Disclosure: Short the market through SDS (double inverse to SP500)

Those who talk finance with me know that I have an abiding respect for investor Bill Ackman.  It comes close to man-love, I must admit.  Bill is eloquent, thoughtful, intelligent, well-informed and any other adjective that gives praise.

My first experience reading about and listening to Bill came about this time last year when I was struggling with whether to invest in General Growth Properties.  At the time last April, GGP was entering bankruptcy.  But the market and economy had just begun to turn and I had personal experience with GGP properties and management and thought the company had excellent mall properties and was well run.  I wanted to invest in GGP which was then selling for only $0.65 per share and had a total capitalization only around $200M on a business with properties once valued at $30B.  If it were possible to solve the debt problem at GGP, then the company had an excellent chance of survival.

Enter Bill Ackman into my life.  As I was researching GGP, I came across research that Bill had put together as his hedge fund, Pershing Square Capital Management.  He had done a very thorough job researching GGP and was able to show that with even modest "cap rate" assumptions, GGP would do very well.  All it needed was time to restructure its debt.  Ackman proceeded to take an active role in buying time for GGP, first by offering to provide bridge (DIP) financing (later provided by another party), helping convince the court of the merits of GGPs survival and later by joining the GGP Board of Directors. 

As the year 2009 progressed, Ackman's activism and my confidence in his research proved very profitable for both of us.  I have now exited my GGP investment (much too early) but Ackman, to my knowledge, remains on board and has seen his investment return over 20-fold.  I admire this type of clear vision and the courage to act on it.

Ackman was a noted short trader earlier in his career.  He gained notoriety for his big short position in credit card company MBIA in 2005, for which he was investigated by the now-notorious Elliot Spitzer, then New York State Attorney General.  He was able to demonstrate to Mr. Spitzer his innocence and turned the table on MBIA by exposing the Attorney General their fraudulent practices, the reason for his short position  (presaging the debt crisis to come).  He took a "sow's ear" and turned it into the proverbial "silk purse".  That taxes moxy.  That takes class.

Given his career path and the level to which he has risen, Ackman is very intimate with the inner workings of Wall Street.  He shows himself to be rational and level-headed and has a thorough, first-hand understanding of the arcane financial instruments that Wall Street has created.  So, when he gives his opinion on the Goldman Sachs situation, I listen (much more so than to EF Hutton).  Today as guest host on CNBC Squawk Box, Bill Ackman shared with us his assessment.  He comes down on the side of Goldman Sachs for all the reasons I have provided in the past two weeks, but with the conviction that can come from only an insider.  Here is an excerpt from the show:

Goldman Sachs did not commit fraud and the insurance company that bought the product that is the subject of a government investigation should have known the risks, Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management, told CNBC Tuesday.

“I don’t believe that Goldman committed fraud,” Ackman told “Squawk Box Europe.” “(ACA, the counterparty to Goldman - Paulson Partners) took their own risks.  "They’re sophisticated investors.” “I don’t think the (Securities and Exchange Commission) has a good case,”  Ackman said.

“Having been the subject of investigation in the past  (for the MBIA case referenced earlier)… I don’t feel sorry for Goldman Sachs, but they’re not being treated fairly (either).”

Not only does Ackman contend that Goldman is innocent of the charges of fraud, as I also maintain, in addition, it would even have been unethical if Goldman had disclosed that hedge fund manager John Paulson was shorting the housing trade to any investors taking long positions, Ackman said.

Ackman argued that sophisticated investors (the German and Dutch bank that bought the long positions from ACA) have the information at their disposal to make their own decisions, and are also responsible for their own mistakes.

“Imagine that Soros and Buffett were on the two sides of this transaction,” he said. “We wouldn’t even be talking about this now.” 

But later in the interview, Ackman states that the true victims are the taxpayers as they do not know they are party to the trade via "too big to fail" and taxpayer rescues.  This is true in Germany and the UK, as well as in America.  It is the taxpayer that has to cover the losses made by overly aggressive bank managers who are playing with OTM (other people's money) in order to win large bonuses.

So, it is not Goldman Sachs that should be taking the fall for the financial crisis, but the bank managers that lost money and the regulators / government officials that are charged by the public with protecting the financial system.  The "witch hunt" that is today's Congressional hearing is completely misdirected and intended to make the Congressmen who failed in their sworn responsibilities, look better, much better, than they really are. 

At the end of this segment, the former SEC general counsel, Simon Lorne, appeared with Bill Ackman. Mr. Lorne offered his highly informed opinion that the case by the SEC against Goldman Sachs is "weak". This is the position I have maintained. The facts will show that there was no "fraud". If anything, there may have been some technical error of omission where disclosure is involved. This might justify a fine of some sort, even a large fine given the stakes involved. But Mr. Lorne says it all much better than me:

Disclosure: I am long GS with October Call contracts; If I could be, I would be short the Congress;

The DOW punched through 11,000 at the open on Monday, April 12 (after moving through briefly on Friday) and the SP500 will possibly close above 1200 today, on Tuesday. If these two levels hold for the rest of this week, then a new psychological floor will be established.

