Insights & Advice

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Market’s Bungee Jump on Goldman Fraud Charge

In case you missed it last week, my column ended with “My target for the S& P remains in a range of 1,200-1,235.” Thursday, the index hit 1,213.92, a new high for the year and just short of the mid-point of my target range. Friday morning’s bombshell announcement by the Securities and Exchange Commission accusing Goldman Sachs of fraud triggered the pullback I was looking for. So what happens next?

It is, in my opinion, simply another correction and somewhat overdue given the S&P’s 18% bounce since early February. Painful, yes, but it is also an opportunity once again to add to positions in stocks, ETFs or mutual funds and a chance to sell Treasury bonds at reasonable prices. If there are securities that you purchased for a trade, which have done well, profit-taking is in order. For those with long-term positions, it is a chance to pick up some of those investments at discount prices. Patience will continue to be rewarded in this market, so wait a bit before committing more money.

As for the Security and Exchange Commissions’ civil fraud charges against Goldman Sachs, maybe there is justice in the world after all. The SEC is accusing the behemoth broker (now masquerading as a bank), with defrauding investors by failing to disclose conflicts of interest in mortgage investments called CDO (collaterized debt obligations). Goldman sold these toxic assets to the world even as the housing market was tanking, according to the complaint.

Allegedly, Goldman had paid one of its clients, one of the largest hedge funds in the world, Paulson & Co., to structure these CDOs but told their clients another firm, ACA Management LLC, was responsible for selecting the underlying mortgages in these investments. During the decline of 2008-2009 it was Paulson & Co. who was one of the biggest short sellers of the very instruments they created and sold to Goldman Sach investors.

Goldman, of course, issued a denial claiming the SEC’s charges were unfounded and they would defend their firm’s reputation, etc., etc.
For those who have been reading my columns over the last few years, you know my opinion of Goldman Sachs and the other mega-brokers. I have consistently written that these financial giants got us into the financial crisis, created a recession and just about drove the world into another depression. Those of us in the marketplace know the truth. Whether the SEC can prove it is another matter. Remember, the legal system is not about justice or what’s true, it’s about what you can prove is true.

Don’t think the timing of these accusations is accidental. Remember, a financial reform battle is raging in the House and Senate. Republicans are fighting the passage of any bill while Democrats are trying to marshal support for its own brand of reform. This kind of charge against one of the biggest players on Wall Street certainly will help swing public opinion toward the passage of a reform bill. I’m not accusing the SEC of partisan politics, or am I?

However, the problems of Goldman and maybe other financial culprits is only the catalyst for what was needed, a healthy pullback. First quarter earnings have come in on target or above expectations so far in this reporting season. The macroeconomic data continues to impress me; even parts of the housing market are beginning to pick up. Here in Berkshire County, a real estate lawyer recently told me that he had actually encountered a bidding war last week for one local property. That, my friends, is progress. So keep your eye on what is important, the economic recovery and the value declining markets might offer you while Goldman squirms on the hot seat.

Posted in A Few Dollars More, At the Market