CDSs & Counterparty Risk; What Every Investor Should Know

Credit Default Swaps (CDSs) are making headlines these days, and not for good reasons. CDSs are essentially insurance contracts on debts - investors buy them to protect their income streams and principal investments in debentures should the issuing party default on their obligations. Most notable of these almost-defaults, of course, has been Bear Stearns and CDSs have been in the headlines ever since.

Why do you care? Well, would you believet that CDSs are unregulated and that there's no public record of the sellers solvency should they actually have to deliver on the contracts they sell. As an investor, this should scare you to death. Think about it this way: imagine you paid into your insurance policy, for your car, your home or even  your life, and when the worst actually happened, the insurance company just disappeared; this is the situation that may very well still happen. Yes, still; we're not out of the woods by any extent.

George Soros has been one of the most outspoken investors on the subject of how "unacceptable" it is to have a market such as this develop in an unregulated fashion. Now representing as much as $62 trillion in contracts, the collapse of such a market could mean worldwide financial fallout. This is no joke folks.

How's this for a revelation. JPMorgan is not only the investor of these types of contracts, but is also one of its biggest issuing firms (i.e. counterparties). Unlike traditional insurance companies, there is no agency that monitors the sellers of swap contracts. What makes things even more interesting, you don't even have to own the asset that you want to protect when you buy the swaps. Yes, that's like buying a life insurance policy on someone else - could you imagine if that were possible and what sort of practices that would condone?

Auction-rate bonds & Sub-prime loans; Deja-Vu anyone?

I have to admit that I wasn't familiar with auction-rate securities shortly before writing this post. From the news reports now filling the pages of many online financial news sites, it would seem that I wasn't alone. Of course, as with the sub-prime loans, the lack of understanding didn't seem to stop many from buying into these products.

One can't help but recite Mr. Warren Buffett's mantra: invest in what you know.

Auction-rate securities offer borrowers seeking long-term capital the opportunity to pay only short-term rates. Sounds ideal, right? You get money for as long as 40-years, but don't have to pay the premiums that would generally go along with such a maturity. This is possible because of the 'auction' in auction-rate. Specifically, as often as every 7-days, the interest rate cost on these securities are reset in a dutch auction. So, for those buying the securities, it's very much like buying short-term debt. Of course, as you might have guessed, there is a catch.

Unlike Treasury bills or investing in short-term money market funds, investors who purchase these auction-rate securities are essentially buying long-term debt (yes, like 40-years), but with the expectation that they'll be able to hand-them-off at the next auction. You have to ask yourself, then, what happens no other buyers show-up at the next auction? You guessed it, you get to keep those bonds. For individuals and institutions that purchased these securities because they were short-term, this could spell disaster if the funds were expected to be liquid to satisfy some other obligations.

It's not all bad news, if you have some other flexibility in your portfolio. There are penalties when the auctions fail; if you happen to be one of the owners of these little-understood securities and can manage to make-do when the auction fails, your return can shoot-up to as much as 20% on an annualized basis. That ain't bad when the banks are offering you less than 1% for short-term, liquid, savings accounts.

Of course, it's hard to think about the other side of the table - the institutions that sold these securities and are now forced to pay those double-digit rates.

At the end of the day, Mr. Buffett's wisdom certainly does shine-through. It's so simple. Invest in what you know and in what you understand. As an investor you have to appreciate that your broker is a salesman; he or she makes their money by selling securities to you. When they offer you a product that is unknown to you, then take the time to quiz them on the details. If they aren't able to answer your questions, then that should tell you something. If they aren't willing to explain them, then just get a new broker.

Forget the Soft Skills; it's All About the Numbers

An interesting study was released this week that showed, at least in the UK, that the top spot at the big companies is reserved for those of us with the number skills. Sales and marketing skills may be good for something, but if your goal is to get a capital 'c' in front of your name, it's time to master that calculator.

Out of 200 CEOs surveyed by the recruitment firm Robert Half, 32 possess a background in finance whereas only 9 have a background in marketing communications - the second most common background. Although I'm certainly biased, being a numbers guy myself, I have to agree that the findings are consistent with my own feelings about what companies need. With Sarbanes Oxley and other new demands on the executive management of our publicly traded companies, it only makes sense that the individuals responsible for singing-off on the reports their companies release to the public actually understand what it is that they're signing.

Earnings & Credit Ratings

In reading this article about GE on Bloomberg, I felt the need to write about the distinction between earnings reports and concerns over credit ratings. The two are separate and one does not directly depend on the other.

