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Week Ahead 4-19-2010

admin on 04 19, 2010

Fraud, earnings, foreclosures and volcanoes; What do they have in common?  All four are being blamed for taking the market down on Friday.  It was first negative day that was greater than 1%, in over 48days.  Newspapers wrote like the world was coming to an end.  Fraud is what the SEC is charging Goldman Sachs with in reference to their trading profits from shorting mortgage backed securities while they were still recommending them.  I think the finer points involved the lack of disclosure to customers that they were betting against the mortgage backed securities.  The SEC is opening Pandora’s Box on this one.  Fraud and Wall Street have been in a blissful love affair for as long as the SEC has been around.  The SEC is still wiping the egg off of their face on the Madoff scam, where they were repeatedly warned that about the largest ever Ponzi scam and failed to do anything about it.  Now they are trying to regain some credibility by slapping Goldman on the wrists.  If the SEC truly wants to punish Wall Street, they have enough ammo to blaze amaze on these brokers until they cry uncle.  Think about all of the times that a broker pushes out analysis that is positive( always positive…how many sells do you see from an analyst?). How many times does that firm hold a short position against that stock without disclosing it?  Do they let you know that they are specialists or market markers in that specific stock?

Brokers and advisors are already restricted in what they can and cannot say to an investor.  Most of their analysis comes from in house sources from the corporate headquarters.  So when a broker pushes something out to the investor, they think (or hope) it truly fits your criteria.  That broker does not know what the trading desk is doing in terms of trading that stock.  The desk could be long or short.  If the company trusts that desk trader to risk millions of dollars trading a stock then the logical conclusion is that they trust their trader more then their analyst.  The trader makes the final call because of what he sees in the market and the analyst simply takes into account that company’s fundamental aspect compared with its industry, but he is by far a trader.  I am going with who the firm puts their millions with.  This simple fact should be disclosed to every investor that the firm pushes out their analysis to.  The fact is the process is very complicated to get you that information.  The trade desk could be short right now, but long 40 minutes from now.  So to truly push this information to you would not be fair to the investor or to the desk, because then they would have to constantly update the investor on what the desk was doing.  I disagree when it comes to the longer term larger positions where it would take several days to get out of a position.  The SEC can mandate that every broker disclose their trading desk’s long term stance on a specific stock.  If that bias changes, I would want to know.  Again the problem here is that traders are different from long term investors.  Where do you draw the line on disclosure?  Good luck SEC, the more information the investor can have at their fingertips when dealing with a broker the better.  I don’t look at anyone’s analysis.  I may read someone’s opinion, to try to see if I am swayed at all, but I always do my own analysis…I am the only person I can trust for my style of trading and to truly know what is right for me.

Google had a pretty ugly day on Friday, the day after earnings were released.  It closed at $595.3 on Thursday and dropped to a low of $549.63.  It was a large move, but it was not solely responsible for the markets negativity.

There was also news out from Realtytrac:

“RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition households  facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009.”

“More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said.”

“Homeowners continue to fall behind on payments because they’ve lost their job or seen their mortgage payment rise due to an interest-rate reset. Many are unable to refinance because they now owe more on their loan than their home is worth.”

RealtyTrac does not paint a pretty picture, but that is reality and our current market is looking past this information.

A volcano in Iceland has been causing major problems to passengers stranded on either side of the Atlantic.  Travelers have been stuck since last week with airlines not being able to fly in the heavy ash clouds that were covering much of Europe.  This has wreaked havoc the airline industry to the tune of $200M a day.  Imagine paying all of your employees to come to work and not making any money from it.  It has caused an increase in inventory of oil because of the lack of demand, thus driving down oil prices.  This is a good thing for us, but most likely a very short break.  There are concerns that the volcano eruptions could last several weeks and even last greater then a year.  Only time will tell what Mother Nature has in store for us.