Earnings, Markets and Policy

So, Goldman Sachs manages to make billions in the face of the crisis.

Companies from every sector are reporting better earnings than projected by some of the sages on the Street as well as by their own CFO's or CEO's or whomever they determine should trot out the numbers.

Markets are moving up and everyone is saying the recession is over and we are on the path to recovery.

And, in Washington the administration is busy reshaping---well, just about everything from American capitalism and society all the way out to reshaping themselves.

Most apparant is Mr. Obama's shift from the great change artist and bipartisan fence mender to Washington business at more than usual (multiples of the same) and a simple statement of his that says it all., "I won".

So, we can all breathe a collective sigh of relief, put this one in the history books and get back to business! Right?

We'll see, goes an old Oriental proverb.

Let me put some clarity to things in a condensed version, just in case you buy into all of this and have some shopping to do.

Goldman made money the old fashion way--at least what is old fashion for them.

The government moved about $1 trillion dollars over the last 9 months, AIG got right at $200 billion of that and we can run the list.

What does this have to do with Goldman? Everything folks.

When a trillion dollars moves around the US economy, especially when the origin of that money is from the US government (in reality it is from you and me and millions of other citizens who have lost control over their tax dollars going to Washington), Goldman is at the center of those movements. Quietly and covertly in some cases and Goldman does not offer their services cheaply. That is even more true today given the relative lack of competition they now have to deal with.

Close to $30 billion of the AIG bailout went to bailout Goldman on some paper it was holding. By the way, unlike most of the rest of the world that had to take a reduction on similar paper they were holding, Goldman was paid 100% of what they were holding.

Mr. Paulson let Lehman fail, they do not exist anymore. Not a stretch to see Goldman do so well when it's fiercest and largest competitor is no longer alive. By the way, the decision to not bailout Lehman was a singular one (despite all the talk) made by Mr. Paulson, who by the way came to his Treasury position from Goldman and who, when he was at Goldman had a warlike posture with Lehman.

His boldfaced lie that the only reason he let Lehman fail was because he did not have a buyer for it is more than disingenuous since he also did not have a buyer for AIG when he decided to give them $160 billion! There is still no buyer for AIG.

I won't go on, I think you get the picture. But there is just one other point you might have missed or are unaware of---- Goldman was the largest contributor to Mr. Obamas' campaign.

Any dots get connected now?

Now for the markets.

The first thing one should realize is that the game currently being played in respect to earnings is one where all expectations for earnings have been lowered so then it stands to reason that it should be easy to improve on those projections.

Kind of like advertising a 40% off sale for tomorrow and having all the employees stay late tonight and mark up the goods by 50% so it looks like a bargain in the morning.

Next is a bit of an illogical equation where simply because things are less bad than projected that scenario turns out to be "good" or a positive when in truth it is simply not as bad as projected or expected.

Some of that thought process helped get people to where they are now.

The market is a forward looking animal, or so the story goes. But, it has to be because the traders cannot trade on the past, even if it is a nanosecond old. Once the price is printed or the trade is made, that is it. But, at the moment most traders are ignoring forward analysis and are trading on the day. Please keep in mind that they have billions of dollars sitting still in Treasuries earning little to nothing and the year is half over. They have to put that money to work and they are and have been for many weeks.

Pour billions of dollars into anything and if you are buying with those billions prices will go up.

However, these professionals have advantages over you that make it dangerous to try and follow them for too long or blindly in the direction they are trading.

At the same time they are buying, they can and do very often use derivatives to limit or essentially remove their risk. Something you have a hard time doing if not due to the restrictions you have trading your 401K plan funds or IRA or Roth accounts (you cannot short, you cannot leverage as they can and in many cases you cannot buy options) just because you do not have the sophisticated software and trading programs to be able to do what they do.

In fact, most of the time, these guys are making money on the way up and on the way down, telling everyone that they are bullish and see green shoots or the worst being over.

That unfortunately folks is the market. It is not an innate institution. The market is made up of people (well human genome carrying entities) and these particular people are interested in one thing and one thing only--- profits, bonuses and momentum in one direction or another.

The game they play each and every day is one in which for every dollar earned by someone, there has to be a dollar lost by someone at some point.

Who do you think they elect to be the one losing the dollar? It won't be themselves I can assure you of that.

Sounds very cynical I know and forgive me for throwing cold water on the parade but, please, for your own sake, be careful of what you are doing and who you are listening to and do some thinking and simple math for yourself.

Earnings at this time are more a function of the tremendous cost cutting and cut backs in employees that many of these companies are reporting than any kind of major improvement to their businesses. That is unsustainalbe and in reality if you look down through it long enough should be a reason to be concerned looking into the future.

Even if business activity picks up any time soon, some of these companies will not be able to take advantage of the pickup due to the cutbacks in personnel along with what is still plaguing many companies, a lack of credit to drive their businesses.

