It takes more than two to make a trend.  JPMorgan Chase & Co. (NYSE: JPM) yesterday (Thursday) became the second major U.S. investment bank – following Goldman Sachs Group Inc. (NYSE: GS) – to this week report windfall profits for the second-quarter. That’s helped fuel a four-day advance in U.S. stocks that’s seen the Dow Jones Industrial Average surge 7%.

Unfortunately, these two decidedly positive developments don’t necessarily indicate that better days have arrived for the U.S. banking sector.

To the contrary, many analysts – including Money Morning Investment Director Keith Fitz-Gerald – say these profits are merely a mirage created by an obscure accounting rule that allows banks to transform “toxic debt” on their balance sheets into income.

JPMorgan, the second-largest U.S. bank, said that that second-quarter profits were $2.7 billion, a jump of 36% from a year ago and 27% from the

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Accountants are changing the rules governing most of the shadow banking system and almost no one is noticing. About 10 days ago the Financial Accounting Standards Board confirmed that by year end “securitization accounting” will be different and the changes are likely to have a bigger effect on financial institutions than mark to market accounting. The new accounting rules will make it much harder for financial institutions to count securitizations as “off balance sheet” transactions and will reconsolidate, i.e., put onto the balance sheet, a large number of transactions that are currently accounted for as off balance sheet.

When financial institutions securitize assets and elect off balance sheet accounting treatment they are pretending that neither their securitized assets nor their related secured debt exists. Like a deadbeat dad denying paternity, securitization accounting is designed to avoid admitting responsibility by securitization sponsors.

Most securitizations are a form of secured borrowing executed by

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Highlights include JP Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp. (BAC).Apparently there is no limit to the arrogance and sense of entitlement at the nation's largest banks. From today's Wall Street Journal we get this:"Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves. Banking trade groups are lobbying the Federal Deposit Insurance Corp. (FDIC) for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program (PPIP). PPIP was hatched by the Obama Administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets."Let's recap a bit. Banks make a ton ...

We highlight Citigroup, Inc. (C) and JPMorgan Chase & Co. (JPM). FASB Changes Rule for Qualifying Special Purpose Entities (QSPEs) The Financial Accounting Standards Board (FASB) yesterday gave final approval to accounting rule changes that will require the companies to bring their off-balance sheet assets onto their balance sheets. FASB release can be seen here. The FASB rule-change affects the so-called Qualifying Special Purpose Entity (QSPEs), which are generally off-balance-sheet entities that are exempt from consolidation under the current rules. The new standard eliminates that exemption from consolidation. The approved standards will be effective as of the beginning of 2010, and will apply to existing qualifying special purpose entities. QSPEs played an important role in the financial crisis, as many banks used them to hold more risky securities without having to disclose the details or to provide adequate capital for the potential ...

Boy, the government is smart. We bet even the great illusionist David Copperfield couldn’t have pulled of a trick quite as intricate, quite as convincing.

Since their March lows, bank stocks, as measured by the Philadelphia Bank Index (BKX), have risen 126%. But aren’t these the same banks that investors sold off in panic back in September of 2008? And don’t they still have the same toxic assets rotting on their books?

The answer, bizarrely, is yes. Nothing has changed at the banks except investors’ perception of them. Of course, the banks, aided and abetted by the Department of the Treasury, the Financial Accounting Standards Board, the Fed and the other failed regulators at the FDIC and the Office of Thrift Supervision in charge of the fudge tests, have sprinkled as much fairy dust in faces of investors as they can get away with.

Starting with a ‘leaked’ memo proclaiming a return

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Well, the gold chart looked pretty bleak very early Friday morning…with gold touching the $880 level in London as I turned my computer off from writing Friday’s rant. I must admit that I turned the computer back on about lunch time yesterday with some fear and trepidation, but was pleasantly surprised that the price I’d seen last night [just before the London a.m. fix] was the low tick of the day. From there it worked its way a few dollars higher…right into Comex floor trading in New York.

But a tiny attempt to run to the upside into positive price territory, that started just before noon Eastern, ran into another not-for-profit seller about an hour later. From there, gold sold off quietly into the close of electronic trading on the Globex. According to the usual New York commentator, estimated volume was 50,990 lots with a switch effect of 7,874 contracts.

Although it

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Tuesday afternoon’s closing bell on Wall Street didn’t just signal the end of the trading day. It also rang in the start of first-quarter earnings season.

Alcoa (NYSE: AA) had the ominous and unenviable task of being the first of the Dow Industrials to step up to the plate. And like a tubby first baseman who’s spent the winter off-season shoveling down junk food, Alcoa swung and missed. Badly.

Already waddling around with debts of more than $10.5 billion, America’s largest aluminum producer reported further loss of half a billion dollars for the quarter (59 cents per share), as sales plunged by 41%. As a sign of how hard the recession has bitten the company, it compared to net income of $303 million (37 cents per share) in Q1 2008. It was the company’s first consecutive quarterly losses since March 1994.

The news wasn’t a surprise. As the recession squashes aluminum

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“The crash has laid bare many unpleasant truths about the United States. One of the most alarming is that the finance industry has effectively captured our government”, says Simon Johnson, a chief economist with the International Monetary Fund in 2007 and 2008. In an article entitled “The Quiet Coup” in the May, 2009 issue of the Atlantic magazine he (with James Kwak) goes on to say that “if the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform and if we are to prevent a true depression, we’re running out of time”.

America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are …

There are signs of both a potential market recovery (the beginning of a larger bull rally), and signs that this recent 20%+ run-up was nothing more than a bear market rally.

The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out.

Bull Market Rally Scenario

The move that we have recently seen, i.e., 24.82% in the Dow Jones Industrial Average ($DJI), 26.82% in the S&P 500 (SPX), and 28.26% in the Nasdaq (COMP), from the lows made in early March to the highs made just 4 weeks later, suggests a larger move could be in store.

For one, it's generally believed that a 20% rise

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Yesterday, the market appeared to love that the Financial Accounting Standards Board (FASB) would ease its guidelines on "mark-to-market" accounting. While we do think the effect has the potential to benefit financial institutions over the interim, the "hows" and "whys" of the change cheapens our entire system of accounting standards. Moreover, the effectiveness of FASB and other independent bodies to remain independent from political strong arming sets a bad precedence.

Markets do not function as smoothly during a financial crisis. As such, the benefits for mark-to-market accounting that the financial institutions received during good economic times have now reversed, forcing them to take big losses, albeit we suspect temporarily.

The new mark-to-market guidelines were designed to allow the "toxic assets" to be "fairly valued" to reflect current market conditions, thereby creating an "orderly" sale, rather than a forced or "distressed" sale. This should make it easier for companies to

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