Credit ratings are simply that: relative evaluations of a company's creditworthiness or its ability to repay its loans. The difficulty arises from the fact that we tend to try and relate the stories we read to our own experiences. We know, for example, that the loss of a job will directly impact our credit rating and consequently the cost of borrowing to buy a home or car - as it should. Although this is accurate, it's not wholly relevant when discussing a company such as GE.

A lower earnings report is not the same as the loss of a job; it's more akin to rising expenses. Your personal credit rating may rise if you suddenly have mounting medical bills to pay, but it's probably not going to change as a result of the higher cost of oil. The important thing to note is the magnitude of the change relative to our overall wealth. In the case of GE, that wealth is significant. When GE reports lower earnings for the quarter, its rating is certainly not going to change. The reason is that this is likely both insignificant in light of its overall market capitalization as well as likely to be a temporary glitch in its continued profitability. Should GE show similarly weak earnings on an ongoing basis, however, then there may be cause for concern as this would tend to indicate signs of trouble within the company and not necessarily as a result of general market or economic conditions.

To make a long story short, it's easy to be swayed by an article that presents the facts in a way that is designed to stir discussion and either increase page views or newspaper sales. As with any information, consider the facts in light of the other information available to you.

Does a AAA rating still mean what it used to?

I've written before about the growing concerns over the reliability of analyst reports on the companies in which we all invest, but there is something to be said for the information available to the analysts as well. Mood's and Standard & Poor's, the two largest ratings agencies, hold an incredibly influential place in the market; it is based on their evaluation of a company's ability to repay its loans that it assigns its ratings with a triple 'A' rating representing the least risky investment. Of course, when the companies bearing this esteemed rating begin to show signs of diminishing creditworthiness, shouldn't the ratings move in tandem?

The answer appears to be no. When the two largest bond insurers, MBIA and AMBAC - insuring more than $1 trillion dollars in debt between them, began writing down hundreds of millions of dollars in losses resulting from collateralized debt obligations and other mortgage-backed securities, neither ratings agency showed any sign of concern. Fortunately for both these insurers, that meant that they could each turn to the capital markets to raise new funds at the lowest possible rates. But what about the lowly investor relying on these same ratings to judge the risk of purchasing a bond?

Unfortunately, there is no simple answer. The un-simple answer is that investors should never rely too heavily on a single source of information. Yes, I'm afraid that needs to include even the most respected ratings agencies in the business. So far, there is nothing to indicate that they haven't acted responsibly. After all, neither MBIA or AMBAC has defaulted on its own obligations and that, ultimately, is what a lower rating would tend to indicate is more likely to occur. Then again, as the saying goes, it's better to be safe than sorry.

Hillary Clinton $11 million in the Red - Personally!

From my years of watching The West Wing I knew about the campaign finance provision that allows candidates to loan personal funds to their campaigns. What I didn't know, however, was that there was a time limit for by when the candidate can recoup those loans by raising money as a candidate. That time limit is their party's nomination. With the August democratic convention nearing, Clinton has only a few months reaming to come-up with a whopping $11 million that she has loaned to her campaign!

Why is this interesting? Well, on the surface it's interesting to hear the kinds of sums of money that are involved - even as a personal loan from a candidate. The real news, however, is what this may mean for the democratic race for the nomination. Depending on how significant $11 million is to the Clintons, Mrs. Clinton may be tempted to back-out of the race and back Mr. Obama in exchange for some financial support. This, of course, would end the inter-party bickering and allow Mr. Obama to finally set his sights on the White House. Of course, having earned over $100 million since the start of this decade, the Clinton's aren't exactly struggling - even if they do need to walk away from their loan.

The law states that Mr. Obama would not be able to help Mrs. Clinton directly, but there is nothing that prevents him from looking to his record-breaking fundraising base to do so. Of course, with his own need to raise further funds in preparation for the national campaign following the convention, he may hold his own interests in priority to those of his rival.

Money makes the world go around. The same is true for politics. The fact that Mrs. Clinton is having difficulty raising funds and has had to resort to personal loans means that she has lost support among her backers. This, of course, is an indicator of where that support may have gone. With Mr. Obama now leading in both the super delegate race as well as the popular vote, it's not difficult to put one-and-one together.

Citigroup to shed $500 Billion; that 'B' for Billion!

In today's financial climate it's not particularly news to hear that a bank is writing down some assets. When its this scale, however, it tends to grab your attention.

