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Binge of Irresponsibility by: Charles Payne

|Includes:General Electric Company (GE), GOOG, GS, ISRG

A combination of factors contributed to yesterday's selloff in the stock market, a market that has hinted that a timeout/pullback was in the offing. I don't think that anything loomed larger than the latest haymaker thrown at Wall Street by the Administration. Again, the best analogy would be Captain Ahab and Moby Dick meets Mutiny on the Bounty. Of course, in an Administration full of sycophants there will not be many people jumping ship, though the American public has already used up all of the lifeboats. Even the band is spying the exits.

"To trade for profit..."

During his press conference to announce his latest measures to tame Wall Street, President Obama mentioned that banks shouldn't be able to use cheap money to "trade for profit" which to me is the crux of his problems with Wall Street. It is inherent in any business to take advantage of circumstances. When it rains, an army of umbrella salespeople blanket the corners of New York City. Naturally, the issue is the fact that the money is cheap. However, why is it so cheap? With the loss in Massachusetts I think that the Fed will now wait until next year to raise rates as it tries to be accommodative enough to spark the economy even at the risk of a massive inflation problem. There is also the issue of the fact that the President doled out billions of dollars to these same evil banks. Those bastards paid back the money (with huge interest) but the reckless taxpayer funds used to prop up high-paying union jobs via General Motors and Chrysler could be lost forever. One can only hope that the bank tax is declared unconstitutional and/or doesn't pass the Senate.

"Obscene amounts of money...doesn't add value to the economy."

The philosophy among folks in the Administration is that pouring money into the system, no matter how inefficient, will have a net-net positive impact because it will circulate. But, how is it that the obscene amount of money flowing through Wall Street doesn't have the same impact? A few months ago I saw Paul Volker in a very famous New York restaurant that couldn't exist without obscene Wall Street money. There is a couple that comes to our office once a week to shine shoes. They are lovely people from some poor nation and they are raising a family via that obscene money that supposedly doesn't add value to the economy. I don't get how the notion of heavy taxes and redistribution of wealth is seen as a more viable vehicle of adding value to the economy. By the way, these investment banks pay so much in taxes, which supports many government jobs. One more thing, and riddle me this...if the government assumes that the banks can deliver $90.0 billion in taxes (for bad loans made by the White House) based on risky trades isn't this a roundabout endorsement of such trading as a way to make a ton of money?

Wall Street banks aren't altruistic but serve an important role that is often overlooked by the obscene amounts of money generated. They did go on a binge of irresponsibility, as did much of the nation, giddy on a supercharged housing market and low unemployment.

I realize that the Bush years are painted as eight years of sorrow that could only accurately be described by John Steinbeck, but a few of those years saw a nation rise out of the muck of a recession and the horrors of 9-11. There was a good time period where most people forgot commonsense principles instilled by their grandparents. At issue here is the idea being planted and watered that banks are part of the public domain. At issue here is the idea that the government is some kind of perfect watchdog and will know how to measure too much risk. They did a great job with Freddie Mac and Fannie Mae, after all. Wall Street banks returned to business as usual and paid back TARP in a flash.

They got out of the noose, or so they thought. I don't think that taxpayers should be on the hook for failed banks, auto companies, or any other business. There should be limits to complexity based on risks to shareholders and the business, and that comes when the safety net is completely removed. Beyond that, separating commercial banks from investment banks shouldn't be sold as a cure-all, because it's not (the failures of 2008, Washington Mutual, Indy Mac, Bear Stearns, and Lehman Brothers had nothing to do with the separation of businesses). I will say that one message President Obama might be trying to send is it's not a good thing to have Republicans in a position of power in Congress when a Democrat is president.

The repeal of Glass-Steagall passed Congress mostly through party lines (supported by the GOP), and was signed by President Clinton. These guys are always thinking a few steps ahead when it comes to manipulating public ire. On a separate note, I'm not happy with the notion that businesses and unions can pour unlimited amounts of money into political campaigns. The best thing to happen in this country in a long time is the awaking of the electorate. I worry that these people with cardboard signs and well-worn shoes could have their voices drowned out by special interest groups.

Other Concerns

China is a concern. However, I just don't think that it's a good enough reason for the U.S. market to selloff as much as it did yesterday, especially since half the speculation is that the numbers are fudged and the other half is that the growth is too strong and overheated. I'm just not sure on China because we have been waiting for that nation to derail for a couple of years now and yet the only time their market slows down is when there are deliberate attempts to step on the brakes. There are people that think the entire thing is a mirage. I don't. Granted, it's not a transparent society, but we know there are 1.3 billion people clamoring for a better life. The government there has serious issues because this kind of wealth doesn't come without demands for more freedoms. Moreover, once people get a taste of the good life they get pissed when it's taken away from them. That is part of the challenge with the Obama Administration, whose ultimate dream is a land of a just a little milk and honey. Or, a Goldilocks economy...nobody makes too much and nobody makes too little.

China real estate is questionable with respect to its current value, but I still think that any miscues will be corrected swiftly. And, there will be miscues because they must balance an orderly slowing of the economy against millions of people looking for a piece of the action.

Almighty Dollar (some people got to have it)

The strong dollar definitely had a negative impact on commodities and multinationals yesterday. The dollar is higher by default as Greece is a bigger worry each day, and the rest of the continent seems to have hit a brick wall.

Observations and Tidbits
  • Barron's noted that if Goldman Sachs (NYSE:GS) had paid out compensation at its regular rate earnings would have come in at $4.00 per share, substantially below the $5.20 per share modeled by the Street.
  • How about them Dallas Cowboys! Wade Philips got a two-year contract extension for winning one playoff game; I think that Jerry Jones is getting soft.
  • Google (NASDAQ:GOOG) shares got clobbered after the closing bell as the company reported earnings of $6.79 per share on revenue of $4.95 billion. That beats the official consensus for $6.48 per share on revenue of $4.92 billion. But, it was clear that people were hoping for more, on revenue and especially on average cost per click, which climbed 2% sequentially instead of the 5% plus that many anticipated.
  • Intuitive Surgical (NASDAQ:ISRG) was a legitimate winner as it beat the Street by $0.24 when it posted bottom line results of $1.95 per share on $323.0 million in revenue against the consensus of $292.7 million. This has been a favorite of mine for years, and the stock will be up big today.

Technical View

For the first time in a long time the major equity indices are faced with serious test from a technical perspective. The Dow Jones Industrial Average closed at its 50-day moving average on strong volume. It's hard to ignore the implications. In fact, volume has been high on down days the last couple of sessions. I think that the next big support point is 10,200, but the 200-day moving average suggests a worst case scenario of 9,700. I don't think that will be the case, but just like that the market has become extremely vulnerable.

Today's Session

General Electric (NYSE:GE) posted earnings of $0.28 per share on $41.44 billion in revenue, both higher than consensus. However, the stock edged lower and the broad market slipped into negative territory after clinging to slight gains in pre-opening trading. The stock began to rebound so maybe it could provide some leadership, although it's not like the old days...where is Jack Welch?

Don't think that the war on Wall Street is all political...Tim Geithner and Larry Summers both fought against the plan. By the way, Paul Volker didn't get a chance to say a word yesterday; it's like he's being used by the President, who understands his stature in the world of finance is prominent.

Guys we aren't going to force the issue. This is a tough period. We get it from both sides. I've had people send me emails about profit alerts over the past couple weeks and of course people are upset with stocks they are holding that are paper losses. This investing thing isn't a walk in the park, but I feel great about folks raising cash.

Disclosure: None
Stocks: GE, GS, ISRG, GOOG