Archive for September, 2008

SEC gives banks more leeway on mark-to-market (Reuters)

Tuesday, September 30th, 2008 | Finance News

WASHINGTON (Reuters) -
U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.

The U.S. stock market added to gains on the news, in hopes that regulators' new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks' balance sheets.

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets.

"This is a significant first step and adds stability, confidence, and liquidity within the capital markets," said Steve Bartlett, president and chief executive of The Financial Services Roundtable. "By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress."

U.S. accounting rule maker, the Financial Accounting Standards Board said on its Web site on Tuesday that it would change the agenda for its Wednesday meeting to focus on fair value accounting. The board is contemplating issuing additional guidance through a FASB staff position as soon as Wednesday, according to a person familiar with the matter.

MARK-TO-ESTIMATE

The SEC's guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.

In a document on the matter, the SEC reaffirmed that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist.

U.S. accounting rule makers assume that the factors used to come up with fair values are based on an orderly transaction between willing market participants. The SEC document said that "distressed or forced liquidation sales are not orderly transactions."

"This guidance will help auditors more accurately price assets that are difficult to value under current market conditions," said Edward Yingling, president and chief executive of the American Bankers Association, whose group has been among several pressuring the SEC to clarify the rules for months.

Under U.S. accounting rules, assets can be valued based on a simple price quote in an active market. But the hardest to value assets are often based entirely on management's best estimate derived from mathematical models.

However, as credit markets seized up this year, many banks were forced to rely on models to value complex mortgage securities that used to trade in more active markets. Critics have complained that accountants forced banks to base their values on fire sale prices in illiquid markets instead of the so-called level 3 input, or unobservable factors, such as the mathematical models used to evaluate their securities.

The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2, or observable factors.

"In essence, the SEC wants to stop the avalanche of declining prices," said Tom Sowanick, chief investment officer at Clearbrook Financial. Sowanick said that the new guidance should allow banks to rely more on their own assumptions when they determine fair value rather than the distressed sale prices occurring in the markets.

But fair value accounting has been popular with many investors who said it greatly increased transparency about the risks banks are facing.

"This letter (SEC document) could be titled, pick a number, any number, as it gives bankers great leeway in choosing what numbers they will give to investors," said Lynn Turner, who served as chief accountant at the SEC from 1998 through 2001.

Others, however, said that the changes have not gone far enough.

In a letter to SEC Chairman Christopher Cox on Tuesday a bipartisan group of more than 60 U.S. lawmakers urged the SEC to suspend the fair value accounting rule immediately.

"Fair value accounting is a utopian dream that ran into the reality of business and litigation," said Chris Whalen, co-founder of Institutional Risk Analytics, which provides ratings and analytical tools to investors.

"Equating an opinion with a market price is crazy," he continued. "It doesn't matter who gives the opinion -- the auditor is still going to say to the client, 'Why don't you write it down?'"

Under U.S. accounting rules, a "Level 1" asset can be marked-to-market based on a simple price quote in an active market. However, the price of a "Level 2" asset is "mark-to-model" and is estimated based on observable market prices and inputs. A "Level 3" asset is so illiquid that its value is based entirely on management's best estimate derived from complex mathematical models.

(Reporting by John Poirier, Emily Chasan, and Rachelle Younglai with additional reporting by Jennifer Ablan; editing by Carol Bishopric)

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Volatile 3rd quarter for stocks ends on up note (AP)

Tuesday, September 30th, 2008 | Finance News

NEW YORK - Investors looking at their 401(k) statements for the quarter that ended Tuesday may be tempted to bail out of stocks entirely.

Who can blame them? With share prices down and daily triple-digit swings in the Dow Jones industrials almost the norm, most everyone would sleep better at night with a smaller stake in the stock market.

First, though, a reality check is in order: By historical standards, the third quarter actually wasn't that bad and not even close to the worst ever. In fact, it's not even the worst quarter of the year.

"Certainly it's somewhat disconcerting. But when you're in it for a long period of time, you don't worry about it as much," said John Doherty, a retired 54-year-old Chicago options trader. He's plowed another $30,000 into stocks in recent weeks and professes not to be worried about what he sees as temporary swings in his investments.

The Dow Jones industrial average fell 4.4 percent in the third quarter, down 499.35 points, a smaller decline than the 7.6 percent and 7.4 percent drops in the first two quarters of the year. The Standard & Poor's 500 index fell 9 percent in the quarter versus drops of 9.9 percent and 3.2 percent in the first and second quarters.

It was the Dow's fourth straight quarter of losses, the longest losing streak since a five-quarter drop that ended in 1978.

The six largest mutual funds — popular homes for many Americans' nest eggs — lost value in the quarter, with five suffering declines of 9 percent or more. American Funds' Growth Fund of America, the biggest with about $179 billion in assets, lost 15 percent.

The final trading days of the quarter show what many investors had to endure. The Dow lost 778 points in Monday's sell-off after lawmakers couldn't agree on a rescue package for the financial industry. Then it surged 485 points on Tuesday on optimism that the rescue package could be revived.

Financial advisers note that those who ditch stocks now, in hopes of getting back in later, are locking in their losses. History suggests those who try to time the market will fail and rob themselves of the chance to share in stocks' inevitable recovery.

But don't tell that to Selina Jarvis of Cranston, R.I. She swapped out all the stock in her 401(k) retirement account for bonds and other less risky investments.

