Bank Stocks Up, Perhaps a Wee Bit Early

Headlines, to include Ben Bernake’s statement and expectations for Thursday’s U.S. House Financial Services Subcommittee on potentially revamping the mark-to-market accounting rules, today helped to stimulate a better than 30% inter-day movement in the shares of Citigroup (C), as well as positive price movement in other financial entities, including, but not limited to, Bank of America (BAC), JP Morgan (JPM), Comerica (CMA) and State Street (STT). We suspect financials could experience lift through this Thursday.

But to paraphrase Hans Solo and Yogi Berra --- While Citigroup's share price movement is “Great, let’s not get cocky." The share price was basically at a penny stock level. This economic downturn is far from over, and unfortunately “it ain’t over, 'til it’s over.”

We suspect the trajectory of the economic downtrend has begun to shift from a parabolic downward angle, but the economy could be poised for a hard, but safe, landing.

Earlier today, Federal Reserve Board Chairman Ben Bernanke made several statements: 1) that major financial institutions would not be allowed to fail given the fragile state of financial markets and the global economy; 2) the continued viability of systemically important financial institutions is vital to this effort until the banking system recovers; 3) a sustainable economic recovery will "remain out of reach; and 4) a fresh approach to the regulation of financial markets.

Therefore we would expect the government to throw more money at the problem rather than requiring all parties to remain fiscally responsible.

This Thursday, the U.S. House Financial Services Subcommittee will be holding a hearing on whether or not to modify or make temporary adjustments to mark-to-market accounting (an approach which values financial assets at current market values, even if markets are engulfed in hysteria and diverge from an asset's obvious intrinsic worth). The result of any change could instantaneously alter a financial institution's balance sheet for the better from, at least, an accounting standpoint. The valuations of billions of dollars of assets would result in a financial institution's accountants modeling or pulling out of thin air what assets would be worth, by not relying on current market prices. (By the way these would be the same accountants with the same models that predicted home prices would never fall, subprime was an infallible investment, and 30-to-1 leverage was a good thing.)