Archive for May, 2010

Do as I Say, Not as I Do

“Be smart…but don’t pay attention to me.”

Watching Goldman Sachs (GS) executives sweat it out under the hot lamps of Senator questioning makes for gripping television (see Goldman article), but as we all know the ethical standing of a significant number of politicians calls into question whether the pot should be calling the kettle black. Ever since I was a kid, I was told by seemingly responsible adults to “do as I say and not what I do.” I suppose the Goldman execs should follow the advice of Congress, but not their actions.

Based on a recent Wall Street Journal article that studied the investment activity of Congressional members (and spouses) during the financial crisis, the analysis discovered 13 of them were betting against the market. Just as Goldman  and hedge fund manager John Paulson partnered to bet against the housing market via shorting synthetic CDOs (Collateralized Debt Obligations), Congressmen and their spouses were wagering against the market through the use of debt loaded (leveraged) exchange traded funds, which  integrate derivatives.

Were any of the Congressional investment activities illegal?  Likely not, but some question the ethical appearance of such behavior. The former head of the House Ethics Committee and past Representative Joel Hefley of Colorado believes such conduct “doesn’t look real great when the economy is tanking and people are blaming the government.” Facing similar challenges, the SEC’s (Security and Exchange Commission’s) squishy fraud charge complaint against Goldman Sachs is expected to encounter significant difficulty in proving the investment bank’s guilt.

Source: The Wall Street Journal (Yellow Dots = Shorting Exposure Trades)

Other politicians were critical of Wall Street too, despite apparent hypocritical behavior. For example, Representative Shelley Berkley of Nevada chided Wall Street for its reckless activities. “No casino on the planet behaves as irresponsibly and recklessly as Wall Street does. Wall Street ought to be ashamed, and take a lesson from the casino industry.” Nearly at the same time, Shelley’s husband Lawrence Lehrner placed 57 bearish trades.

I find it very amusing the same politicians shredding apart the Wall Street firms are in many cases the same politicians stretching the bounds of ethical behavior. Various politicians do a great job pontificating about the latest shortcomings of the financial industry, but fail to take some accountability for missing one of the greatest real estate booms of all-time. Where were the regulators and politicians when the debt bubble was bursting? Unfortunately, “reactive” is a much larger part of a politician’s lexicon than “proactive.” Responding to populist fervor is easier than leaning against consensus views, even if going against consensus makes more strategic sense.

For those having difficulty in deciphering the advice given by esteemed Congressmen, just remember to “do what they say, and not what they do.”

Read Full Wall Street Journal Article

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in GS, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 5, 2010 at 12:41 am 2 comments

Earnings Showing Speedy Growth

With approximately 2/3 of the S&P 500 companies reporting, Thomson Reuters is reporting not only are 78% of those companies beating analyst expectations, but they are also beating them by a large margin (~16%). The financial sector is still rather volatile and is distorting comparisons, but if you look at the non-financial sector, profit growth is on pace to grow +35% this quarter as compared to +18% last quarter. Earnings are not the only thing growing…so are revenues. After four quarters of revenue declines, sales are on track to rise +11% this quarter (versus +8% last quarter) thanks to almost 80% of the S&P 500 companies reporting revenue growth (rather than declines) in the first quarter of 2010. 

Source: The Wall Street Journal

Signs of Employment Improvement

Unemployment at 9.7% remains stubbornly high, but with corporation’s newfound revenue growth, there are signs companies are becoming more confident in the hiring department as well. Typically the sequence of a business cycle follows the pattern of cutting expenses and increasing layoffs into a recession; building cash at the cycle trough while running leaner expenses and staff; improving productivity with capital expenditures and technology purchases before hiring; and then as the recovery firms up, companies enjoy widening margins with sales growth, resulting in the confidence to hire. Take for example JP Morgan (JPM) mentioned they plan to hire 9,000 workers in the U.S. this year and Intel (INTC) another 1,000 new positions.

Growth is Global

With all the headlines about Greece’s financial woes, one might underestimate the recovery abroad as well. The average earnings growth rate estimates for the G6 stock markets is +41.6% and +21.9% for 2010 and 2011 according to Ed Yardeni, but a majority of the growth is not coming from the Euro zone.

There is still no shortage of issues to worry about, assuming we understand a Utopia does not exist. Besides elevated unemployment, other issues to remain concerned about include: a lack of credit accessibility for small and medium businesses; massive government debt and deficits; and diminishing impacts in the coming quarters from government stimulus and Federal Reserve monetary stimulus.

Regardless of the nervousness, evidence continues to build for a continuation of better than expected earnings. The music will not last forever and eventual stop, but until then, our economy will enjoy the speedier than anticipated earnings growth recovery.

Read Whole Wall Street Journal Article on Earnings (Subscription)

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in JPM, INTC, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 3, 2010 at 12:59 am Leave a comment

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