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Goldman Sachs 24 Hours Later

04/18/2010
I believe in allowing time to pass before letting Mr. Mouth express any thought that is not internally questioned and properly reflected upon. So, 24 hours have passed, enough time for me to offer some thoughts on the SEC suing Goldman Sachs (GS) for fraud. The one thing that I keep focusing on is "how this will impact the markets." I will survive however it turns out for GS. Sorry, call me superficial, but that is my concern, and maybe yours as well so, let's dig a little deeper.

Is it important what happens to Goldman Sachs? Yes. I have traded and done business with GS for the past twenty years. I, and others on the Street, often have referred to them as the "Evil Empire." The Boston Red Sox ownership slapped the same tag on the Yankees a number of years back. Think about Major League Baseball without its Evil Empire - not good for anybody. There is certainly an abundance of jealousy tossed toward the Yankees and toward GS. However, both Major League Baseball and Wall Street need their Evil Empires. Let's be clear on that.

Does that mean I agree with everything GS does? No way. In fact, I was openly critical of their super spike oil call back in 2008. I thought it was irresponsible to further ignite the oil rise to $147. One of the authors of that report happened to be a former intern at my previous employer while I supervised the intern program. I was not happy about it; he must not have been paying attention in class. Plus, they were wrong in the super spike call, at least for now.

So what will happen to the Evil Empire? I have no clue, nor does anyone who pontificated on Friday. Neither should investors try and guess GS's fate or play the game of who is next on the SEC list. I do not believe it is prudent to alter your portfolio based on Friday's GS fraud charge. Understand that a Wells letter had to be sent to GS many months ago, so GS should be well prepared to defend. Along the lines of defense, at my previous employer, we shared the same law firm with GS, with some pretty astute lawyers. So, no knee-jerk reactions please.

What is most important is how it impacts the markets. In my estimation, the "baseball season of frustration" is here. We lost some confidence once again Friday, after working so darn hard to restore it last year. The events of April 16 were "Chicago politics" at its best and it does impact the market. Number one I believe that Main Street will continue to be positioned against Wall Street as incumbents seek re-election. In fact, the rhetoric will begin to ramp up. Financial regulation is front and center now just as healthcare was one month ago. After healthcare passed, I took a short position in GS (I covered the day before the April unemployment report) solely on the premise that financial regulation was next, and it is. My opinion, which may not matter, is that regulation will pass as well. Wall Street made a big mistake allowing the Government into its house back in the fall 2008; once they arrive it is hard for them to leave.

So far, Q2 earnings have been excellent. On the morning of the SEC fraud charge, Bank of America (BAC) and General Electric (GE) produced two excellent earnings reports. Who could have imagined that two of the main culprits in the credit crisis would have improved so dramatically just 18 months later. The sausage making is front and center now. Investors will really begin to question whether to stay in the game. The appreciation in the capital markets is historic - why not take a profit?

What happens between now and Election Day is difficult to forecast - it is anyone's guess. So, I want to keep it simple. I continue to believe that the capital markets will be higher on December 31, 2010 than they were on January 1, 2010. I like my Jungle Book theme - the Simple Bare Necessities. Let's remember that the summer is a wonderful time to relax and enjoy the family. Even take a trip, spend some money. It is okay to do so, the economy is improving, of that I am certain. So, let GS play out accordingly, let the sausage making in D.C. unfold, but make sure you turn your head, don't watch. You will like what you see a lot better during the winter Holiday season


Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.