We are pleased to announce a new addition to the Granite family: Justin Amero joined our research team at the end of 2013 as an equity analyst. He joins us from Cowen & Company where he researched aerospace and defense companies. Justin began his career in the defense industry working for Raytheon, before transitioning into equity research. This valuable, hands-on experience allows Justin to offer a unique perspective on those industry sectors.
He received his MBA from Cornell University, with an undergraduate degree from Providence College. We are delighted to have Justin join our research effort. Please join us in welcoming Justin to Granite.
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” - John Adams
The above quote does a wonderful job of highlighting what we believe to be one of the biggest fallacies investors are currently being bombarded with, namely the investment case for commodities or the reason to keep them as a separate asset class. We often hear from Wall Street strategists, analysts, the media, and some of you, our clients, wondering why we do not invest in commodities as a way to protect our portfolios from the detrimental effects of inflation. While all commodities are believed to offer protection against inflation, gold is considered to be a natural hedge. Commodity prices peaked in 2011 and have declined ever since, leading some to believe that now might be a good time to establish positions. We are of the school of thought that inflation will accelerate due to various global Central Banks’ policies and are always looking for bargains. As such, we decided to look into this in more depth. Our goal was to determine if the perceived inflation protection offered by commodities held true based on history, and if not, what investments can protect against inflation?
I think most Americans agree that something needs to be done to rein in government spending both on federal and state levels. It seems that everything from entitlement programs, defense spending and even Big Bird are on the table. This approach of looking at each program or expense individually seems destined for failure.
The real issue is that no one has defined what the role of the Federal or State Governments are or should be. Until this happens they will continue to grow, spend more money and get involved in more areas. On top of this most of us want a government that we are not willing to pay for. So while we don’t want taxes to increase we are not willing to cut spending on things we feel important whether it’s Social Security, housing or protecting the rest of the world.
Many have likely heard the term High Frequency Trading or HFT as it is known. However, who owns, operates and profits from the companies involved in this activity is less known, and remains murky likely by design. Proponents argue these firms provide vast amounts of liquidity to the marketplace given they represent an estimated 60+% of the volume of the New York Stock Exchange (NYSE) as well as other exchanges. Essentially these firms have spent billions of dollars in designing supercomputers that can react quicker than others giving them an advantage over humans and slower computer models. They would likely argue that in a capitalistic society anyone who spends more money on plant and equipment versus their competitors should reap the benefits of it.
By now most of you are aware of the $2 billion dollar (and growing!) loss that JP Morgan took on a large synthetic derivative trade that went against them. CEO Jamie Dimon admitted that the strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”. JP Morgan not only has the largest notional amount of derivatives on their books, but is supposed to be the best risk manager of any of the large banks. If JP Morgan is the best risk manager, how did this transaction then become “poorly reviewed, poorly executed and poorly monitored”? People are always going to make mistakes but systems and controls are supposed to minimize their impact. Clearly in this case it went undiscovered or hidden until the problem became too big to ignore.
My thoughts on the most recent Goldman Sachs controversy.
There are two issues to this as I see it. One, why did this happen? Two, what should be done about it?
As many are aware Greg Smith a former Goldman Sachs employee chose to publish his resignation letter in the Op-Ed section of the New York Times on March 14, 2012. This has caused quite a stir forcing Goldman’s senior management to refute his accusations by saying their clients always come first. Much of what has been written in support of Goldman has been inferring that perhaps Mr. Smith was a disgruntled employee who did not make partner in the firm. However we are past the point where putting the proper PR spin on it will make a difference.