The CFA Institute is currently holding its annual conference in Boston. There are about 1,600 investment professionals in attendance from all over the world. Not surprisingly, there is much discussion about regulatory failures. Therefore, it was appropriate that SEC chairman Mary Schapiro kicked off the morning session on Tuesday. Unfortunately, she did not appear in person. She addressed the crowd remotely from her office.
Schapiro talked about a number of issues, but one she stressed strongly was the need for high quality international accounting standards. She called for a convergence of U.S. and international accounting standards.
The audience, however, was more interested in hearing about reforms at the SEC that might prevent the kinds of failures seen in recent years. Harry Markopolos, who was sitting in the audience, is particularly interested in this. Markopolos is a former student of mine from Boston College's M.S. program in finance. He is best known as the man who tried to stop Bernie Madoff. Markopolos complained to the SEC for years about Madoff, but was ignored. He recently published a book titled "No One Would Listen," which details all of this.
Its failure to stop Madoff before things got worse is one of the SEC's most embarrassing moments--even more embarrassing than the recent revelation that some employees had spent a considerable amount of time surfing pornographic websites during working hours. Without directly mentioning its Madoff failure, Schapiro said the SEC receives thousands of tips and leads every month. She is trying to get the agency to do a better job of processing all of these.
Some observers have complained that the SEC has too many lawyers and not enough financial experts. Schapiro admitted the agency is heavily lawyered, but said that is necessary since it is a law enforcement agency. However, she also said the SEC has been hiring individuals with broader talents and experiences. For example, many recent hires have worked at hedge funds and rating agencies. Schapiro mentioned that a lack of proper funding has long been a problem, but said funding was recently restored to 2005 levels. Nonetheless, she argued that the SEC should have independent sources of funding.
Schapiro explained that the reason she could not appear in person was because the SEC was going to release a statement later in the day about the May 6 meltdown. That was the day when the Dow suddenly lost 1,000 points on an intraday basis. Sure enough, the SEC announced a proposal to pause trading for five minutes on any stock that moves by 10% or more in a five minute period. It is hoped that such a pause would prevent high frequency, algorithmic, computer-driven trades from moving stock prices in a disorderly fashion. Click here to read the SEC press release regarding this proposal.
Tuesday, May 18, 2010
Friday, May 07, 2010
MoneyShow Las Vegas Webcast
If you can’t make it to the MoneyShow Las Vegas, May 10-13, 2010 at Caesars Palace, you can still see my presentation, "Quantitative Stock Picking for the Forbes Growth Investor," by webcast LIVE on Tuesday, May 11, from 7:45am – 8:30am PDT. Click here to register then return on Monday to view the event.
Thursday, May 06, 2010
Fat Fingers Cause Panics
Trading couldn't get more exciting than it was today. At one point this afternoon, the Dow Jones Industrial Average was down almost a thousand points. It staged a huge rally, but still closed down 348 points. At one point, Apple (AAPL) dipped below $200 before jumping back to $246. All this happened very quickly. This is the kind of volatility traders live for.
I have been expecting a pullback in stock prices for some time. I have argued that a strong rally off the March 2009 lows was fully justified, but not to the extent we have seen. Yet, I did not expect a selloff to happen in a matter of minutes. Why the market plunged so much and so fast in the middle of the afternoon isn't entirely clear. Some blame an erroneous quote on Procter & Gamble (PG), saying it caused panic selling across the board. Others say the selloff was caused by a trading error on the Nasdaq. This so-called fat-finger error occurred when a trader accidentally entered an order to sell a billion shares rather than a million shares. Still others blame the rioting in Greece for the selloff. That rioting was widely broadcast on trading floors.
These reasons might explain the extent of today's selloff only if investors were already extremely nervous to begin with, which I believe they were. Like myself, many investors have been skeptical of the rally. They were happy to see their stocks go up, but they were also prepared to sell at the first hint of trouble. That trouble came this afternoon, so they sold with a vengeance.
Those who were paying close attention to the markets today had an opportunity to make a fast buck. However, everyone else needs to focus on the longer term. While there are many stocks selling at attractive prices (especially after today's action), I continue to expect further weakness. After all, the recent growth we have seen in the U.S. economy is largely the result of government programs. The jobs market will probably start improving soon, but not enough to significantly reduce the unemployment rate. The recent strength in the housing market may not last now that those tax credits have expired. Finally, troubles in Greece could spread to other European nations.
I prefer to hold onto much of my cash for the time being. I suspect there will be better buying opportunities in the weeks ahead.
I have been expecting a pullback in stock prices for some time. I have argued that a strong rally off the March 2009 lows was fully justified, but not to the extent we have seen. Yet, I did not expect a selloff to happen in a matter of minutes. Why the market plunged so much and so fast in the middle of the afternoon isn't entirely clear. Some blame an erroneous quote on Procter & Gamble (PG), saying it caused panic selling across the board. Others say the selloff was caused by a trading error on the Nasdaq. This so-called fat-finger error occurred when a trader accidentally entered an order to sell a billion shares rather than a million shares. Still others blame the rioting in Greece for the selloff. That rioting was widely broadcast on trading floors.
These reasons might explain the extent of today's selloff only if investors were already extremely nervous to begin with, which I believe they were. Like myself, many investors have been skeptical of the rally. They were happy to see their stocks go up, but they were also prepared to sell at the first hint of trouble. That trouble came this afternoon, so they sold with a vengeance.
Those who were paying close attention to the markets today had an opportunity to make a fast buck. However, everyone else needs to focus on the longer term. While there are many stocks selling at attractive prices (especially after today's action), I continue to expect further weakness. After all, the recent growth we have seen in the U.S. economy is largely the result of government programs. The jobs market will probably start improving soon, but not enough to significantly reduce the unemployment rate. The recent strength in the housing market may not last now that those tax credits have expired. Finally, troubles in Greece could spread to other European nations.