Don't mistake my comments for criticism. I agree with other opinions on the matter that this is the right move for Citi's new chief, Vikram Pandit. A good rule of thumb for any investor is to limit their focus to only a handful of securities; you really can't properly monitor more than that and adequate portfolio management is key to long-term success. I see Mr. Pandit's actions as no different. He's consolidating. Here's a good summary of their reasoning for the move form this article:

...Citigroup executives did point out several shortcomings at the bank that need to be fixed, including organizational redundancies, a fractured corporate culture and waning market share in U.S. retail banking. And the company introduced a new slogan as part of its revamping efforts: "Citi never sleeps."

It's funny that people are actually concerned about Citi's resulting loss of its top-spot as the nation's bank; who cares! I'm not a shareholder, but if I was I wouldn't care about its ranking nationally or otherwise; I care about the bottom line. I care about what management's decisions mean for its earnings and how that will affect equity value. Period.

Fooling Some of the People All of the Time

CNBC just had a great little interview with David Einhorn, the president of Greenlight Capital and author of a new book: Fooling Some of the People All of the Time: A Long Short Story. I haven't read it yet (just learned of it), but I think that it's going on my reading list. Why? In the interview, Mr. Einhorn suggested a fairly simple idea to help avoid the sorts of financial problems that he saw at Allied and that we're seeing today with CDOs and mortgage-backed securities: why not mark-to-market all securities?

Marking-to-Market is simply the idea that your portfolio should accurately reflect the value of your investments even if they are not yet realized. For example, if you sold a call option (sold the option to buy a stock/security to someone else), then you have the obligation to deliver that stock or security if that call option is ever exercised. Now, let's further assume that you sold that put right at the money and it has since declined by $10. Since options are marked-to-market, your broker may require you to place the $10 in your cash account as a security against the $10 that you will be obligated to pay upon the exercise date. Sure, the exercise date may be months away and the price may very well reverse in the meantime, but the concept of marking-to-market ensures that those investors issuing those securities have the assets to finance them. From the perspective of the big banks doing the same thing, the marking-to-market would clarify the value of their balance sheets and make retail investment in those banks that much safer.

So why isn't Marking-to-Market not done all of the time? Well, the principle reason is cost. Marking-to-Market on some securities can require a great deal of monitoring expense that would undercut the earnings investors were collecting from those investments. This is a valid point, but like most things in life, there should be some compromise. Moreover, as the digital age advances, our financial transactions are increasingly computerized. As some of you know, however, at least part of the problem with the CDOs and mortgage-backed securities is the documentation: it's a mess. Marking-to-Market of such securities would undoubtedly increase the cost of these assets, but it would also require the financial institutions both issuing and purchasing them to keep very accurate records of their value.

What I like most about this idea, as Mr. Einhorn explains, is that it doesn't require more legislation or regulation besides requiring companies to do what they already must do on other (similar) securities. Even monitoring by the government and its agencies would be simple. I'm going to have to think this idea through further, but for now... it's a very interesting idea for both its simplicity and effectiveness.

12 times $625 million equals $7.5 billion

That's the total, potential, exposure that State Street faces in light of a law suits already filed against it by several insurance companies for whom they managed retirement funds. No one believes that the verdict will be that high, of course, but that's the maximum as calculated based on the losses suffered by the funds under management as a result of the sub-prime mortgage investments. $625 million, on the other hand, is what State Street set aside late last year in anticipation of these lawsuits. See a discrepancy? Me too.

The lawsuits, under review for class action status, appear to have more than one leg to stand on. The reason is that the suits are filed under the Employee Retirement Income Securities Act (ERISA); why is that important? Well, funds registered under ERISA are designed to be relatively low-risk so as to appeal to individuals looking for retirement-oriented investments. As it turns-out, of course, sub-prime lending isn't all that safe and a lot of people are now faced with the loss of as much as half of their retirement savings. How would you feel or react if that were you? Yea, me too.

State Street, of course, isn't the only one in this position and there will be others hitting the headlines in the coming months. The issue is really the extent to which these fund managers owe a fiduciary responsibility to the individual investors whose money they are ultimately investing. Were these investors properly informed of the risks being taken? Did the fund managers even appreciate the risks themselves? If you're interested in corporate finance, then the next year will certainly be an interesting one to observe. 

