Posts tagged ‘FBI’

Political Showers Bring Record May Stock Flowers

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2017). Subscribe on the right side of the page for the complete text.

There has been a massive storm of political rain that has blanketed the media airwaves and internet last month, however, the stock market ignored the deluge of headlines and focused on more important factors, as prices once again pushed to new record highs. Over the eight-year bull market, the old adage to “sell in May, and go away,” once again was not a very successful strategy. Had investors heeded this advice, they would have missed out on a +1.2% gain in the S&P 500 index during May (up +7.7% for 2017) and a +2.5% surge in the technology-driven NASDAQ index (+15.1% in 2017).

Keeping track of the relentless political storm of new headlines and tweets almost requires a full-time staff person, but nevertheless we have summarized some of the political downpour here:

French Elections: In the wake of last year’s U.K. “Brexit”, fears of an imminent “Frexit” (French Exit) resurfaced ahead of the French presidential. Emmanuel Macron, a 39-year-old former investment banker, swept to a decisive victory over National Front candidate Marine Le Pen by a margin of 66% to 34%.

Firing of FBI Director: President Trump fired FBI Director James Comey based on the recommendation of deputy attorney general Rod Rosenstein, who cited Comey’s mishandling of Hillary Clinton’s private email server investigation. The president’s critics claim Trump was frustrated with the FBI’s investigation into the administration’s potential ties with Russian officials in relation to the 2016 presidential elections. Comey is expected to testify next week to Congress, where he will likely address reports that President Trump asked him to drop the FBI’s investigation into former National Security Advisor Michael Flynn during a February meeting.

Trump Classified Leak to Russians: Reports show that President Trump revealed classified information regarding the Islamic State (ISIS) to the Russian foreign minister during an Oval Office meeting. The ISIS related information emanating from Syria reportedly had been passed to the U.S. from Israel, with the provision that it not be shared.

Impeachment Talk and Appointment of Independent Special Prosecutor: Heightened reports of Russian intervention coupled with impeachment cries from the Democratic opposition coincided with Deputy Attorney General Rod Rosenstein’s announcement that former FBI director Robert Mueller III would take on the role as an independent special counsel in the investigation of Russian interference in the 2016 election. Rosenstein had the authority to make the appointment after Attorney General Jeff Sessions recused himself after admitting contacts with Russian officials. The White House, which has denied colluding with the Russians, issued a statement from President Donald Trump looking forward “to this matter concluding quickly.”

Kushner Under Back Channel Investigation: President Trump’s son-in-law and senior advisor, Jared Kushner, is under investigation over discussions to set up a back channel of communication with Russian officials. At the heart of the probe is a December meeting Kushner held with Sergey Gorkov, an associate of Russian President Vladimir Putin and the head of the state-owned Vnesheconombank, a Russian bank subject to sanctions imposed by President Obama. Back channels have been legally implemented by other administrations, but the timing and nature of the discussions could make the legal interpretation more difficult.

Trump’s First Foreign Trip: A whirlwind trip by President Trump through the Middle East and Europe, resulted in commitments to Middle East peace, multi-billion contract signings with the Saudis, pledges to fight Muslims extremism, calls for NATO members to pay their “fair share,” and demands for German President Angela Merkel to address the elevated trade deficit with the U.S.

Subpoenas Issued to Trump Advisors: The House Intelligence Committee issued subpoenas to ousted National Security Adviser Michael Flynn and President Trump’s personal attorney, Michael Cohen, as it relates to potential Russian interference in the presidential campaign. Flynn reportedly plans to invoke his Fifth Amendment rights in response to a separate subpoena issued by the Senate Intelligence Committee.

Repeal and Replace Healthcare: The Republican-controlled House of Representatives narrowly passed a vote to repeal and replace the Affordable Care Act after prior failed attempts. The bill, which allows states to apply for a waiver on certain aspects of coverage, including pre-existing conditions, received no Democratic votes. While the House passage represents a legislative victory for President Trump, Senate Republicans must now take up the legislation that addresses conclusions by the nonpartisan Congressional Budget Office (CBO). More specifically, the CBO found the revised House health care bill could leave 23 million more Americans uninsured while reducing the federal deficit by $119 billion in the next decade.

North Korea Missile Tests: If domestic political turmoil wasn’t enough, North Korea conducted an unprecedented number of medium-to-long-range missile tests in an effort to develop an intercontinental ballistic missile (ICBM) capable of hitting the mainland United States. Due to the rising tensions, the U.S. and South Korea have been planning nuclear carrier drills off the coast of the Korean peninsula.

Wow, that was a mouthful. While all these politics may be provocative and stimulating, long-time followers of mine understand my position…politics are meaningless (see Politics-Schmolitics). While a terrorist or military attack on U.S. soil would undoubtedly have an immediate and negative impact, 99% of daily politics should be ignored by investors. If you don’t believe me, just take a look at the stock market, which continues to make new record highs in the face of a hurricane of negative political headlines. What the stock market really cares most about are profits, interest rates, and valuations:

  • Record Profits: Stock prices follow the direction of earnings over the long-run. As you can see below, profits vacillate year-to-year. However, profits are currently surging, and therefore, so are stock prices – despite the negative political headlines.