I prefer to hold onto much of my cash for the time being. I suspect there will be better buying opportunities in the weeks ahead.
Sunday, May 02, 2010
Goldman Sachs, Washington, and the Theater of the Absurd
The following commentary is from the May issue of the Forbes Growth Investor.
Albert Camus was an Algerian French writer linked with a philosophy known as absurdism. His spirit must have been in Washington last week where Congress and Goldman Sachs performed in the Theater of the Absurd.
I have no particular desire to defend Goldman Sachs, a firm full of arrogant, overpaid bankers. In fact, about 15 years ago, Goldman turned down a friend of mine for a job. She was told, "You are very smart, but you are not a guru. We only hire gurus." We got a great laugh out of that comment. Today, I have to wonder, "Where have all the gurus gone?"
The SEC is suing Goldman Sachs for fraud, so you would think Goldman’s attorneys would have advised those called to testify in Congress to keep mum. There can be no doubt that the SEC will use their words against them. Instead, current and former Goldman executives answered questions politicians posed. I use the word "answered" loosely. More often than not, these executives came across as being obviously evasive. Now the Justice Department has jumped into the fray by filing criminal charges against Goldman.
The case against Goldman boils down to three issues: 1) Did the firm have an obligation to disclose who the parties were on both sides of a trade, 2) did it have an obligation to advise one of those parties not to make what appears to be a stupid trade, and 3) did it represent to one of the parties that the securities in question were something other than what they really were? In my opinion, the answer to the first two questions is no. As for the third, we will have to wait and see what the evidence shows.
Whether we are talking stocks, bonds, or houses, by definition, the buyer has a more bullish outlook than the seller does. Only time will tell who guessed right. If you go back to when these infamous trades were made, you will see that it was not obvious to everyone that housing prices were going to collapse. Back in 2004, I was not yet convinced we had a housing bubble. Still, I wrote an article called, Why I Hate Homebuilders arguing that housing prices could fall. A year later, I told NBC Nightly News that homeowners with interest-only subprime mortgages will be shocked by how much their monthly payments will increase. This was a full year before housing prices peaked. At the time, most housing experts still thought prices would never fall.
John Paulson figured out a way to bet against subprime mortgages. I wish I had been smart enough to do that. Goldman Sachs helped Paulson put the instrument together. Those on the other side of the trade were simply wrong.
Furthermore, Goldman’s actions did not cause the housing market to collapse. Housing prices fell simply because irresponsible lenders gave mortgages to unqualified borrowers. Both the lenders and the borrowers knew (or should have known) that these mortgages were designed to blow up if housing prices simply stopped rising. The government bears more responsibility for the mortgage mess than Goldman does. The government thought it was good public policy to encourage home ownership. For years, it urged lenders to make money available to unqualified borrowers. The government used Fannie Mae and Freddie Mac to prop up the mortgage market. Will the government take its share of the blame? Of course not. Instead, it will go after Goldman Sachs (and probably several other banks). After all, that is where the money is.
Albert Camus was an Algerian French writer linked with a philosophy known as absurdism. His spirit must have been in Washington last week where Congress and Goldman Sachs performed in the Theater of the Absurd.
I have no particular desire to defend Goldman Sachs, a firm full of arrogant, overpaid bankers. In fact, about 15 years ago, Goldman turned down a friend of mine for a job. She was told, "You are very smart, but you are not a guru. We only hire gurus." We got a great laugh out of that comment. Today, I have to wonder, "Where have all the gurus gone?"
The SEC is suing Goldman Sachs for fraud, so you would think Goldman’s attorneys would have advised those called to testify in Congress to keep mum. There can be no doubt that the SEC will use their words against them. Instead, current and former Goldman executives answered questions politicians posed. I use the word "answered" loosely. More often than not, these executives came across as being obviously evasive. Now the Justice Department has jumped into the fray by filing criminal charges against Goldman.
The case against Goldman boils down to three issues: 1) Did the firm have an obligation to disclose who the parties were on both sides of a trade, 2) did it have an obligation to advise one of those parties not to make what appears to be a stupid trade, and 3) did it represent to one of the parties that the securities in question were something other than what they really were? In my opinion, the answer to the first two questions is no. As for the third, we will have to wait and see what the evidence shows.
Whether we are talking stocks, bonds, or houses, by definition, the buyer has a more bullish outlook than the seller does. Only time will tell who guessed right. If you go back to when these infamous trades were made, you will see that it was not obvious to everyone that housing prices were going to collapse. Back in 2004, I was not yet convinced we had a housing bubble. Still, I wrote an article called, Why I Hate Homebuilders arguing that housing prices could fall. A year later, I told NBC Nightly News that homeowners with interest-only subprime mortgages will be shocked by how much their monthly payments will increase. This was a full year before housing prices peaked. At the time, most housing experts still thought prices would never fall.
John Paulson figured out a way to bet against subprime mortgages. I wish I had been smart enough to do that. Goldman Sachs helped Paulson put the instrument together. Those on the other side of the trade were simply wrong.
Furthermore, Goldman’s actions did not cause the housing market to collapse. Housing prices fell simply because irresponsible lenders gave mortgages to unqualified borrowers. Both the lenders and the borrowers knew (or should have known) that these mortgages were designed to blow up if housing prices simply stopped rising. The government bears more responsibility for the mortgage mess than Goldman does. The government thought it was good public policy to encourage home ownership. For years, it urged lenders to make money available to unqualified borrowers. The government used Fannie Mae and Freddie Mac to prop up the mortgage market. Will the government take its share of the blame? Of course not. Instead, it will go after Goldman Sachs (and probably several other banks). After all, that is where the money is.
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