Just as in we had Sorbanes Oxley come-about as a result of the scandals earlier this decade, I'm sure that we'll have new legislation and regulation written to avoid such events in the future. It's easy to view this as just a cycle - one that will repeat again, just in a different form with a different name and with different acronyms. What makes this a little more real is the thought of the millions of people whose life savings have been so detrimentally affected by the decisions of so few.

Credit lines in the sand

It's tempting to believe that the credit crisis is nearing an end. I hear it too; many of you know that I'm an avid CNBC watcher and their stance, more often then not, is that the worst is behind us. I'm afraid that I disagree. The worst is yet to come. The reason? The tighter belts at the banks and slowing credit hasn't had enough time to really impact businesses ...yet.

I wrote a post a few days ago quoting an article wherein they stated that bankruptcies were up 49% year-over-year. I'm afraid that even that is only the beginning, but it is an indication of what is yet to come.  Businesses, especially growing businesses, rely on their credit lines to get them through the tough times. We're in one of those times now, but the credit lines won't be there to provide the businesses with the cushions that they need.

In stead, businesses will begin to see their cash reserves dwindle as their sales and revenues decline. Of course, no business, especially new businesses, can react instantly to changing market conditions. As a result, fixed costs will remain at their original levels for some time and those fixed costs will need to be covered - if not by revenues, then by what? The credit lines won't be there... Put one and one together and you begin to see the picture that's developing nationwide.

The credit crises, or at least what started it initially, may be nearing an end. Unfortunately, the effects of that crisis are only now beginning to be felt and it will take time for their full impact to reach the bottom line.

Money Market Funds ...Almost Risk-Free

If you've ever studied finance, then you know that the notion of the risk-free rate is critical to the valuation of many other financial instruments. U.S. Treasury Bills (T-Bills) are most often used as the de-facto risk-free rate, but what about money market funds. Since they were introduced almost four decades ago, not a single retail investor has ever lost a cent. Does that mean that they're risk-free?

No. Fortunately, that shouldn't dissuade anyone from including them as part of their well diversified portfolio. Money market funds tend to offer rates of return slightly better than T-Bills and certainly better than what your bank will offer on your savings or checking accounts. What should be considered as part of the decision, however, is that they are not guaranteed by the government in the same way as your savings and checking accounts are. There is a risk of default and there is a risk that you could lose all or part of your investment.

Money market funds, like other funds, group various types of investment assets together to offer retail investors (that you and me) the opportunity to buy an already-diversified (and presumably less-risky) asset in one go. In the case of money market funds, these include T-Bills, short-term corporate bonds and other, generally high-quality, short-term debt. The fact that they're short-term is important. The fact that they're high-quality is also important. These two facts together mean that it is highly unlikely that a debt instrument that is deemed to be high-quality is to default within one-year or less (the generally accepted short-term duration). As investors, however, we should be aware that there is a risk and like any risk, should not be ignored.

So what does this mean for your investment decisions? Probably, not much. If you're a savvy investor, then you already know that diversification is your best safety net. As long as you don't invest too much (proportionally) in any one type of asset, then you're unlikely to suffer a significant loss in even the worst of circumstances. Money market funds are a great safe bet. Just remember that safe doesn't equate with risk-free.

Bankruptcies up 49%! Yes, 49%!

Some days, when you listen to the latest equity market numbers, you wonder can't help but wonder where all the fuss about recession comes from. Sure, the markets decline some days, but for the most part we only hear about the rallies and bulls. The bears are sparse and far between. Then you come upon an article that shocks you with some numbers that bring your feet back on the ground... bankruptcies up 49% years-over-year.

We already heard about the foreclosures, but that's because of the sub-prime hoopla, right? If there was any doubt as to whether the economy was slowing, the rising number of businesses forced to closedown should shed some light on the matter.

1.1 million bankruptcy filings! Yes, that's 'm' for million. As in... if you had one dollar for each business that failed, you would be a millionaire with some change to spare. Sobering, isn't it?

Indexes as Market Indicators

An index is just a collection, usually weighted by some variable, of assets so as to provide an average that observers of that index can use to evaluate general trends in the underlying market for those assets. This implies a very important concept: an trending indicator is not an indicator of underlying value.

For some reason, people (including sophisticated investors) are tempted to view indexes as representative of the value of the assets that they represent. The credit default swaps market and indexes like ABX, CMBX (any kind of X, really) is an ideal example. According to accounting principles, companies must use such indexes to value securities, like swaps, that are traded irregularly or for which there is limited liquidity. Why is this important? Simple. Like any other market index, it is susceptible to volatility resulting from investor speculation; as investor excitement grows for the underlying assets, the value of the index can climb completely unrelated to the underlying growth of the assets that they represent. Of course, the opposite is true as well and this has proven to be a big problem in the face of the persisting troubles resulting from the sub-prime mortgages.

