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David Trainer
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David is CEO of New Constructs (www.newconstructs.com), an independent research that specializes in unearthing key insights from the Financial Footnotes of Annual Reports. Having analyzed over 50,000 annual reports and their Financial Footnotes, New Constructs research regularly produces Hidden... More
My company:
New Constructs
My blog:
Hidden Gems and Red Flags
My book:
The Valuation Handbook
  • Private Sector to the Rescue 0 comments
    Nov 8, 2010 5:06 PM | about stocks: GOOG, GS

    At a time when most of the pub­lic believes lead­er­ship of all sorts, espe­cially polit­i­cal, to be weak, we should not focus on find­ing scape­goats but rather on assum­ing account­abil­ity to help fix problems.

    As detailed in his book, Bad Money: Reck­less Finance, Failed Pol­i­tics, and the Global Cri­sis of Amer­i­can Cap­i­tal­ism and in the Harper’s Mag­a­zine arti­cle, “Num­bers racket: Why the econ­omy is worse than we know”, Ken Phillips doc­u­ments how since the 1960’s Wash­ing­ton has been play­ing with the offi­cial sta­tis­tics by which the health of our econ­omy and soci­ety are mea­sured in order to avoid the per­cep­tion of their legacy as hav­ing done a poor job. I bor­row from the Harper Mag­a­zine article:

    The cor­rup­tion has tainted the very mea­sures that most shape pub­lic per­cep­tion of the economy—the monthly Con­sumer Price Index (CPI), which serves as the chief bell­wether of infla­tion; the quar­terly Gross Domes­tic Prod­uct (GDP), which tracks the U.S. economy’s over­all growth; and the monthly unem­ploy­ment fig­ure, which for the gen­eral pub­lic is per­haps the most vivid indi­ca­tor of eco­nomic health or infirmity.”

    The point is that: as getting-elected has become the pri­mary busi­ness of politi­cians, less and less have we been able to trust any­one in polit­i­cal lead­er­ship to make the dif­fi­cult but cor­rect deci­sions. Evi­dence of this trend is all around us in the state of our econ­omy and soci­ety. No one in office wants to take respon­si­bil­ity for exces­sive and prof­li­gate bor­row­ing and spend­ing for fear of being vil­i­fied as anti-growth, anti-jobs, anti-happiness or anti-anything that their polit­i­cal com­peti­tors believe pleases peo­ple in the cur­rent moment.

    In the afore-mentioned con­text, I am pleased to learn of Google’s inten­tions to cre­ate its own Price Index and find it reas­sur­ing that we are not paving the Road To Serf­dom. I believe the found­ing fathers would cheer this endeavor as a shin­ing exam­ple of suc­cess of the inno­v­a­tive spirit empow­ered by free enter­prise. Indeed, their orig­i­nal vision for the United States is to cre­ate a soci­ety that rewards cit­i­zens com­men­su­rate with the value they cre­ate. That, in my opin­ion, is the Amer­i­can Dream.

    The longer we allow cer­tain fac­tions of soci­ety to exploit oth­ers or reap rewards greater than the value they cre­ate, the more our lib­eral demo­c­ra­tic sys­tem declines. Our civ­i­liza­tion depends on cit­i­zens trust­ing that their oppor­tu­nity for achieve­ment and suc­cess is equal to their peers and that no injus­tice will under­mine their efforts to cre­ate value for them­selves, their fam­ily and their soci­ety. Fran­cis Fukuyama artic­u­lates this idea with ter­rific lucid­ity in his book, Trust: The Social Virtues and the Cre­ation of Pros­per­ity.

    Given that our abil­ity to trust polit­i­cal lead­ers is low, we must rely more than ever on pri­vate enter­prise to lead our soci­ety. Keep in mind that the pri­vate enter­prise is not to blame for Wall Street’s excesses and inor­di­nate com­pen­sa­tion. Blame the politi­cians, begin­ning with Greenpsan, who paved the way for Wall Street to loot the cap­i­tal mar­kets. In his inter­view with ABC, Larry Sum­mers points out the fact that the finan­cial ser­vices sec­tor (part Wall Street and part cor­po­ra­tions) spends, annu­ally, about $1mm per con­gress­man while employ­ing 4 lob­by­ists per con­gress­man. That is why Wall Street and Cor­po­rate Amer­ica con­tinue to get what they want and are not held account­able for what amounts, in many cases, to rob­bing the invest­ing pub­lic. That’s right – politi­cians and polit­i­cal influ­ence can be bought.

