Rules Keep Changing: Mark to Market

... 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.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc

Comments:

I have stated frequently that the Government (Congress) keeps changing the rules. This time, the board that governs accounting rules (Financial Accounting Standards Board or FASB) has changed the Mark-to-Market Rules.

It will take effect as early as 2Q/2009, it will give more flexibility on valuations, and it will use cash flows and not distressed markets.

This "solves" the question of "how do you value assets that are unmarketable. This benefits the banking sector.

This now means more work for you and I as an investor. We now need to do even more homework in assessing the health of a bank.

Other Notes:
On a positive note Changyou.com issued an IPO and rose 25%. This illustrates that
1) the market has an appetite for new issues, and the market is depressed partially on the bank lending problems.
2) if the banking system resumed lending, innovative companies in a healthy industry will be able to tap the debt market.

Long GME. Long ATVI.

Long RIMM (No position). Here was my writeup on RIMM before earnings were released, and before RIMM rose +20% in after hours trade.

Game Playing In Your Portfolio
Hot Stock: Activision Blizzard IncGame Stop reported a same store sales increase of 10.2% in December. During the 2008 holiday period, total sales were $2,856.0 million, a 22.3% increase from the prior year of $2,334.6 million.

This is significant. Sales for consumer goods declined in December. On a relative basis, computer and console gaming products were healthy. A number of key products from Activision in particular made the top sellers list:

Call of Duty: World at War
Guitar Hero World Tour,
Blizzard Entertainment's World of Warcraft

In the chart I posted above, the stock is at a cusp of rallying. Downside risk is still at $8.10 in the short-term. But the upside is $11.91. If I were a consumer who had the choice between dressing comfortably in ragged clothes among friends dressed the same to play these games, or shopping for clothes and high-end goods when I expect prices will keep falling, I would choose the former.

When the company reported its results in November, the numbers were healthy. I expect this to remain the case for the current quarter.

My short-term target price for ATVI is therefore $11.91, a potential 32% return.