It became a self-fulfilling prophecy. As concerns over mortgage back securities, collateral debt obligations and other new acronyms abounded, investors began speculating the market (and its index) downward. As the index crashed, companies around the globe relying on them as representations of underlying value were forced to write-down the value of their holdings in those assets. A vicious circle emerged with more and more news of write-downs spurring greater and greater downward pressure on the market indexes and even further declines in the representative value of the assets held by financial institutions.

Suddenly, banks were losing tremendous amounts of money and reporting lower performance in their reports. To protect themselves, they started selling-off the assets that caused them problems and, more importantly on an individual basis, began to tighten their lending making it more difficult to obtain loans. As credit shrank, the economy began to slow further when companies could not borrow the funds they needed to finance their growth plans. As banks looked to cover their butts, foreclosures ramped-up driving even greater pressure on homeowners already facing higher prices and growing unemployment.

Fortunately, nothing lasts forever. The price of anything can only fall to zero and no lower; there is a lower limit. Yes, many of these sub-prime mortgages will default, but not all. Eventually the market will stabilize and banks will resume business-as-usual. As this happens, new legislation will be passed and new accounting principles written to help avoid a similarly vicious circle in the years ahead. It's all a learning process for everyone involved. The politicians and policy makers that write the laws and regulations we all follow are only human and they too learn from their mistakes... sometimes.

What's driving the price of Oil?

We've all cringed at the sight of the prices at the pumps, but what's driving the staggering and persistent climb? Demand? Unlikely. If it were demand, then how could it have changed so dramatically in such a short period of time? Sure, China is certainly demanding more than before; China, as big as it is, however, is still not big enough to sway world demand to the extent that we've seen in the past year. So what is it?

Yes, I know, everyone's got politics on the tip of their tongue. The truth is, that that's probably a big factor. The even greater truth, however, is that this is really the underlying factor - the real cause of the rise in price is speculation. That's right; folks like you and I, investors, buying-up contracts in the belief that prices will continue to rise. The funny thing is that it becomes a circular and self-fulfilling prophecy. Although we all complain about the rising price, we too might be responsible for those very prices.

There is a silver lining, at least for those of us who are speculating. For said investors [speculators], they're hedging their increased pumping fees by profiting for those same rising prices in the capital markets. If you've ever studied economics, then you'll quickly be reminded of the Prisoner's Dilemma. Although its in our interest, collectively, to quit the speculation, we are best served individually by joining-in on the free-for-all in the futures market. Like the saying goes: if you can't beat 'em, join 'em.

Buffett Chastises Wall Street for Financial Mess

Yes, I know, it's another Buffett post, but can you really blame me?

Did you know that Berkshire Hathaway Inc. and Mr. Buffett were approached as a possible white knight for Bear Stearns? Neither did I. Apparently Berkshire turned-down the offer because they didn't have enough capital or enough time to properly evaluate the situation. When you consider that Mr. Buffett is just about to leave on a European buying with about $35 billion in spare change.

In what has now become known as Woodstock for Capitalists, Mr. Buffett and his Berkshire investing partner, Charlie Munger, chastised Wall Street and financial institutions in general for letting the financial system slip into this kind of disarray. Mr. Buffett has said before that he doesn't trust the financial statements of most financial institutions and he said it again: banks can get away with too many big secrets for too long.

I, for one, will certainly be keeping an ear open to hear about what comes from Mr. Buffett's Eurotrip. I'll be sure to keep you all in the loop.

D-Day + 1 ...and no news on MS / Yahoo! deal?

Is it jsut me or does anyone else find the lack of any news on the Microsoft Yahoo! deal a little bizzare? Yesterday, the day of the deadline on Microsoft's buyout offer for Yahoo!, it's all we heard about. Today, I've listening to the radio for a couple of hours and ...nothing?

My best guess? Something is brewing behind the scenes. But what?

D-Day :: Decision day on MS & Yahoo! Buyout

Today is the day. Yahoo! is to make a final decision today on the buyout offer from Microsoft or face two possibilities:

1. A retraction of the bid by Microsoft, or
2. A hostile bid for Yahoo!

Personally, I don't think that either will happen, but I do believe that Microsoft cannot walk away from this deal. So, how do you reconcile this: an all-cash-offer. Microsoft's bid for Yahoo! is in stock; Yahoo! has been adamant that its offer is too low and Microsoft has been equally stubborn on its stance not to increase its offer. By offering an all-cash bid in lieu of its stock-bid, Microsoft could make its offer a little more enticing as well as offer Yahoo! an 'out' without forcing a hostile action by its soon-to-be owner.