    All the more rea­son for pri­vate enter­prise to step into the lead­er­ship void and help steer Amer­ica back on track.

    Google is not the only exam­ple of excel­lent lead­er­ship by pri­vate enter­prise. There are many. A fairly recent arrival on this front is Bet­ter Mar­kets, Inc. – a non-profit ven­ture founded my Michael Mas­ters of Mas­ters Cap­i­tal Man­age­ment, LLC and run by Den­nis Kelle­her, a senior staff offi­cial from the Demo­c­ra­tic Pol­icy orga­ni­za­tion in the Sen­ate. Bet­ter Mar­kets aims to enhance the ratio­nal allo­ca­tion of cap­i­tal pri­mar­ily within the deriv­a­tives mar­kets. Mr. Mas­ters has served soci­ety admirably over the past sev­eral years via his tes­ti­mony to Con­gress and his numer­ous papers on the flaws in the cur­rent deriv­a­tives mar­ket. I highly rec­om­mend read­ing the inter­view by Welling@Weeden with Mr. Mas­ters and Mr. David Frenk, Direc­tor of Research a Bet­ter Mar­kets, in the attached arti­cle to gain a fuller under­stand­ing of the Bet­ter Mar­kets under­tak­ing. I also rec­om­mend read­ing the excel­lent paper by Mr. Frenk that refutes an objec­tion­ably poor study by Irwin and Sanders on the impact of spec­u­la­tors on com­mod­ity prices and markets.

    I can­not fail to men­tion my own firm, New Con­structs. Per our Mis­sion state­ment, we are ded­i­cated to improv­ing the integrity of the cap­i­tal mar­kets because we believe that is in the best inter­est of the long-term pros­per­ity of our soci­ety. Though not nearly as impact­ful as Mr. Mas­ters, I also spent time in Wash­ing­ton meet­ing with Sen­a­tor Corker, the SEC, the Sen­ate Bank­ing Com­mit­tee, FDIC, Con­gres­sional Over­sight Panel and oth­ers. My pre­sen­ta­tion focused how to improve the integrity of the cap­i­tal mar­kets most effi­ciently. As detailed in my let­ters (#1 and #2) to Sen­a­tor Corker, my pur­pose was to pro­vide our polit­i­cal decision-makers with a pow­er­ful tool to com­bat stock mar­ket manip­u­la­tion – that tool is New Con­structs research, which decodes Wall Street pro­pa­ganda and deliv­ers the whole truth about prof­itabil­ity and val­u­a­tion. I sub­mit­ted a list of over 20 Cor­po­rate Finan­cial Dis­clo­sure Trans­gres­sions to the Sen­ate Bank­ing Com­mit­tee. I pointed out that not only were com­pa­nies able to manip­u­late the account­ing sys­tem, but also that vio­la­tion of account­ing was ram­pant and unde­tected. For exam­ple, as detailed in our Cor­po­rate Finan­cial Dis­clo­sure Trans­gres­sions, over the last 5 years we found 10 com­pa­nies whose income state­ments do not add up cor­rectly and 20 com­pa­nies in the last 11 years whose bal­ance sheets do not bal­ance. I’d say that is proof that when the cat is away the mice will play.

    New Con­structs can solve all of these issues and many more. Hav­ing worked on Wall Street for sev­eral years, I know how the “sausage is made”. I explained to every­one I met in Wash­ing­ton that New Con­structs can imme­di­ately pro­vide the pub­lic with addi­tional infor­ma­tion on the true prof­itabil­ity and val­u­a­tion of com­pa­nies that would empower investors to make more informed deci­sions. I do not believe that most investors make bad invest­ment deci­sions because they are stu­pid. They make them because they are mis­led about the true prof­itabil­ity and val­u­a­tion of companies.

    The New Con­structs approach to deter­min­ing cor­po­rate prof­itabil­ity is straight-forward, sim­ple and, most impor­tant, com­plete. Yes, build­ing a com­plete finan­cial pic­ture of a com­pany is crit­i­cal to under­stand­ing its true prof­itabil­ity. Our patented Research Plat­form for revers­ing account­ing dis­tor­tions and dis­counted cash flow analy­sis lever­ages data from the Finan­cial Foot­notes to deliver research of unri­valed qual­ity and accuracy.

    Disclosure: No Positions
    Stocks: GOOG, GS
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