"I'm losing more weekly than what I'm putting in," the assistant supermarket manager, who is in her late 30s, said Tuesday as she walked out of the Coastway Credit Union in downtown Providence. "I wish I did it before yesterday."

Over the past 30 years, the just-completed quarter ranks as the 10th worst percentage decline for the S&P 500. The worst was the fourth quarter of 1987, when Black Monday helped pull the S&P 500 down 23.2 percent for the three months.

"If you look over the quarter, it feels like we should be down 15 or 20 percent," said Chris Johnson, president of Johnson Research Group. "It feels to investors like they're just getting whipsawed around right now."

Not all sectors fared as poorly as the overall market. Airline shares were among the best performers, with most major carriers showing double-digit percentage gains after crude oil fell from its mid-July peak of $147 a barrel. Oil settled just above $100 on Tuesday. American Airlines parent AMR Corp. saw its shares double in the quarter.

Meanwhile, biotech stocks gained ground as investors were enticed by potential blockbuster drugs and multibillion-dollar buyout bids. Amgen Inc. rose about 26 percent for the quarter as investors awaited data on a potential drug to treat osteoporosis.

Uncertainty tugged at Wall Street throughout the quarter. Take one week this month: The Dow fell 500 points on the Monday after the bankruptcy of Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co., and then regained 141 points the next day. Then it dropped 449 points a day later after the government rescued insurer American International Group Inc.

The week ended with a surge of about 780 points on Thursday and Friday on word that the government was cobbling together a financial sector bailout. After all that, the Dow ended that week down only 33 points, or less than one-third of a percent.

Those searching for a stock market bottom should be mindful that such downturns have historically been full of head fakes, strategists say. Even after market indexes do hit their ultimate bottoms, they tend to zigzag violently, rising and then falling close to their lows again before turning back up for good.

During 1998, for example, the S&P 500 bottomed on Aug. 31 at 957.28, down 19.3 percent from its July 17 close. The index rallied strongly over the next month, recouping nearly half its losses. But over the next two weeks, it plunged again to 959.44, just a shade above its bottom, before finally turning back up.

Technical traders call this phenomenon "testing the bottom," and it's happened to some degree every time the S&P 500 has dropped more than 19 percent since 1957, according to S&P strategist Sam Stovall.

Sometimes, when a market seems most bearish, it's actually hit bottom and is about to rally. Take the stretch between March 24, 2000, and Oct. 9, 2002, when the S&P 500 lost nearly half its value. By March 11, 2003, tensions about whether the U.S. would go to war with Iraq meant the index was still down 47.6 percent from its 2000 high.

Amid that gloom, a strategist on March 10, 2003, described an "irrational despair (that) seems to imply that there is no floor to stock prices." But the market finally turned back up, gaining almost 40 percent between March 11, 2003, and the end of that year.

Even if Congress approves a rescue package in the coming days, economists point out that the weak housing market and the credit crunch — the main problems weighing on the economy — remain.

Johnson of Johnson Research Group contends that some of the pieces for a sustained rally are not yet in place. He said investors need some development like the financial bailout or better-than-expected quarterly earnings from companies reporting in October to goad them into putting money into the markets.

"It's as if you had a full tank of gas in your car and no spark plugs," he said. "The cash is all the gas in the tank, but you've just got no catalyst to get that gas moving into the engine."

Johnson's pessimism about the immediate forecast for stocks could be well founded. October has been home to the famous crashes of 1929 and 1987 and pullbacks in 1978, 1979, 1989 and 1997.

At the same time, October has also been the launching pad for market rallies, hatching the turnarounds of nearly a dozen bear markets since World War II, according to Stock Trader's Almanac.

One piece of comfort, according to S&P's Sam Stovall, may be that October has heralded the end of five of the last nine bear markets.

But he acknowledged that today's market looks to be in uncharted territory.

"I don't know if (Monday) was the capitulation low for this bottom, but I do believe that now is not the wisest time to cash out of your equity positions," he wrote in a research note. "I recommend that you just sit tight."

___

AP business writers Stan Choe and Candice Choi in New York, and AP writer Hilary Russ in Providence, R.I., contributed to this report.

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Nasdaq to cancel some late trades in Google shares (Reuters)

Tuesday, September 30th, 2008 | Finance News

NEW YORK (Reuters) -
The Nasdaq Stock Market said it will cancel some of the late trades in Google Inc (GOOG.O), whose shares appeared to plunge as low as 1 cent at the close of North American markets on Tuesday.

A spokeswoman for exchange parent Nasdaq OMX Group (NDAQ.O) told Reuters in an email the "erroneous orders" that caused the abrupt plunge "were triggered by orders routed from another exchange."

She did not say which exchange routed the trade orders, but added the decision to cancel trades cannot be appealed.

Transactions at or above $425.29 and at or below $400.52, that were executed between 3:57 p.m. and 4:02 p.m. EST, would be wiped out, Nasdaq said.

The exchange set Google's closing price at $400.52, up 5.12 percent.

A Google spokesman said the company declined to comment on the trading spike.

Earlier, Nasdaq's surveillance arm said in a statement it was investigating "potentially erroneous transactions" in Google shares.

Canceling trades is rare and often embarrassing for exchanges, which some say are more susceptible to problems as they become more electronic. Nasdaq is an all-electronic venue.

(Additional reporting by Eric Auchard in San Francisco; Editing by Gary Hill and Carol Bishopric)

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