Source: Dr. Ed’s Blog

  • Near Generationally Low Interest Rates: Generally speaking, most asset classes, including real estate, commodities, and stock prices are worth more when interest rates are low. When you could earn 15% on a bank CD in the early 1980s, stocks were much less attractive. Currently, bank CDs almost pay nothing, and as you can see from the chart below, interest rates are near a generational low – this makes stock prices more attractive.
  • Attractive Valuations: The price you pay for an asset is always an important factor, and the same principle applies to your investments. If you can buy a $1.00 for $0.90, you want to take advantage of that opportunity. Unfortunately, the value of stocks is not measured by a simple explicit price, like you see at a grocery store. Rather, stock values are measured by a ratio (comparing an investment’s price relative to profits/cash flows generated). Even though the stock market has surged this year, stock values have gotten cheaper. How is that possible? Stock prices have risen about +8% in the first quarter, while profits have jumped +15%. When profits rise faster than prices appreciate, that means stocks have gotten cheaper. From a multi-year standpoint, I agree with Warren Buffett that prices remain attractive given the current interest rate environment. To read more about valuations, check out Ed Yardeni’s recent article on valuations.
Overall, the political showers continue to come pouring down, but the economic flowers have been blooming. Politics are fun to talk about, but when it comes to your investments, do yourself a favor and pull out your umbrella, turn off the politics, and take advantage of the sweet smell of the flowers.

 

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

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 position in any other 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.

June 3, 2017 at 4:52 pm Leave a comment

Shrewd Research or Bilking the System?

Information is power and some hedge funds, mutual funds, and investment managers will go to great lengths to obtain the lowdown.

Integrity of the financial markets is key and recently several hedge funds (Level Global Investors LP, Diamondback Capital Management LLC and Loch Capital Management LLC) have been raided by the Federal Bureau of Investigation (FBI). Other large investment players, including SAC Capital Advisors, Janus Capital Group Inc. (JNS) and Wellington Management Co. have also received inquiries as part of what some journalists are calling rampant industry insider trading activity. Even investment bank Goldman Sachs (GS) is allegedly being examined for potential unlawful leakage of merger information. Little is known about the allegations, so it is difficult to decipher whether this is the tip of the iceberg or standard investigative work?

Regardless of the scope of the investigation, there is a fine line between what scoop is considered fair versus illegal. The distinction becomes even more difficult to pinpoint with the evolution of faster and more voluminous trading (i.e., high frequency trading). The internet has accelerated the speed of information transfer faster than a politician’s promise to cut spending. Data is chewed up and spit out so quickly, meaning tradable information has a very short shelf life before it is profitably exploited by someone. In the old days of snail mail and private back-office meetings, security prices would require time for information to be completely reflected.

Expert Networks Questioned

Another ingredient introduced over the last decade is the advent of the “expert network,” which are firms that connect fund managers to industry specialists, in many cases as part of a “channel check” to gauge the health of a particular industry. About 10 years ago Regulation FD (Fair Disclosure) was introduced to prevent selective disclosure of “material non-public” information (tips that will likely cause security prices to go significantly up or down) by senior company officials and investor relation professionals to investor types. Greedy (and/or ingenious) institutional investors are Darwinian and as a result figured out a loophole around the system. Hedge funds and other investment managers figured out if the senior executives won’t cough up the good info, then why not target the junior executives and squeeze the inside story from them like informants? Expert networks (read thorough description here) serve as an informational channel to service this demand. Although I’m sure there have been a minority of cases where mid-level managers or junior executives have leaked material information (intentionally or unintentionally), I’m very confident that it is the exception more than the rule. In many instances when the beans were spilled, Regulation FD protects both the person disseminating the information and the investor receiving the information.

Rigged Game for Individuals?

OK sure…hedge funds and institutional managers may occasionally have privileged access to executive teams and can afford access to industry experts. I should know, since I managed a multi-billion fund and consistently had access to the upper rank of corporate executives.  Hearing directly from the horse’s mouth and trying to interpret body language can provide insights and instill confidence in a trade, but these executives are not stupid enough to risk prison time by selectively disclosing material non-public information. This dynamic of privileged access will never change as long as CEOs and CFOs are allowed to communicate with investors. Corporate executives will naturally prioritize their limited investor communications towards the larger players.

So with the big-wig managers gaining access to the big-wig executives, has the game become rigged for the individual investors? The short answer is “no.” Over the last decade individual investors have experienced a tremendous leveling of the playing field versus institutional investors. While institutions have privileged access and have pushed to exploit HFT and expert networks, individual investors have gained access to institutional quality research (e.g., SEC filings, real-time conference calls, Wall Street reports, etc.) for free or affordable prices. With the ubiquity of technology and the internet, I only see that gap narrowing more over time.

There will always be cheaters who stretch themselves beyond legal boundaries and should be prosecuted to the full extent of the law. However, for the vast majority of institutional investors, they are using technology and other tools (i.e., expert networks) as shrewd resources to compete in a difficult game. I will reserve full judgment on the names pasted all over the press until the FBI and SEC reveal all their cards. So far there appears to be more noise than smoke coming from the barrel tip of the insider trading gun.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

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 position in GS, SAC Capital Advisors, Janus Capital Group Inc. (JNS), Wellington Management Co., or any other 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.

November 23, 2010 at 11:45 pm 3 comments


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