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Our original
plan today was to focus on all the economic data that came out this week...
we saw some interesting turns on that front. But, news of possibly-fraudulent
activities of a Goldman Sachs executive put the economy on the backburner.
Our thoughts on the SEC's charges as well as the likely fallout
for the market are below.
We'll still
serve up the economic data - we'll just limit it to charts (which
is more efficient anyway). The links are below.
Before we get
to either of those though, let us direct you to two of our latest
blog entries:
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Op-Ed:
Goldman Scandal More Catalytic Than Criminal |
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While
it's no secret that a Goldman Sachs executive was named as part of a trading
scandal on Friday, surprisingly few news sources have actually explained
exactly what the SEC allegations are. We can sum it up in a few
sentences for you; our op-ed thoughts will be a tad more verbose.
 In
simplest terms, the SEC is suggesting Goldman Sachs executive Fabrice Tourre
hand-selected a group of subprime mortgage loans he felt were particulalry
apt to sink in value, and then packaged them up as a collateralized debt
obligation (or CDO) specifically for hedge fund Paulson & Co. to bet
against.
That in itself wouldn't have been a tremendous problem [thousands of CDOs
have been created by Goldman], except the SEC also feels Paulson also had
a hand in selecting the mortgages that would make up this particular pool
of collateralized debt - an alarming influence and conflict of interest,
if true.
While that allegation
may cross the line into a grey area, the SEC further suggests that
Tourre crossed all the way over to the wrong side of the line when he turned
around and sold that CDO - knowing it was particularly loaded with troubled
mortgages - without disclosing to its buyers the true nature
of how or why the underlying mortgages were selected (i.e he dumped some
garbage on them).
Outrageous?
Maybe, maybe not. The conflict of interest and failure to disclose is clear.
What is not clear is whether or not it would have mattered to the
CDO buyers (in terms of losses) if other mortgages had been selected.
The allegation,
whether it's true and supported with evidence or not, isn't anything that
isn't
going on anywhere else, nor would it likely have significantly mattered
if other assets had been selected as the ones poised to sink in
value. After all, it was 2007, and the entire subprime mortgage
market (as were the collateralized debt obligation 'packages' of those
mortgages) was imploding - a monkey could have just as likely picked mortgage-related
assets that were headed for a tumble. Tourre was simply too obnoxious about
his role in the matter for his own good.
This particular
act of alleged impropriety - which was still illegal and should be dealt
with as such - isn't on par with Madoff's; it barely registers up there
with Martha Stewart's. No, the reason this has snowballed into a media
feeding frenzy is simply that it's a great platform from which the federal
government can launch financial reform legislation.
And if that's
the end goal, so be it. As painful as this might be for stocks in
the short run and Wall Street firms in the long run, the upside of the
embellishment and ensuing equity market overhaul is still far greater
than the downside.
Mostly
though, we hope Fab Tourre gets the justice he deserves... no more, and
no less (if any).
The question
is, should this - and will this - continue to put selling
pressure on stocks like it did on Friday?
 The
fact is (and bear in mind this is in spite of our opinion that the market
is ridiculously overbought at this point), it's still too soon to say.
While dire at
the time, investors can be fickle about the scandals they choose to forgive
and forget.... and they generally err on the side of forgetting. Moreover,
given the benign nature of this poor decision relative to, say Stanford's
ponzi scheme, this news is apt to be come a fading memory fairly
soon.
No, the real
worry investors should be feeling at this point is the catalytic effect
this may have on stock prices. With the market as overbought as it
was (read 'vulnerable'), this proverbial punch in the nose may finally
be what pushes stocks over the edge. If not this, then something else would
have come along soon enough to do the same.
Either way,
Friday's average 1.5% plunge was the kind of move consistent with
the beginning of corrections.
Before committing
to that call though, let's see what the resilient bulls can do on Monday.
Their job will be doubly tough, as stocks were already pressing into a
significant resistance line. When/if we make the next close under Friday's
low, that should be the final straw needed to start the corrective move.
They say a picture
is worth a thousand words, which is good news for us - it saves us the
trouble of writing 5000 words about last week's economic data. We'll
just serve up five charts instead, with a minimal amount of commentary.
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On
the jobs front:
Initial claims as well as continuing claims were both higher, as well
as higher than expected, last week.
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Inflation
still in check:
It's amazing that with a growing economy, tons of worthless dollars out
there, and rock-bottom interest rates, that inflation isn't soaring. In
fact, the lack of inflation at this point is starting to be a worry.
Nevertheless...
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Waning
confidence: The Michigan Sentiment Index took a dip this month,
somewhat mirroring the Conference Board's consumer confidence figure's
pullback in March. As you'll see on the chart though, it's not a game-changer
or trend-breaker. (You'll also be able to see how erratic the Michigan
n Sentiment Index can be.)
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A
lack of home buyers is irrelevant: Despite
the fact that there were fewer new homes sold last month than we've seen
in decades, starts and permits are sharply on the rise. On the flipside,
both are still well under 2007/2008 norms.
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Using
more/producing more: Both
the utilization of our industrial production capacity and our actual industrial
output continued to rise last month.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
