FDIC Chief Sheila Bair Steps Up

January 12, 2010 Edition, Volume IV

Inside Signature Update

- The Market – Earnings Season Upon Us Once Again
- The Economy – FDIC Chief Sheila Bair Steps Up
- The Takeaway – 2010 Gets Ready to Heat Up


THE MARKET – Earnings Season Upon Us Once Again

The US stock markets have been relatively calm this past week. As of Monday’s close the DOW was well over 10,600 and the gold and oil markets were holding their own. About what we expect as we enter into 4th Quarter 2009 earnings reporting season for publically held companies. Trading volumes have been light to moderate and there is a growing amount of investor cash on the sidelines once again. Traders and investors are waiting to make their moves; some would ask, “what are they waiting for?”

On one hand, the current calm is to be expected; on the other it’s surprising. The markets don’t appear to be bracing for negative reports; rather, a few strong earnings releases could send the market swiftly higher. Alcoa (AA) was one of the first companies to report and their earnings were disappointing. Adjusted for one-time-events and charge-off’s, the company reported a profit of one cent per share versus an expected 5 cents, but their sales (gross revenues) were up. The market reacted by handing Alcoa shareholders an 11% loss on the day; while the DOW only moved downwards by only .34%; an indication that Alcoa’s poor results weren’t expected to be repeated across industry segments.

Supervalu Stores (SVU) shares dipped .22% along with the broader market on reports that the chain had swung to profitability and beat their full-year earnings estimates; while rival A&P (GAP) dropped by more than 20% as 4th quarter results disappointed at both the top and bottom lines.

Most companies reporting early either have good news they can’t wait to share or bad news they want to get out of the way: Alcoa’s numbers were a little bit of each. JP Morgan Chase, Cargill and Intel are all scheduled to release later this week and numerous financials, retailers and industrials are scheduled for the week following. Until then, the markets may well hold steady as we look for confirmation that signs of growth in the 4th quarter translated into profitability at the corporate level.


THE ECONOMY - FDIC Chief Sheila Bair Steps Up

FDIC Chief Sheila Bair drew fire from bankers Tuesday morning as the agency announced plans aimed at altering compensation and risk management among the nation’s bankers. Others cheered the announcement, and here’s why: the proposal offers compensation, without limits, to executives and managers based on long-term stock performance rather than all-cash payouts. This is exactly what we’ve recommended since before executive compensation and bonus rewards came into focus in the wake of the financial crisis. Bair is doing without legislative interference which is what the agency is empowered to do: regulate the risk profiles of those banks covered by the FDIC. The proposal is focused and addresses the relevant issues without over-reaching; something very difficult for legislators and political appointees to accomplish. Also something White House Pay Czar Kenneth Feinberg has been unable to do after more than six months on the job.

The FDIC plan is linked to an earlier plan to increase fees and depository insurance premiums for those banks insistent on maintaining aggressive risk structures. Though the move may be controversial, it’s consistent with the assessment of other risk insurance premiums throughout the financial services industry. It’s about time.

The December 4th, 2009 issue of Signature Update addressed executive compensation as the Obama administration moved to limit compensation at those firms that accepted TARP resources. The article noted that “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.” The FDIC’s most recent proposal takes on compensation beyond the scope of TARP recipients, but does so in such a manner as to not directly impact banks’ ability to compete in the compensation market and it does so just as the debate is set to heat up once again.

Goldman Sachs CEO, Lloyd C. Blankfein, has become one of the most visible executives in the compensation debate. Though the top 30 executives at Goldman (GS) will accept stock in lieu of cash for their 2009 bonuses, the firm, like many others, is battling shareholder groups over the right to set compensation policy. Many Wall Street firms, even those that are publically held, continue to act as partnerships and distribute substantial portions of their revenues to talented managers and executives. In good times the practice was tacitly approved by shareholders as profits masked the dynamics of the problem; that was then. Boards of Directors are tasked with overseeing major policy initiatives for large corporations and serve in much the same capacity as do elected legislative representatives for the population at large. Industry leaders correctly argue that shareholders have the right to influence management decisions by virtue of their votes for board members and point out that without competitive executive compensation the firms would be at a disadvantage and shareholder value may be more adversely affected than it is by disbursing billions in incentive bonuses.

It’s a valid argument, and one for which Bair may have provided a meaningful influence across the spectrum of corporate America. In the end, shareholders may well be judged deserving of the right to contravene in the decisions of the firm’s management, though they may also live to regret the possible adverse effects. In the mean time, let’s hope executives, managers and policy makers are listening.


THE TAKEAWAY – 2010 Gets Ready to Heat Up

- Just as we’re now seeing 4th quarter earnings reports for publicly held corporations, we’re also about to see US GDP forecast revisions for the 4th quarter and full-year 2009. Look for better-than-expected GDP figures, possibly exceeding 5% for the 4th quarter.

- The market’s reaction to recent employment, revenue and earnings reports bodes well for the bulls. The yield curve continues to be strong and steep, and suggests extended gains for US equities.

- Look for legislative representatives to jump on executive compensation as the debate comes back to the forefront. Their positions will likely have less to do with shareholder rights than social engineering, but shareholder advocacy groups will almost certainly applaud their efforts.



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