Equities Move Higher As Earnings Line Up!

The purpose of a team is not goal attainment but goal alignment.

Tom DeMarco

When most people are in grade school, you get used to your teacher having you line up outside the class.  Lining up is a form of order, precision, discipline.  You can see this in the various armed forces routines, for example, when training fresh recruits to become accustomed to how things are done.  The idea of lining up applies globally as well, especially in the military, and has for decades.  One needs only to remember our history classes and the films remembering World War One and Two battles and subsequent victory celebrations.  Even today, when we see various shows of force from tyrants around the globe, it always involves soldiers marching in line.  So, why does this matter to the investment world?  Good question, and I am glad you asked it friendly reader, so let me move on to the importance of alignment in the financial world.

Many problems regarding financial matters center around misalignment.  The same way a car does not run well when the wheels are not aligned correctly, investors, companies, and even massive pension funds suffer the consequences when what needs to be aligned with precision is not.  For investors in stocks, one of the big problems you see is when the management team does not have a large financial ownership position of the company.  Often times this occurs with the egregious granting of options, thereby diluting existing shareholders.  It also takes place when compensation of management is based solely on short term stock performance versus long term operational metrics combined with long term stock appreciation.  With respect to companies, when expenses are not aligned with revenues, say for example, costs are in euros but revenues are in pounds, a company can suffer severe consequences.  Much of what transpired with Lehman Brothers during 2008 was because of overwhelming debt, an abundance of which was short term in nature, called repos.  All across the country, many of the largest state pension funds suffer from underfunding.  It is because their liabilities (payments to their pensioners) are locked in the highest levels of members pay, and the assets to support those distributions have to grow at rates which are going to be difficult to achieve (you might have read about the 2 billion dollar investment by a pension fund which went to, ahem, ZERO).  So you see, alignment is a very important issue in the financial world, and for anyone interested in investment results, one to evaluate carefully.

In the financial markes this week, Mario Monti made news by declaring tapering was certainly on the table because of improvements in economies across Europe.  One can see this with the strength of the Euro versus the dollar, now at 1.16, at it’s yearly high.  Netflix turned in a monster subscriber number and led the NASDAQ advance all week.  Long time Dow component,Johnson & Johnson, met expectations and guided higher for the rest of the year.  Interestingly, analysts downgraded it on valuation levels.  Amazonitis continues to afflict the financial world, this time when Sears decided to offer it’s Kenmore appliance line with the beast that ate modern retail, do it yourself monsters Hope Depot, Lowe’s, and even electronics powerhouse Best Buy got dinged.  Amazonitis grows more deadly by the passing week, especially to unsuspecting investors.  Next week brings an avalanche of earnings reports, from the most well known companies across the land.  It will be interesting to see what transpires, but I expect earnings will hold up pretty well, especially if everything is lined up properly.

In the political world, the issue of alignment is quite applicable as well.  For citizens, we suffer from a Congress which cannot pass gas.  Much of this is because contributors interests take priority over the broader populace. The Democrats have special interest donors from various unions, trial lawyers, and the environmental lobby, which dominate the Dem’s fundraising.  The majority of the population works in private industry, and is concerned with economic issues.  When the party platform consists of climate change and minimum wages of $15 an hour, those ideas aren’t in alignment with most working people.  I am not sure if you read the Wall Street Journal’s article on how the climate has literally moved less than half a percent over three or four decades.  Maybe you saw where different states raised their minimum wages to $15 an hour, and the result has been fewer jobs for those who need them the most.  Not aligned with Joe from Peoria, not at all.

On the Republican side, same problem, but interparty alignment does not exist.  It manifested itself in the failure to repeal and replace Obamacare last week.  Moderate Senators want more of the entitlement, more conservative senators want it gone.  The major problem is self interest of the individual senator in terms of getting elected.  If you come from a moderate state and the subsidy for Medicaid gets eliminated, your constituents who lose that benefit might not be inclined to vote for you next year, right Mr. Heller (our Senator, for the time being, here in Nevada).  Finally, on the Executive level, the question of alignment is also pertinent.  Is Donald aligned with party Republicans?  Is Donald aligned with the country in terms of financial self interest versus country interest, and the same question holds with respect to the light evidence of collusion with Russia?  Yes, indeed, nowadays, the seemingly trivial idea of lining up ain’t so trivial, is it?  

Thanks for reading the blog this week and if you have any questions or comments, please email me at information@y-hc.com

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.