Reggie Middleton on the latest Mark to Market Rule Changes...
A lot of people have been asking my about my opinion of the latest M2M rule changes. Well, I find it to be a travesty that political pressure and corporate lobbying can actually change the way accounting is done. Note, I say it is a travesty, but not a surprise. I should be grateful, though. This actually means that I should be making more money as people will undoubtedly have significantly more problems evaluating companies due to the ADDED LACK of TRANSPARENCY! Hey, more people for me to sell puts to.
In an earlier posting, I made clear that the lack of transparency should bring down the valuation of the entire sector, for when in doubt, devalue - hiding market values and permanent impairment losses does nothing if casts significant doubt. Yes, there will be a momentum trading pop, but I am a longer term investor, and I see these companies being devalued as guys like me start to punch holes in them. Even more profound is that I will not be able to make macro calls on 32 stocks to drop as accurately as before (see the Doo Doo 32), but when I do hit my target, it will be the motherload. The reason, well before the FASB political travesty that just happened, institutions had to move "other than temporary" impairments from the balance sheet to the income statement and take a loss for it. Now, they no longer have to. It was bad enough before, since the impairments that they did take weren't very accurately marked down to market. Now, there's no telling what kind of fairy tale numbers will be thrown at us. There is one thing for sure, though. Many (outside of my blog's paying subscribers, of course) will not see a company's collapse coming until they actually feel the impact of the debris slam against their cranium! FASB has effectively removed the warning signs for everyone who does not have a team of forensic CPAs and CFAs who have no conflicts of interests. In other words, just about 95% of the investment population!
Mark to Market will do nothing to aid the economic values of banks and financial institutions. Cash flows are cash flows, and losses are losses. Calling a loan a performing asset (in lieu of a non-performing assets) does not make the borrower pay his bills! As a matter, it very well may damage economic value of the companies in question due to the warped compensation system therein. For instance, many companies will not act in the best interests of the company and raise capital due to its dilutive effects when share prices are low and costs of capital are high. The alternative is that they risk running undercapitalized, which they now have considerably more freedom to do thanks to the punks pundits at the FASB. Management will receive higher bonuses due to higher per share performance metrics when compared to what they would have received had they went the safer route and diluted, but they run much, much higher risk. If, or more accurately when, the stinky brown mushy stuff hits the impeller blades, splat!!! Corporate implosion, ala Bear Stearns, Countrywide, IndyMac, Lehman Brothers, WaMu, etc. style. Let it be known that I warned on all of these companies months ahead of their implosions (save IndyMac).
Hey, if you catch HIV, and then call all of you political friends, and coerce, threaten or make love to the members of the Medical Boards to change the nomenclature of virus to that of a dermal rash, it does absolutely nothing to extend your lifespan or alter your medical condition. The most it will do is allow you to fool yourself or make it easier for you to pass the disease along to others as you tell them it's just a rash (while still remaining within the confines of technical veracity) as you infect them and put their lives in danger. Just keep that in mind when evaluating the financials under the M2M rules.