Microsoft needs Yahoo! Google has already made its quasi-white knight intentions clear and Microsoft certainly cannot afford to let Yahoo! slip into the hands of its arch rival. It will be interesting to see what happens next from both a business perspective as well as from the perspective of a consumer.

I'm both a Yahoo! user and Google user. I don't really use MSN's search offer, but do enjoy its homepage as a news aggregator. A merging of some search and rich-content could very well help Microsoft take a dominant position in the market. In terms of display ads, the mere purchase of Yahoo! by Microsoft will make it bigger than Google in this arena, but I think that its true success will come from leveraging the synergies that these two future siblings can offer together in providing us lowly surfers with an even better way to spend our time online.

A market disconnect indeed!

I just got through reading an interesting article in the Toronto Start (read it here). To put things in context, here's a little excerpt:

The headlines continue to paint a dire economic picture. The credit crunch has forced global financial institutions to take major losses and slash jobs. Meanwhile, the U.S. housing downturn and crushing oil and gasoline prices have clobbered U.S. consumers, which promises to dampen Canada's already struggling manufacturing sector.

That pretty much says it all. I personally believe that rumours that the current recession is nearing an end (yes, we're in a recession) are largely overstated. In Canada, especially, the worst is yet to come. The impacts of the economic slow-down in the U.S. have yet to really hit us north of the border and when they do (they will) things will tumble hard.

I recently read some stuff on technical analysts' approach to investing and found it quite enlightening. The reason: they seem to see opportunity in almost every market situation, and for good reason. Many people (myself excluded) have made a bundle while others stayed on the side-lines (myself included) waiting for this bubble to burst. I'm sure that I'll take some satisfaction in being proven right, eventually, but it's still a little frustrating to see potential profits fall into the pockets of others.

Is there really a difference between 2.25% and 2.00%

Ok, so I studied finance and I know that there is a 25-basis-point difference, but I think that you and I both know that that's not what I meant.

The Fed (the U.S. Federal Reserve Bank), via the open market operations, helps to manage the swings in the business cycle by monitoring various economic indicators and pulling various levers to flatten-out the bumps. One of these levers, the most important one actually, is the interest rate (the Fed Funds Rate, to be precise).

When the Fed reduces the interest rate, it makes money cheaper - it makes borrowing money less expensive because those who do borrow, pay less interest. You have to ask yourself, however, whether a 0.25% further reduction in the interest rate will stimulate those who have been holding-off on an investment decision (like buying a home or expanding business operations) to suddenly make the leap. The answer is likely no.

The Fed's actions are likely less important that the reasons for its actions. People watch the Fed to learn of what top economic minds think the economy will do next (or what it's doing now). With almost 300-basis-points down in the last 9-months, I think that we all can accept that the Fed and all those economic brains think that the economy needs help. We got the message, trust me. Sending the rate lower yet will not drive-home that message any further; moreover, it could cause problems for the Fed in the medium term should it really need to pull on that lever harder, later. It's going to be interesting to see what the Fed chooses to do; it will be more interesting to see if the markets react at all to whatever it is that they do choose to do!

Earnings Expectations, it's a game...

You have to wonder why every CEO doesn't work themselves to death to keep expectations for their companies' earnings as low as possible ...at least coming-up on earnings announcements, as we are today. The lower the expectations in the weeks prior to an announcement, the more likely is the stock to see a rise following even a met-expectations performance outcome.

You just have to wonder if this isn't all just a game.

How are individual (retail) investors to interpret what they hear from analysts in light of how easily swayed the markets can be by the opinions of those in-the-know at the companies in which they invest? The answer is that any interpretation is likely to be wrong about half the time. Even those with access to more information on the actual performance of publicly traded companies get it wrong about that often ...just look at the track record of the best analysts of late!

As tempting as it is to get caught-up in the excitement of earnings season, long-term investing is likely the only way a regular-joe investor can protect themselves against the affects of the games played on Wall Street. There is a new push to see top executive earnings tied more to long-term performance than stock price valuations from quarter-to-quarter. Hopefully this alignment of interests between those who run these companies and the folks who invest in them will benefit us all.