THURSDAY FEBRUARY 4, 2010
Blame the Greeks!
Good earnings report...check, good retail sales...check, strong market...not so fast! While the economic numbers today were strong, the market took it on the chin with a 268 point drop in the Dow. Why?
The good domestic news was overwhelmed by international developments. Specifically, the market has become concerned, and rightfully so, with sovereign debt. Over the last few weeks, the financial conditions of countries such as Greece, Italy, Spain and Portugal have worsened and are bringing into question the ability of these countries to service their debt. The news out of Greece was disconcerting today and it set off market declines across the globe. These declines caused a flight to quality and the U.S. dollar rallied strongly. It seems that as difficult as the economy is here in the states, it is even worse in Europe. At the moment, the U.S. appears to be the nicest house on a bad block!
There may be a silver lining in this story. Greece's debt crisis was caused by excessive government spending that was financed by debt. Greece has one of the highest tax structures in Europe (and that's saying something!) and its economy has been struggling. Sound familiar? Hopefully , there are some lessons to be learned. Is anyone in Washington paying attention?
POSTED AT 05:15 PM
TUESDAY FEBRUARY 2, 2010
Are stocks back?
The stock market feels a whole lot better in the last few days. And it should. Last Friday, GDP for the 4th quarter was up 5.7%. Yesterday, the ISM Manufacturing index was up strongly, at 58. Today, the pending sales of homes number was surpirsingly strong, suggesting the housing is stabilizing. And finally, the corporate earnings season continues to go well. Importantly, many companies are beginning to show a recovery in revenues as well as earnings. Over the last year, earnings have been strong but have been driven by cost cutting. After cutting costs for over a year, earnings have the potential to jump with even modest revenue growth. The appearance of revenue growth in 4th quarter earnings is very encouraging.
It could be that the slow but methodically improvement in the economy is beginning to overwhelm the uncertainty coming out of Washington. President Obama's budget appears to be dead on arrival in D.C. The death (?) of healthcare, the diminishing prospect of Cap and Trade, and the political unwillingness to raise taxes might be encouraging the bulls to return to the market.
POSTED AT 07:09 PM
THURSDAY JANUARY 28, 2010
The Accuracy of a Weatherman
You have heard of the Chief Executive Officer (CEO), the Chief Operating Officer (COO), and the Chief Financial Officer (CFO); now meet the CMO, the Chief Meteorology Officer!
Yesterday, the Securities Exchange Commission announced that companies must consider the effects of global warming and efforts to curb climate change when disclosing business risk to investors. The guidelines will require companies to weigh the impact of climate-change law and regulations, both domestic and international, when assessing what information to include in corporate filings. So, for example, an insurance company will need to quantify the physical impact of rising sea levels due to warming and increased floods associated with more frequent hurricanes.
What a relief! The SEC has addressed one of the more pressing issues in financial accounting. Every investor who uses financial statements knows that the one missing ingredient needed to provide clarity and accuracy to the data is…a weather forecast! After all, we all know how accurate the local weatherman is! And of course, we know with absolute certainty that sea levels will rise and hurricanes will be more frequent. Will companies be required to incorporate the National Hurricane Center’s forecast into their financials each year or will companies hire their own CMO? Will the presence of El Nino be a factor in earnings projections? How would the accounting work? Would the insurance company that projected losses based on the hurricane forecast need to reduce its loss reserve if the number of hurricanes is less than forecast? Would Home Depot need to take a charge for an overly optimistic forecast for plywood sales?
Financial accounting rules are meant to bring clarity to a company’s financial well-being so investors can make educated decisions. Whether one believes in man made global warming or not, it should be clear that we have little ability to accurately forecast the weather, let alone the weather’s financial impact on a company. These rules will politicize financial reporting and create more uncertainty.
It makes one question the priorities over at the SEC. Maybe they should focus more energy on the Bernie Madoffs of the world? Or consider whether mark-to-market accounting rules helped speed the onset of the economic crisis? Maybe the SEC will next direct companies to consider the impact of Astrology forecasts. Why not, the astrologers have a better track record than meteorologists! But these would be a silly allocation of resources.
Finally, while acknowledging that I have little training in weather forecasting, I am willing to go out on a limb and suggest that if a gigantic meteor hits the earth, there will be no need for financial reporting!
POSTED AT 02:22 PM
WEDNESDAY JANUARY 27, 2010
Monday Morning Quarterbacks
The media will be filled with Monday Morning Quarterbacks today as the House holds an inquiry into the AIG "bailout", the Federal Reserve's FOMC issues its statement at 2:15 and the Senate will vote on Chairman Bernanke's second term tomorrow.
The main issue of the AIG hearings will be the 100% payment of counter parties (including the evil Goldman Sachs) with taxpayer monies. This fact will be sliced and diced, with a particular focus on the accusation that the NY Fed guided AIG to hide the true value of their counter-party risk. Treasury Secretary Timothy Geithner will be the star witness. Mr. Geithner was President of the NY Fed at the time of the AIG action. His predecessor at Treasury, Hank Paulsen, will also testify. Congressmen from both sides of the aisle will be gunning for them. There is no question that different courses of action could have been taken. In hindsight, it would have been more politically tolerable if "haircuts" were given to the counter-parties. However, I believe it is easy to cast aspersions now, comfortable in our knowledge that the financial markets have stabilized. One cannnot overestimate the horrible circumstances of the week of September 15, 2008. Keep in mind that the AIG matter involved contractual matters. In the height of crisis, having the government direct a financial company to violate the terms of their contracts would have created an even greater crisis environment. Could things have been handled differently? Certainly. But all of these government officials were asked to make incredibly difficult decisions with the global financial system on the brink of collapse. I think the Congressional inquiry amounts to cheap Monday Morning Quarterbacking.
Similarly, the dialog surrounding the renomination of Ben Bernanke as Chairman of the Federal Reserve also involves a high degree of hindsight. Yes, Mr. Bernanke has been at the Fed for many years, first as Alan Greenspan's deputy and then as Chair. I agree with many that claim the Fed's easy money policy was in part to blame for the housing "bubble." Nonetheless, many of the difficult decisions made by the Fed were made in a crisis environment that was unique in history. Could matters been handled differently? No doubt. It now appears that the Senate will reconfirmed Mr. Bernanke . However, the political grandstanding has caused a great deal of uncertainty for the markets.
Finally, the FOMC will conclude its meetings and issue its statement this afternoon. With its Chairman's nomination scheduled for tomorrow, does anyone think the committee will raise interest rates this afternoon? Once again, the market will parse the language for signs of an exit strategy. In particular, the market will look for the Fed's commitment to cease purchases in the mortgage-backed security market.
And, by the way, I don't think the Viking's Brett Favre should have thrown that pass with 12 seconds remaining in the game against New Orleans!
POSTED AT 10:03 AM
TUESDAY JANUARY 26, 2010
Do these guys talk to each other? Part II
The word out of Washington continues to send mix messages to the market. Today, President Obama announced a plan to freeze spending in certain non-defense, non-entitlement spending. The administration is clearly trying to send the message ahead of the State of the Union speech that it understands the public's concerned about spending levels. They believe this policy will save $250 billion over ten years. Good for them! Meanwhile, over in the Senate, the majority announced that they are considering another $80 billion in a new stimulus plan. So which is it? Deficit hawk or free spender? Do these guys talk to each other? Should the market be encouraged by the White House's new found fiscal discipline or be scared by the prospect of yet another Stimulus plan?
POSTED AT 04:01 PM
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KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES
Ken is a Senior Vice President and the Director of Investment Management Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.
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