U.S. politics and bank reform legislation

It was widely reported this past weekend; Goldman Sachs, the most profitable investment bank is being sued for fraud by the U.S. Securities and Exchange Commission. The U.K. and other countries are joining the fray to try and re-coup some of their losses on derivatives.

We do not know if the facts, which will be presented in court months or years from now will exonerate Goldman Sachs or find them guilty, but we do know that the SEC’s suit will have two immediate effects.

The first effect will be to insure the passage of the proposed financial reform bill being pushed through by the U.S. Congress and the Obama administration. It will be very difficult politically for anyone to stand up and fight against this legislation with media headlines convicting Goldman before they get their day in court. The big question here is will the bill really provide financial reform, or will it, like the healthcare bill, benefit the industry that it is supposedly trying to regulate?

The second effect will be to put a cloud over the U.S. banking industry and their stocks in this election year. The next time a politician wants to get some leverage with the voting public, he will vilify banks and press for more investigations and more fines, restrictions, etc.

Politicians have realized that although the U.S. public does not know the intricacies of the instruments that were sold, nor does the public understand the mechanics of the sales, the public is angry about the bank bailouts and what they see as the excessive pay that some bankers receive. In any case, the public wants to extract something from the bankers, who they see as rich and manipulative.

SUMMARY

We have volatile markets. Adding to volatility is the fact that 2010 is an election year in Brazil, U.S., and the U.K. among major countries. Political unrest in Thailand may lead to an election there.

Of course election years make for wild political actions as politicians defend their poor records by blaming other forces such as, but not limited to: nasty corporations, greedy unions, recalcitrant opposition parties, and anything else that comes to mind. They quickly acquire amnesia when confronted with the facts that they have created many of the problems that their nations currently face.

Investors are frightened of wild statements and actions by politicians, volatile currencies, fluctuating commodity prices, bond market declines, and stock volatility. On the other hand, the fuel of stock prices is corporate profits. Corporate profits are rising rapidly in much of the world.

Certainly, profits are growing fast in China, India, Brazil, and East Asia. Profits are fine in Europe, the U.S. and Latin America. This is the season where markets sometimes correct for a few months (‘sell in May and go away’ is an old saying, but in recent years, sell in early September and buy back in late October is more accurate), however this is also a period of strong economic and corporate earnings, which is providing a positive backdrop for stocks.

If the political rhetoric against banks is not too strong, the rally could continue. If the rhetoric gets out of hand, we will see a market correction for a few weeks with a resumption of stock price increases later in the year.

We continue to invest in Asian growth countries, oil, gold, and export driven companies who can grow earnings while shipping products worldwide.

Thanks for listening.

Guild Investment Management, Inc., a registered investment advisor. All material presented herein are solely the opinions of Monty Guild and Tony Danaher. Investment recommendations and opinions expressed in these reports may change without prior notice. Read Monty and Tony’s past periodic market and economic commentary articles by going to the Commentary Archive on www.guildinvestment.com.