Consequences of Leadership and Economic Data 12-12-2008

The Consequences of a Lack of Leadership

The FBI’s announcement of the arrest of Bernard Madoff, former NASDAQ chairman and founder of Madoff Investment Securities, LLC, shocked market insiders and sent regulatory officials scrambling late Thursday. Madoff’s allegedly fraudulent activities may have resulted in $50 billion in investor losses, principally effecting wealthy hedge fund investors, and raises serious questions concerning the effectiveness of the SEC and the New York State Securities Division. SEC Chairman Christopher Cox and his senior advisors will certainly come under increased scrutiny as details surface. Already among those details are reports that SEC officials were alerted to possible improprieties as far back as 2005, but remarkably failed to act.

The announcement earlier in the week of the arrest of Illinois Governor Rod Blagojevich, though initially shocking, continues a long, albeit unsurprising, string of corruption in Illinois politics. Though otherwise unrelated, the common brazenness with which Blagojevich and Madoff appear to have operated is both interesting and revealing. One CNBC commentator remarked that he couldn’t imagine how Madoff might be able to sleep at night given the enormity of what is now being considered a clever and sophisticated ‘ponzi scheme’. Blagojevich, though recognized as intelligent and measured, appeared to operate without respect for the public’s trust or consideration for the relevance of his office.

As the nation’s key investment, banking, insurance and manufacturing leaders have been brought before the public to defend their organization’s worthiness to receive hundreds of billions of dollars in federal aid, we’ve seen men and women of great accomplishment describe, and in some cases attempt to defend, years of poor judgment. In an age in which leadership in the private and public sectors are accorded high levels of respect and reward it is tragic that such breaches so often occur.

As the Obama administration takes office in January, the first measure of business will certainly be to restore health to the economy. Perhaps trillions of dollars will be invested in US corporations in the way of preferred stock capital and federally backed loans, and hundreds of billions more will be directed to public works and energy development. At the same time our national leadership addresses these fiscal and economic issues, attention must be given to how we got into the quagmire we’re in today, and as much effort needs to be directed towards how we avoid these kinds of problems in the future as to how we restore growth to the economy today.

The role of supervisory commissions in the public sector and boards of directors in business, and their fiduciary responsibilities, must be addressed. Both demand short term results, often at the cost of long term progress. Even the SEC, Treasury, and Comptroller of the Currency have played into this short term mentality as they continue to support ‘mark-to-market’ accounting and the elimination of the uptick rule in short selling.

Though these are simply examples of the sort of mentality that has led to some of the worst of our economic woes, and that may have allowed the actions of men such as Madoff and Blagojevich, they are telling and reflective of a lack of true leadership.


Economic Reports and Correlated Data

The US consumer is making their presence felt in the retail markets despite increases in unemployment and tightened credit standards. Though virtually every sector of the economy is facing some level of demand destruction, and retail and producer prices continue to fall, consumer purchases have increased over both previous month and year figures. Though it’s unlikely that a consumer rally would be sufficient to pull the economy out of recession at this point, the obvious improvement in consumer confidence provides welcome relief amidst the slate of other troublesome financial and economic news.

November retail sales figures have been released and represent an increase of .3% when sales of automobiles and gasoline are factored out. Contrary to media and anecdotal reports of lower holiday sales, and substantial decreases in overall spending, it appears that the US consumer is taking advantage of decreased fuel costs. The steep discounts offered by retailers at the start of the holiday buying season appear to have brought consumers to the table, but the increased purchase activity may not be enough to offer retailers relief from lagging profits.

Manufacturing inventories were up in October by 4.6% from October 2007, but down .6% from September 2008. Likewise, retail inventories were up over previous year figures though down from the previous month.

As of the end of November, 10.3 million Americans were out of work and unemployment figures are expected to increase to as much as 7% by the end of December, up from 6.7% in November. Regardless of the whether or not the proposed bailout of the US auto industry is acted upon, it is clear that additional manufacturing jobs will be lost as we enter the first quarter of 2009.

The Producer Price Index (PPI), which represents the cost of goods to retailers and distributors, fell by 2.2% in November, continuing a deflationary trend represented by 2.8% and .4% declines in October and September. The price to producer figures, the prices manufacturers and producers pay for goods from which they make their products, fell by yet larger amounts, down 4.3% in November and 3.9% in October. These figures suggest that the Consumer Price Index for December may be lower than anticipated, and could represent a decrease of 4-6% when holiday buying incentives are taken into consideration.

This mixed bag of economic data, coupled with the ongoing debate over the fate of the US auto manufacturers and their dealer networks, was enough to send the markets on another rollercoaster ride for the week, but left the equities markets relatively unchanged from Monday’s opening. Whether or not this represents a bottom in the volatile markets may remain to be seen. It certainly represents an increase in both consumer and investor confidence, and for right now, that’s about all we can hope for.

Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management