It May Not Be Over, But It's Better

December 4, 2009 Edition, Volume III

Inside Signature Update

- The Market – Executive Compensation Returns to the Spotlight
- The Economy – It May Not be Over, But It’s Better!
- The Takeaway – Improving Trends Well Into 2010


THE MARKET – Executive Compensation Returns to the Spotlight

The Obama Administration’s plan to curtail executive compensation at firms taking advantage of TARP resources is well within the purview of policy makers. Without question, compensation plans at many firms presented phenomenal rewards for taking risks now recognized to be excessive. Fed Chairman Bernanke, FDIC head Sheila Bair, Treasury Secretary Geithner and senior Congressional and Administration leaders have each addressed the issue recently with calls for new regulatory oversight. Many have continued to press for compensation limits reaching far beyond reason in a free-market system.

We knew this was coming. Regulatory reform of the financial services industry is an obvious byproduct of the crisis we’ve lived with for almost two years. With the markets stabilizing, policy makers have begun to turn their attention to preventing a similar debacle in the future, and rightly so.

Many will suggest the Administration’s plan to cut 2009 compensation by as much as 50% of 2008 pay levels for the top 25 executives at AIG, Citigroup, Bank of America, GM, Chrysler, and GMAC is overreaching, but we can’t ignore that these firms received $240 billion (more than half) of TARP funds invested so far. Of those firms that have sought to repay their TARP obligations, including recently announced Bank of America, most have sited the need to independently govern their core business operations as one of the most important factors in their decision. The Administration’s move is unprecedented and will bring changes in compensation plans for most levels of corporate pay by a trickle-down effect for years to come.

Truth be known, it’s probably the right thing to do and may go a long way towards decreasing income inequality in the US. High corporate incomes in and of themselves don’t represent a societal imbalance, but the upward creep of executive pay among US business leaders has evidenced more than an increase in their effectiveness and has come to represent an inefficient leadership market. It has also become a focus of shareholder advocacy groups and social reformers from across the globe.

It remains to be seen how closely new compensation agreements will track long-term corporate benefit, or if 2010 executive pay plans will be held to the same levels. The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms. This may long be viewed as one of the smarter, though aggressive moves on the part of center/left policy makers to influence an area of corporate activity previously thought only approachable by outright regulatory intervention.


THE ECONOMY – It May Not be Over, But It’s Better!

The US Department of Labor’s announcement Friday morning of a November unemployment rate of 10% surprised many traders, investors and economists. Consensus expectations had been for job losses in the range of 125,000; much higher than the 11,000 figure released. Additionally, downward revisions of prior month losses presented a stronger-than-expected picture for the US labor markets. Not surprisingly, the news sent the equities market higher in early trading, while the dollar gained ground and interest rates edged higher.

The good news here is less obvious than one might suppose. Certainly, we’re pleased to see a better jobs report and we can breathe a collective sigh of relief as a result. The troubles in the labor market may not be over as yet, but they are better - much better than expected. A one month improvement isn’t enough to reverse many months of mounting job losses, and there’s much to be done before the unemployment rate decreases to the 5-6% range, but 10% is better than 10.2% and that’s all there is to it. If nothing else, the shift should give much needed hope to the nation’s jobless.

An important facet of the market’s reaction to the news wasn’t simply that the stock market closed the day higher. Of import are the strengthened US dollar (as can be seen by a 4% decrease in the price of gold) and an increase in interest rates. In recent months the stock market has moved inversely to the dollar – as one gained, the other lost. Historically this hasn’t been the case and Friday’s gain in equity values along side of gains in the dollar may be an indication that the two are once again set to act in concert.

Intuition tells us that a stronger dollar represents a stronger economy and should give rise to improved investment values. Very true, except in times when the dollar has been going through a devaluation process. While this recent move for the dollar and equity values may not be enough to suggest a change in trend, it’s certainly a good sign and sends an important message to the rest of the world.

Chairman Bernanke and the Federal Reserve

Fed Chairman Ben Bernanke’s appearance before the US Senate Thursday, in a round of confirmation hearings, offered a more considerate treatment of the nation’s top monetary policy maker than many had expected. Bernanke is under fire from legislative leaders on both the left and right sides of the aisle and true to form, handled himself with a resolve that bespeaks of the man’s strength and character. Though the senators treated Bernanke far more professionally than they did Treasury Secretary Timothy Geithner only a few weeks ago, but some left little ambiguity of their negative impressions of the Fed’s performance in recent years and Bernanke himself.

Representative’s Ron Paul (R-TX) and Alan Grayson (D-FL) actively sought to delay Bernanke’s Senate confirmation hearings and have gathered a surprising degree of support from fellow congressional representatives. Rejection of the Fed and its leadership isn’t anything new, in fact, the Fed has most often been a source of national contention; even outrage. It’s only been in recent times, while the Fed has enjoyed strong, capable economic leadership that the Fed’s reputation has become one of trust and stability.

Beginning with Fed Chairman Paul Volcker (1979-1987), the central bank entered into an era of economic leadership that went beyond the string of political appointees previously in charge of the nation’s money supply and banking system. Prior to Volcker’s appointment, the Federal Reserve had only twice been lead by a professional economist; Marrinier Eccles (1934-1948) and Arthur Burns (1970-1978). Virtually all other Fed Chairmen have come from business, academia and political circles and many were considered puppets of politicians and the wealthy. Under its recent string of strong economic leadership the Fed became the most powerful and perhaps most highly respected central bank in the world; the recent crisis notwithstanding.

It is this very strength and reputation, coupled with creative leadership and a powerful balance sheet that moved the US and global economy from the brink of disaster in the fall of 2008. Bernanke may not be the only leader capable of guiding the economy through what will undoubtedly be a long and difficult recovery process; he clearly has the mindset and international political capital to get the job done. Years from now, after an intense period of scrutiny we may find facets of Bernanke’s leadership wanting; we may also herald him as the right man for the job during a particularly difficult time in our nation’s history.



THE TAKEAWAY – Improving Trends Well Into 2010

The US equities markets continue to experience volatile swings, sometimes intra-day, but are poised for continued rebounds well into 2010.

Interest rate increases, thought to be as far in the future as next Fall, now may begin to present themselves in the late spring. A strengthening dollar and lower gold prices are sure to prevail.

A move towards more long-term performance based compensation of the nation’s business leaders likely coincides with a return to growth in the labor markets – both will lead to important GDP gains and a strengthening of the US dollar.

10% unemployment can hardly be called good, but it’s better than 10.2% and better still than the November projection of 10.4%. Higher than normal unemployment rates will likely linger throughout 2010, but businesses small and large are finally beginning to return to higher capacity levels and pressure on the nation’s unemployed is slowly beginning to improve… it couldn’t have come at a better time.






Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC