Goldman Sachs were nearly 40 Percent of the employees are Vice Presidents

The Bloomberg article http://www.bloomberg.com/news/2012-10-18/greg-smith-quit-goldman-after-unrealistic-pitch-for-1m.html

The article on Greg Smiths resignation and it’s famous Muppet contained pretty much what one would expect from the offensive in Goldman Sachs rebuttal campaign, but the little jewel I found in the story was that it reported that Goldman Sachs has 13000 vice presidents.

This is a pretty amazing fact.   Yahoo profile for Goldman Sachs reports they have 34700 full time employees ¹.   This makes the statement on the number of Vice Presidents not only amazing but also absurd and bizarre.  Imagine that nearly 40 percent of all Goldman Sachs employees are vice presidents to be fair to Goldman Sachs it is only 37.5 percent, who wants to quibble over 2.5 percent.  Sounds likes too many chiefs and not very many Indians, maybe that might be part of the problem with Wall Street, or at the very least that might be part of the problem with Goldman Sachs.

13,000 vice presidents would explain why the senior management had no idea of who Greg Smith was when he left the firm.  So if someone were to say that they were or are a vice president of Goldman Sachs, your response could or should be “I thought nearly everyone who is employed by Goldman Sachs is a Vice President”.   It would appear that Vice President is some sort of entry-level position at the firm, what a snow job.  It is another indication that the emperor has no clothes.  The pathetic part is that we buy into to this dribble.

Mr. Smith request for a salary of 1 Million Dollars a year could be taken as prima facie evidence of his delusional mental state and possible sanity  (paranoid/schizophrenic, narcissism, and greed (ok greed is more of a sin than a psychiatric disorder, but you get the picture) at the time he worked was employed at Goldman Sachs.  Some how 500K Dollars was not enough, go figure.   I do not know about the rest of you, but I know more individuals than I can count on the fingers and toes in my immediate family, who would jump at the chance to work to be employed for just one year (two would be nice, but I am not going to be greedy) at that salary level.  (On the other hand I could just be Mittens for 9.125 days and make the same amount of money, I know it is a cheap shot, but sometime the devil just gets the best of me, after all I am only human, and from time to time I can be tempted by the dark side)   I would suspect that Mr. Smith is not the only individual working at employed at Goldman Sachs afflicted with these conditions.   I would suspect that the condition is especially rampant within the entire senior executive corps with equal or more severity.

And we wonder why the frigging wheels came of the bus.

¹ Unable to determine the number of individual who actually perform work at Goldman Sachs on any given work day, but using the most opportunistic estimates it could be that on any given work day at most about half of the employees actually perform some type of work.  It is highly unlikely that this group of employees is composed of Senior Executive Corps, Directors, and Vice presidents.

The Market is RIGGED get use to it.

Of coarse the stock market is rigged, it always has been rigged, and I would speculate that it will always be rigged call it human nature.  So get use to it.  The following paper is another indication of the level of rigging.

 “Earning Quality: Evidence from the Field” Dichev, Grahm, Harvey, and Rajgopal www.isb.edu/faculty/upload/Doc952012946.PDF

From the above-cited paper you have reports that CFO of public companies who responded (169 in all, although not typically by themselves) felt that corporate earning reports were being managed within the economy in any given period, by 18.43 percent of the firms.  Additionally 99.4 percent of the CFOs felt that “at least some earnings management of the opportunistic kind happens”.  There however was a large dispersion in the answers provided by the CFO as to magnitude of the earnings management.  The size of the dispersion precluded the authors of providing any statistically accurate measurement of the magnitude of the earnings management.

These same CFO when asked a hypothetical for any reported earnings what percent of the number is managed.  They estimated that about 10 percent of the reported value was the result of some type of management.  Most outsider models estimate that the percentage of the reported earning that is managed is much higher.

When asked under what conditions would they believe that earnings management is being performed, the one of the following three conditions were cited by the CFO’s  (1) fast growing firms; (2) firms whose earnings are more volatile than their peers; (3) and firms with higher exposure to lawsuits.

When asked if earning were managed to upside versus to the downside, only 58.8 percent indicated that they thought the management was to the upside.

Why influence earnings, the number one answer is that earnings influence stock prices.  Given that for many members of a company Senior Executive team not just the CFO have their bonus contractually tied to the performance of the stock price relative to some stock market bench mark (typically the SP 500) or to various named competitors, it is no wonder that earning are managed, baby needs a new pair of shoes.

My own personal opinion for what ever it is worth, would suspect that companies that are currently trading with high P/E ratios would be deep into the process of managing reported earnings, given that a short fall in reported earnings could result in a significant drop in stock price given the leveraging effect of their high P/E ratio.  In these high P/E stocks a small miss in earnings can have a profound effect on the price of the stock, which in turn could significantly reduce the expected bonus of the management team.

So how do you get around the rigging?  Can you get around the rigging?  At best I think that you can only minimize the effects of the rigging, I do not think that you can get around it, it is just too endemic to game.  Therefore we are left with minimizing the effects of the phenomenon.  To that end my advice would be to invest in broad base stock indexes, there is safety in numbers, as far as the index is concern the broader the better, this will go a long way in minimizing the effects of those companies that manage their earnings to the extreme, up or down, call it regression to mean.

As an investor one needs to look at long term tends in the indexes, minimize purchases on rises, and maximize purchases on retreats.  A very long event horizon is also required, remember that in the long term the stock market is a very accurate measuring device, eventually some one somewhere will see the butcher thumb on the scale.

An investor should carefully listen to manage words, but scrutinize managements actions, and act accordingly on any and all inconsistencies, after all the devil is in the details.   If management words are correlated with their actions, the caution is advised.

If things appear to good to be true, well we all should know by now that the pile of manure under the Christmas tree does not mean we are getting a pony.

Now Jack it is not the Soviet Union

For if it was the old Soviet Union the door to your apartment would have been kicked in, you would have been pulled out of your warm bed in the middle of the night, by several really nasty individuals, blind folded, dragged down the stair of the building and thrown into the back of a Black Maria.  There would have been a very cold ride to Lubjanskaja Ploschadj, 2, (Lubyanka headquarters of the KGB), where you would be shown the error of your ways, and allowed to change your mind on the subject, and come to your senses.

After you had come to your senses and realized the enormity of your error, and had professed to those present that this type of mistake would never ever happen again, as demonstrated by your own hand written and signed confession, never mind that you really did not write it, but it was your signature on the document, they (you know the really nasty individual who brought you to this place) would help you make sure that it would never happen again, since in the course of your conversion from the wrong path to right path you suffered a 9mm hemorrhage.

That was the old Soviet Union.  You know the place where you had the right to say anything ONCE.

Goldman Sachs “Muppet Hunt” Draws a Blank?

Where is the surprise in this announcement?  The Goldman Sachs “Muppet Hunt” is the moral equivalent to one “Elmer J. Fudd” looking for “Wabbits”.

So Goldman Sachs senior management goes on a “Muppet Hunt”, and surprise of surprises they dutifully report back to the Board of Directors that they have not found any “Muppets”.  That it was all just sour grapes by the recently departed, disgruntled, disaffected, “Not meriting promotion to Managing Director”, employee.  And that “No further actions should be taken.”(Let Sleeping dogs…). 

The “Muppet Hunters” are more than happy to report that everything is all right within the Goldman Sachs Magic Kingdom.  They dutifully report that Goldman Sachs Management and Employees are currently and in the past have been looking out for the best interest of their customers.  Additionally they are pleased to report that Goldman Sachs currently does not place the company’s interest nor has it ever placed the company’s interested above those of their customers (What a bunch of Boy Scout) (A Goldman Sachs Employee is: Trustworthy, Loyal, Helpful, Friendly, Courteous, Kind, Obedient, Cheerful, Thrifty, Brave, Clean, Reverent).  That 99 percent of the nearly 4000 emails that reference the word “Muppets” were not comments on their customers but were references to the latest Muppet movie.

So management of Goldman Sachs has fulfilled the requirements of those immortal words uttered by of Governor William J. Le Petomane “We have to protect our phoney baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!”.  And something they did, they investigated, and they reported that they found nothing (surprise), it was just one big snipe hunt.

Trust them if you want, but remember that a fool and his money are soon parted.

Apple Revealer of State Secrets?

Headline “Apple Map Accidently Reveals Highly Sensitive Taiwanese Radar Installation”

Apple now they are the destroyer/revealer of state secrets, at least that what the article in Network World implies.  Link: http://www.networkworld.com/news/2012/101012-apple-maps-taiwan-263253.html?hpg1=bn

Reveals to Whom is the real question?  The United States, United Kingdom, France, NATO, Russian Federation, Japan, South Korea, the Peoples Republic of China?

Since all of these entities either have their own Reconnaissance Satellites or access to the data from someone who does have a Reconnaissance Satellite, many with resolutions on the order of at least 10 cm or better, they already know about it.  In the case of the United States we really know about the site, since Raytheon sold them the equipment, with DOD and State Department approval.

Who are the Taiwanese really trying to hide this site from?  The PRC?  That will be hard since the PRC for some time has had their own constellation of “Remote Sensing Satellites”.  Since January 2010 the PRC has launch 9 of the “Yaogan” series of “Remote Sensing Satellites” split fairly evenly between unit with Electro-Optical Digital Imaging and Synthetic Aperture Radar vehicles most in nearly circular polar orbit with orbital altitudes of 600 to 1200 KM.

I would not bet against the fact that the PRC already has had organic assets in the facility, and quite possibilities currently still have organic assets in the facility.  I would also wager that the PRC probably has better and more current maps and photo imagery of the site and surrounding area, and the rest of the island of Taiwan then the current government of Taiwan.

For some strange reason the average citizen of the world must have any and all satellite imaging of the site blurred so as to not cause concern to the Taiwanese government that their little egg nest has not only be located, and plotted on maps, but heaven forbid that unknown outside parties might know how many eggs are in the nest.  Because we all know that “We cannot handle the Truth”.

What to do about General Ward ?

Background:  See the following link to Wikipedia.org http://en.wikipedia.org/wiki/William_E._Ward for a very good run down of his impressive and distinguished career.

But his career is not the central fact in his current situation, General Ward is under investigation for numerous allegations the he spent or authorized the spending of several hundred thousand dollars allowing unauthorized individuals including family members to fly on aircraft operated by or for the United States Government, and spent or authorized the expenditure of excessive amounts of funds on travel expenses, and or failed to follow DOD policies and procedure in the spending or authorizing of these expenditures.  Additional he spent or authorized the expenditure of excessive amount of funds on other uncategorized activities.

These charges were serious enough that The Office of the Inspector General U.S. Department of Defense conducted a 17 Month investigation into the allegations and forwarded a 99 Page report with recommendations to the Secretary of the Army for his consideration and “appropriate action”.  The Secretary of the Army recommendation of “appropriate action” is unknown, but the report and the Secretary of the Army recommended “appropriate action” was forwarded to the Secretary of Defense, for his decision on the matter.  The matter currently resides in the Office of the Secretary of Defense.

Recently The Chairman of the Joint Chiefs of Staff, General Martin Dempsey has voiced his opinion that General Ward should not be punished and be allowed to retire with the Rank of General.  General Dempsey is not in General Wards direct chain of command, since the Joint Chiefs of Staff do not exercise any direct operational command function, they are theoretically an advisory group to advise the President and the Secretary of Defense on Policy matters, he can therefore voice his opinion.

To me General Dempsey pronouncement is a trial balloon to see how and if the American People, Member of Congress, and the Members of the United States Armed Forces will react to the possibility that General Ward will be allowed to skip on these charges.

If this were a lowly solider, sailor, airman, or marine and comparable charges had been alleged and the required UMCJ investigations had be held, that poor unfortunate soul would be lucky if they let them out of the service with anything less than a Bad Conduct Discharge.  If they were unlucky enough to get a Bad Conduct Discharge and if the maximum sentence that could be assigned to the charges exceed 1 year of confinement then this individual would gain the additional benefit of have to report that they have felon conviction on their record.

If General Ward is allowed to skip on these charges and retire at his last highest held grade (General) it sends a message that there is at least a two tier, if not three a tier justice system in the Department of Defense.  It would announce that there is justice system for Flag Grade Officers, and a justice system for the all of the other military personnel.  Some will argue that there are in fact three tiers in the UMCJ as it is currently practiced.  One tier for Flag Grade Officers, Another tier for Senior NCO, Warrant Officers, Company Grade Officers, and Field Grade Officers, and a third tier for lower grade NCO and enlisted personnel.

There is a series of public announcement spots on the Armed Forces Network, called “That not what right looks like” which are attempts to highlight daily situations were personal integrity, or walking the talk are important to an individual, especially when that individual is in some type of leadership position.  The troops are not dumb, they watch their leadership, the have their leaders disconnects between words and deeds memorized.  Just sit in a DFAC and listen to some of the conversations, it can be a truly mind altering experience.

If General Ward is allowed to skip and retire with out any consequences, and to this writer that is what it appears to be happening, then the Department of Defense should save taxpayers money and stop playing lip service to “That not what right looks like”, and a host of other public announcements that are dispensed to members of the armed forces

If General Ward is allowed to skip, it will be another rock added to officers who have displayed lack of integrity and corruption pile.  It could be a sign to other that this behavior is acceptable.  Yes, it was just a little over the line, after a while there is no line, then what.

When the troops do not believe their officers, they will not follow them.  We do not want that to happen with our United State Military, but it could and General Ward’s case could just be the start of our journey down that slippery slope, then again we could already be some distance down that slope.

Please note that individuals in the Operational Chain of Command, and General Ward’s chain of command have not voiced any public opinions of this matter, for it would be criminal on their part to do so.

To Secretary of Defense, by allowing General Ward to have his day in court so sunlight can be shown on the charges, the evidence, and the verdict could go some distance in reestablishing confidence in the system, after all it is said that  “Sunlight is said to be the best disinfectant” Louis Brandeis.

General Ward has a great deal to risk by having his day in court, he could be found guilty of all or some of the charges and specifications, and if found guilty he could face the full extent of punishment that the law allows, and could end up with nothing.  But by the same token he has a great deal to gain by having his day in court, he could forever remove the blotch on his distinguished career.

General Ward could go silently into the night and accept a retirement at a lower grade, but this could result in the placement of an asterisk by his name, like with baseball statistic where the use of drugs was suspected in enhancing a player performance.

If General Ward does not want his day in court to refute the allegations, and clear his besmirched name then the Secretary of Defense must not reward him by allowing him to retire at his highest grade of rank.

Enlist Personnel and Officers of the United States Armed Forces should to be held to higher standards then the ordinary American citizen.  Officers should be held to higher standard then members of the enlisted ranks.  Flag officers should be held to higher standards than members of the company and field grade officer corps.  Flag officers are the leaders of the armed forces leadership.  If any individuals’ actions should be circumspect it should be these individuals for who the United States Government has appointed and entrusted the lives of citizens to.

Every now and then even I surprise my self

I was reading an article on the Harvard Endowment found at the following link http://www.businessweek.com/articles/2012-09-20/can-timber-rebuild-harvards-endowment.  In the article there was a graphic that compared the Harvard endowment 10 Year Annualized Return to 7 of it peer endowments (Yale, Columbia, Princeton, Brown, Dartmouth, Penn, and Cornell).  The 10 Year period of comparison for this report was June 2001 through June 2011.   And as one would expect all of the Endowments achieved these results via the efforts of some very highly competent and compensated professional money managers.

Entity	10 Year Annualized Return
Yale	10.1 %
Columbia	9.9 %
Princeton	9.8 %
Harvard	9.4 %
Me	8.6 %
Brown	7.7 %
Dartmouth	7.0 %
Penn	6.8 %
Cornell	6.4 %
Annualized S&P 500 Return (Dividends Reinvested)	2.3 %

I added the 10 Annualized SP500 as an additional reference, one should have an impartial bench mark.  I suspect that the respective endowment manager report their portfolios relative progress versus this benchmark to their respective Universities.  The 10 Year Annualized Return for the SP500 used in this comparison was calculated using the calculator provided on the site http://dqydj.net/sp-500-return-calculator/

Granted I do not have all of the high price talent, connections and resources that they have, and I certainly pale in comparison as to amount of funds that I have to invest, but all in all I feel that I have done reasonably well in comparison considering what I do and don’t have or know.   My 10 Annualized Rate of Return was calculated by Quicken accounting program, so you might want to take it with a grain of salt.

The average 10 Year Annualized Return for this group of Universities for the period in question is 8.39 Percent.  This groups average and individual 10 Year Annualized Return when compared to the 10 Year Annualized Return for the SP 500 is remarkable (3 to 5 times that of the benchmark).  Then again it could be a very poor benchmark, I don’t know.  For the same period my Quicken calculated 10 Year Annualized Return was an impressive (Well I consider it impressive) 8.6 Percent, not bad for an old retired Physicists/Engineer.

All that I am claiming, if I am claiming anything is that I consider my self to be very lucky and fortunate.  I feel that I am just another data point in the tale of the old blind hog finding another acorn or truffle.

My portfolio is an equal blend of three different model passive portfolios (Aronson, Yale, and Second Grader) that all invest in passive index mutual funds that have low if not the lowest management fees available to the average investor.  The particular on the various portfolios can be found at the following site http://www.marketwatch.com/lazyportfolio.  I do owe a sincere debit of gratitude to Paul B Farrell who generated the articles, and marketwatch.com for publishing them.

Now for the obligatory verbiage I am not currently nor have I ever been nor is it likely that I will ever be an employee of the Marketwatch.com or any of subsidiaries, or controlling corporations.  I do not know, nor have I ever met Paul B. Farrell, and to the best of my limited knowledge I do not know or ever met any of his family.  I am not currently nor have I ever been, nor is it likely that I will ever be an employee of The Vanguard Group.  I do have vested interest in the various mutual funds that make up these model portfolios since I own shares in them.

Finally and most important past performance is no guarantee of future performance.  But you do have to be in the game if you ever expect to have any chance.