The round numbers like 1000, 1100 and 1200 are easy for most casual investors to remember and relate to, so they do act as psychological barriers, both up and down. The true technicians can find many shades of grey in between those levels, by using various moving averages like 21 day or 100 day and stochastics / oscillators. But the round numbers are the stronger. Once four days pass, the duration defined by IBD's William O'Neil as having some permanence, the barriers become difficult to break down.

With 11,000 and 1200 setting up as new floors, then the obvious targets become the next round number up, 12,000 and 1300. Given continued good news on earnings and revenue growth, even at a slow pace, economic strengthening, and digestion of problems like Greece, those targets will become a reality by year end.

Jim Paulsen and Ed Keon, two very thoughtful and accurate forecasters, believe that the economy has turned a corner and that revenue growth will take up where profits growth has already gone. It has been a lack of "top line" growth that has kept the market in check. Paulsen and Keon both believe the indicators show the economy strengthning. A stronger economy in combination with high "operational leverage" from very trim corporate operations, will be earnings and cash flow rocket fuel if revenue grows significantly the next 12 months.

This throws a big question on the PIMCO "New Normal" thesis. If the economy picks up due to so much government stimulus and a generally strong global backdrop, US GNP could grow above 5% in 2010, which is of the "Old Normal" recovery variety. This would be a big change from where the market currently values the economic prospects and would take the DOW and SP500 up another 10-15% if it proves true.

The role of the Federal government is very simple, and is outlined in the Constitution in Article 1, Section 8. Congress's only roles are to establish national security (defense) and commercial regulation in all its forms including bankruptcy law, patent law, banking regulation, foreign trade, etc. And that is it! Everything else legislated by Congress jeopardizes the very idea of democracy.

Because I am compassionate, I accept a very minimal social safety net, as opposed to entitlements. A safety net should keep people from suffering, but should not allow some to live the good life on another's dime.

The best prescription for healthcare, as part of that social safety net that most of us agree is needed, is to convert the industry to a utility. Just like electric, gas and communications utilities, healthcare would be subect to regulated fees at the state level to some minimum federal level of service. This preserves the sovereignty of the states (which will be the subject of at least one Constitutional challenge of Obamacare) that are expected to administer the current and future Medicare, but without additional funding by the Feds.

The big advantage of state-administered healthcare programs is that it keeps decision making closer to the taxpayers and beneficiaries, and preserves the opportunity for innovation amongst states. One state might find a better way than another and pass that approach along. This, along with multiple private administrators of the programs, much like multiple telecom carriers, will preserve the benefits of competition.

The jobs report this morning, April 2, was pleasantly neutral (not too hot and not too cold, but just right) Everyone agreed that the report showed the economy is making progress and the stimulus is working. The markets showed that at the open (bond and futures). There is really nothing to stop the market from moving up another 10%, now. But further out, there is a debate. Today that debate was led between Robert Barbera and Mohammed El-Erian.

Of course, El-Erian was pumping the "New Normal" paradigm of PIMCO. Barbera was maintaining his "Old Normal" posture, for which he has been an outlier the last year (there are a couple others like Mike Darda and Jim Paulsen, our local MN boy). The New Normal states that we are stuck in a stagnant recovery like in the 1930s with high unemployment and low economic growth. PIMCO has been whoring this idea for the past year. PIMCO led by Bill Gross, really thinks they have ALL the answers and everyone else is just wrong. But we have caught Bill Gross being wrong on interest rates in the past. No reason to think they are right this time.

Meantime, Barbera, like Paulsen, has been calling for 4-5% GNP growth this year (same as my call, by the way), with enough momentum to achieve "escape velocity". This is another way of saying the economy will not stagnate near no-growth, but will get back on to a normal cyclical track.

I agree with Barbera and my investing posture shows that. I believe we will get back on a positive economic track and for a lot of good reasons. I have maintained the only thing that can screw up the economy is the government making the wrong moves. But for demographic reasons, I think the Feds will be forced to make the right moves, even against the will of Obama.

Obama is an ideologue. He doesn't seem to care much what happens to the economy so long as he can socialize the country. He wants to "lift up the poor" on the backs of the rich. Unfortunately for him, that is NOT what most Americans want. They didn't want more of the Bush Jr. regime. They did want "change", whatever that means. Now they have found they are getting way too much change. The Dems will lose power in November and that will allow our economy to get back to the "Old Normal".

This is my take and for this reason, I am staying long.