adjustments aimed a protecting investors from companies' tricky accounting maneuvers. In its day, the Enron bankruptcy was the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the collapse of Lehman Brothers and Washington Mutual in September 2008).
Former Federal Deposit Insurance Corporation Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially the requirement for banks to mark their assets to market, particularly mortgage-backed securities. This accounting rule requires companies to adjust the value of marketable securities (such as the mortgage-backed securities (MBS) at the center of the crisis) to their market value. The intent of the standard is to help investors understand the value of these assets at a point in time, rather than just their historical purchase price.
On April 9, 2009, FASB issued an official update to FAS 157 that eased the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses while paying large bonuses to their executives. Few have made the direct correlation with the timing of this new standard and the closely coinciding March 2009 bottom in US equities, however it may just be coincidental timing, again.
PICTURED: The weekly graph of the S&P 500 Index illustrates when changes were made to "mark-to-market" rules near key turning points.
Some today are increasingly concerned at the unknown extent of a handful of leading financial firms' looming liabilities following the "recovery" which has been widely publicized. Last week Citigroup Inc (C), Bank of America Corp (BAC) and JP Morgan Chase & Co (JPM) each reached lows that they have not seen since April 2009, Goldman Sachs Group (GS) hit lows not seen since March 2009, and Morgan Stanley (MS) hit lows not seen since December 2008. The market hates uncertainty, and apparently the tide is rising in a sea of uncertainty right now that is consuming the financial sector. History has proven that the action in the financial indexes is usually a reliable leading indicator for broader market averages. A financial industry that is hard to believe in directly translates into a stock market that is hard to believe in.
BELIEVE IN YOU
It's true: You do your best when you have encouragement. So to do your best you become your own coach and cheering section, changing each thought of "I can't" to "I can." You should give yourself appropriate rewards when you have succeeded in releasing losing positions that have weighed your portfolio down for a period of time. Celebrate your freedom. Whenever you forgive yourself for a setback, you are setting yourself free from thoughts of self-criticism or self-blame. Then you are able to start again with renewed energy and optimism.
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program. Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.
The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.