Today's 200-Point Rally Seems Light, Actually

What, me sounding bullish? Yup.

Today's jobs number is old news that had long ago been priced into this market; I firmly believe the sole reason behind today's move is the possible announcement on Monday of changes to current mark-to-market accounting rules. Truly, it is hard to overstate how big an impact such a change would have on banks.

A snippet on what may be coming:

Accounting rules may also be changed as part of the package. After a Senate Banking Committee meeting Tuesday, Dodd said an accounting regulation that some bankers and lawmakers complain is a key contributor to the financial crisis might need to be temporarily changed or restricted. The rule, known as mark-to-market, requires corporations to adjust the value of their assets four times a year to reflect the fair market price. However banks have been apprehensive about determining the value of illiquid mortgage backed securities on their books. SEC officials did not return calls. (source)

In summary, Steve Forbes said it best the other day: essentially, banks can't lend today because if they portfolio those loans (as opposed to securitizing them, a well which has obviously run dry), in most cases they take an immediate write-down due to having to mark-to-market in today's climate.

Not only would suspension of that rule allow for a dramatic upward revaluation of the so-called "toxic" assets currently on their balance sheets, but it would allow them to start lending more freely again, something the political left has been screaming about.

With $1 Trillion in excess banking reserves currently in the system-- a thoroughly unprecedented number-- the economic implications are enormous.

Now, there's certainly a chance that Tim Geithner won't get it right on Monday, that he'll announce some silly half-measure that misses the mark on this issue. Still, it seems pretty risky to me to be short financials going into the weekend given the possibility of this change. And personally, I sold FAZ and bought FAS this morning on the announcement, a complete 180.

A long-term fix? Doubtful, especially with all the costly legislation stacking up in D.C.-- today's real "toxic assets"-- but in the short-term the market itself could see a big pop, as could the economy if some of those excess reserves piled back into the system (with particularly bullish implications for hard assets).

Stimulus, shmimulus. In the short run, at least, it's all about Geithner and what he says on Monday.