Reality vs Fantasy

FN: The broader markets are stretched to the upside of their ranges. A move above 830 on the S&P 500 could flip the trend from DOWN to UP.

The current battle is a big one. The market threw a bit of a party in anticipation of the FASB mark-to-market vote. The vote came in this morning. As expected the rules will be 'relaxed' and 'significant judgment' will be allowed in the valuation of assets 'held to maturity'. (I'm not sure if the asshats holding these assets have any judgment...)

It is important to understand that the FASB decision does not change what really matters: CASHFLOW.

A bank holding toxic assets does not like what they would fetch on the open market. The market price is (mostly) the present value of EXPECTED future cashflows. For example, the market price of a particular mortgage reflects that fact that while it is CURRENTLY paying, it will stop in three months. The way the banks are now going to value that same mortgage is quite a bit different. They will categorize that mortgage as a 'hold to maturity' and since the mortgage is still throwing off cash as intended it will be valued at par (or something ridiculously close to par) INSPITE of the fact that everybody knows that it is very probable that the mortgage will cease payments sometime in the near future.

The effects of this decision will be fleeting. They have to be because it does not change what really matters.

FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update1): “The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. FASB approved the changes during a meeting in Norwalk, Connecticut.”

FN: Meanwhile in the real world job losses continue to mount. The unemployed will continue to default on their mortgages, car payments and credit cards. It will not matter what kind of ‘significant judgment’ is applied to their debts. In the end, when all is said and done, the market will mark them to reality.

While battles between Reality and Fantasy are almost always epic, Reality always triumphs.

U.S. Initial Jobless Claims Rose by 12,000 to 669,000 (Update1): “The number of Americans filing unemployment claims unexpectedly rose last week to the highest level since 1982 and those staying on benefit rolls jumped to a record as companies kept cutting jobs to trim costs.

Initial jobless claims swelled by 12,000 to 669,000 in the week ended March 28, topping 600,000 for a ninth straight time, after a revised 657,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls soared in the prior week to 5.73 million.

Another Labor Department report tomorrow may show the jobless rate in March rose to the highest in more than 25 years, reinforcing concerns that the economy will continue to bleed jobs as companies reduce output. Less employment and slowing incomes may thwart a rebound in consumer spending, setting back prospects for an economic turnaround in the second half of 2009.”