The market's recent rally, although much appreciated, has been driven largely by political events. One could say political progress, but I fear that is really an oxymoron. Still, we should give Team Obama credit for their efforts. Even a flawed and ever changing stimulus plan is better than no plan at all, right?
Large and in charge... I do long for the day when the market will reflect the underlying fundamentals: earnings, interest rates, and inflation, and less so, political rhetoric, congressional hearings, and the like. I'm just not sure when that will be. Holman W. Jenkins, Jr. stated it very succinctly in a recent Wall Street Journal editorial - "Politics is in Charge." But politics, by its very nature, can never be as productive or as creative as the private sector. So, while Team Obama is driving the bus, the outlook for future prosperity is suspect. Is this view an oversimplification? Probably. But at some point we have to replace "politics in charge" with "people in charge."
What does "people in charge" mean? Basically it means the courage to act, to take risks, to embrace the creative spirit hidden within. In a nutshell, it means to go for it unabashedly. There are many who fear our country is losing its entrepreneurial spirit, some convinced it's already gone. Even the thought of that is disheartening.
I realize that the absence of effective government and regulatory controls played a key role in the financial and economic mess we are in. However, the ideal balance between too much regulation and too little is very difficult to maintain. At the moment, the movement toward the former is probably unstoppable. Having said all that, we have to come to grips with the short-term costs as well as the long-term impact of this lava flow of government intervention, and this is far from an easy task.
Wisdom from Honest Abe... Just as it is unacceptable to pay millions in salaries to corporate executives from financial firms bailed out by tax payer dollars, it is unacceptable to create an environment where prosperity doesn't stand a chance. As Abraham Lincoln stated it, "That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise."
As recent events have shown, free enterprise is not a perfect system and is prone to excess, especially when its leadership lacks a moral compass. I suppose there are many definitions of a moral compass, but in my view it really comes down to doing the right thing whether or not it is popular or politically correct. In the investment business it means controlling the ever present and destructive emotions of fear and greed and putting the interests of clients, colleagues, and community before one's own.
Moreover, effective portfolio management, even individual buy and sell decisions require the mental discipline to think independently and unemotionally. I don't believe any of this is possible without a moral compass.
Unfortunately, the government, despite Obama's noble pronouncements, can not create a moral compass for our society, corporate leaders, or individuals. All of which begs a simple question. If our country has in fact lost its moral compass, and I believe it has, how do we get it back?
Forging the compass... As I said in a recent edition of Willingdon Views, our current economic challenge is really a generational opportunity to refocus on three things that are most important: faith, family, and community. As this reprioritization process occurs, a moral compass is forged. I truly believe it is that fundamental.
As we search for companies to invest in, and as we continue to build our own company, the thought of a moral compass is going to be in the forefront of our minds.
Earning season is at hand... Over the next few weeks 1st quarter earnings reports will take center stage. For the most part, expectations are very low. It will be particularly interesting to listen to the commentary from companies as they search for ways to navigate the difficult economic environment. How will they handle the tough decisions about job cuts, executive compensation, cash flow management, dividends, restructurings, government involvement, and their own career goals? Jeff Immelt from GE has all these challenges and more in the center of his plate. So does Ken Lewis at Bank of America, Jamie Dimon at JP Morgan, and many others CEOs. Perhaps their decisions will reveal their moral compass. Or lack thereof.
