4.23.10

4.23.10

          As Congress considers re-working financial regulations to protect investors, consumers, and ultimately the financial well-being of the country, from the sometimes questionable, sometimes dangerous, sometimes illegal activities in the financial industry they need to include stiff penalties for those who cross the line.

There needs to be consequences for those, just as in other walks of life and business, consequences commensurate with the damage that results from their activities. The majority of individuals and businesses in the financial industry are honest and upstanding. They go after profits and successful careers in ways that not only comply with the regulations as written, but with the spirit and intentions of the regulations. However, there are also individuals and businesses who prefer to game the system, looking for loopholes, or even ignoring regulations altogether, hoping they will not be caught, but knowing that under regulations as periodically revised over the last century, if they are caught the consequences will simply be an acceptable cost of doing business.

          We’ve had many decades of examples. We’ve also seen each financial collapse, bursting bubble, or bank bailout since the 1970’s more severe than the last, involve more sections of the financial industry, and cost more to fix. If the spiral is not halted, the trend is toward a financial doomsday from which merely taking from future generations to bail the current system out will not work. Unfortunately the spiral will not be halted by simply redefining financial industry regulations to close the latest loopholes, or the questionable practices the latest collapse has revealed, or by providing regulators with more people to supervise the complexities of financial firms, or more power to regulate.

The only hope for new regulations to finally succeed this time is if they implant fear of real consequences for those who ignore them or try to circumvent them. It is no deterrent at all when the known consequences for those who are caught is that they will be allowed to make partial reimbursements and say they’re sorry, or get away with settlements in which they ‘neither admit nor deny guilt but agree not to engage in such practices in the future’, and fines paid by corporations while the decision-making executives do not even lose their jobs, at most having to move down the street to a similar position at another firm.

          The need for real consequences is obvious. Let’s hope we see the need met in the new regulations that are apparently approaching their final stage of Congressional debate and negotiation.

          Do we think that will happen? Sadly, NO. Congress is controlled by money, and Wall Street controls the money.

THE MARKET

          The market has been up eight weeks in a row and is seriously overbought. Asian and Euro have been in a correction for several weeks now. The light volume in the U.S. market allows the big Banks and Brokerage firms to control 30 to 45 % of the trades for their own in-house accounts. On the valuation side, we have the popular DJ Transportation Avg selling at 59.7 times trailing earnings versus a P/E ratio of 25.5 a year ago, and the popular iShares Russell 2000 etf, which tracks the small stocks of the Russell 2000, selling at 88.6 times trailing earnings. Can earnings surge enough, in what economists and the Fed predict will be an anemic recovery, to justify those P/E ratios? And we have the well-respected Shiller ‘cyclically-adjusted P/E ratio’ saying the S&P 500 is 30% over-valued.

           We also see a market that responded negatively to the excellent 4th quarter earnings three months ago, by declining in the Jan/Feb correction, now not enthused, so far at least, by the impressive 1st quarter earnings reports. Is that because the market already factored the good earnings into stock prices during the spike-up bull market?

Are the major financial firms also concerned?

It’s our impression that the large program-trading firms (which are the major brokerage firms and banks), and which account for 30% to 45% of daily trading volume, are using the power of their massive buy programs in a low volume market to hold the market up each time it tries to decline. Is that because although they are saying the market is only due for a 10% correction at worst, they fear that if it gets started it may well become some-thing worse?

Stay tuned!  We are looking for a place to get in but this isn’t it. We remain 100% in CASH.

Till next Time

The MTA Staff