And, just in case you are not certain, credit is still harder to find and obtain than the winning powerball numbers and with the new standards being adopted for lending, many will not qualify even if and when credit becomes more available.

Add into this mix the varied and many accounting tricks that can be played to push numbers around to produce earnings and you want to read more of the earnings reports than you want to listen to how the companyh or the analysts are spinning things.

Next point is, everyone at the moment involved in the markets have become ten percenters whether they will admit it or not. If they put a position on and get a 10% gain, many are selling that position, booking the gain and moving on to the next potential ten percenter.

That by the way is the strategy that I have been advising people to adopt in terms of the markets. Have been telling people that for the past 5 months. I am also telling them to add gold ETF's into their portfolios on drops, crude oil ETF's (DIG)on drops and to build a position in the ETF's that will profit when the market falls as part of their long holdings, (QID, SKF).

Why? Whatever happened to the buy and hold theory of investing?

It is no longer valid folks and anyone trying to stick with that is opening themself up to getting hurt and in some instances, depending on the company you decide to buy and hold because it is cheap, you could lose your entire investment.

Now to the crux of the matter.

Policy.

Read this as decisions coming out of Washington these days at a rate that is spellbinding not to mention the dimension of change these policies hold for America and its' capitalist structure.

This administration and the Democrats have well over 30 years of pentup socialistic changes that they have been waiting to unleash in order to achieve the social change they seek.

They now have the opening to do it and by using fear tactics on an already stunned American populace, they are rapidly getting more and more citizens willing to give up freedoms and self-determination in order to have the government promise to take care of everything for them.

Between these socialistic changes, growth of government and entitlement liabilities, by the time this administration completes this term, the US will have become a nation that will make France's socialism look like capitalism and the US tax rates could well have gone beyond 80%!

In truth, this is perhaps the most dangerous element I see but, that is a subject of another blog.

No matter how smart of a market maven anyone is and no matter what may be going on inside the markets themselves in the current environment and in the current economic crisis we face, governmental policy is the ultimate determinate of what anything is worth that trades on the exchanges.

Don't believe that I know. Harder even to write. Worse still will be living with the results this administrations' policies have the potential of unleashing.

Just consider for a moment some of the policy decisions already made and those that are being pushed through congress now and do some math.

By the time Mr. Obama finishes this term, the US will be in debt to the tune of $12 trillion dollars (some analysts say more, but, let's be kind). If the economy continues to contract or not grow at the projected rate they are using now (3% GDP growth year over year) that will represent pretty close to the total one year GDP of the US economy.

Add on to that what some estimates are of the costs for another stimulus, Cap and Trade costs to the economy, health care reform, entitlement program payments and we will have somewhere around another $4 to $7 trillion of added costs over these same years we will be waiting for this administration to exit Washington (one can only hope).

Add another $70 trillion of unfunded liabilities the boys and girls in Washington will have starring them in the face year some of it starting to impact the budget in 2010 and all of a sudden we are at multiples of debt burden over our annual GDP!

In short, the US is bankrupt. By 2015 just the debt service of the $12 trillion dollar debt we will have at that time will be more than any other nation on the planet.

Can you understand why China is exiting the dollar and not so slowly as some would like to think or that has, up to now been their plan?

It is also why they are more focused on building their own internal consumer base as opposed to counting on a resurgence of the US consumer.

Chna is not alone in this but is the primary concern given their holding of US debt. And, it is not so much the debt they now hold that is the problem, although it is serious. It is the issue of how much more and for how much longer will they be willing to continue to buy the new debt being issued by the US.

This is where the policies of this administration will take us, if they are not stopped and new policies put in place to prevent this from happening.

The best starting policy point is to stop the growth and expansion of government.

Next, tax cuts not tax increases across the board in order to spur economic activity and create jobs. It is the height of error to be adding taxes on top of an economy in the condition we find the US economy at this time.

As for spending our way out of this, there are enough failed attempts at this and enough credible expert economists warnings that even the spin being attached to this plan is starting to sound laughable.

Next, rather than continuing stimulus in these pork laden, misguided programs we have seen up to now, programs by the way that have not worked, grants and funding for new technologies in energy, non crude based transport fuels, environmental programs that have merit and will form the new economy where America could lead but is rapidly losing any hope of leading at the moment.

Programs and research into the new era of energy supply worldwide needs to come from and be lead by American ingenuity and companies as no economy can grow in a sustained manner without adequate and reasonably priced energy.

So, before you become a believer in any of the current hype coming out of Wall Street, K Street or any other street, look into some of this for yourselves and if you find yourself in agreement with what you are hearing and reading, follow the boys and girls on Wall Street and K Street.

If, however, you find some areas of concern, then adopt a reasonable trading approach to the markets, don't get stuck holding things for too long for now, add some of those ETF's mentioned above and write your representatives about what you think makes sense in the policies being put forward, most of which do not right now and need to be halted.

Someone had to say it. I just did!