More Raises for CEOs (brk-a, brk-b, lz, aig, gm)

Stocks look poised to push higher again this week. The S&P 500 is on the cusp of a break above resistance at 1,335. And that would likely set up a test of the post-crash highs at 1,344.

But as Jason Cimpl told his TradeMaster Daily Stock Alerts members this morning, earnings are coming and stocks have been relentless since recent lows:

Although the market participants have seemingly not cared about economic data for the past few weeks, the market will not move higher if earnings disappoint. And earnings season will officially begin next week. Even though the bulls look unstoppable now, and to a large degree they have been over the past eight months, a poor earnings season will awaken the bears.

Additionally, I would prefer the market fall to 1301, which lets the bulls regroup before they take stocks to new highs.

Alcoa AA starts earnings season next Monday, April 11.

Let's also note that there have been virtually no earnings warnings, so for now, we should expect another round of solid earnings gains.

*****Oil prices are above $108, but the action in oil stocks has been a little unusual. The big integrateds, like Exxon XOM and Chevron CVX have been moving higher. But some of the smaller E&Ps (exploration and production) that I favor have not moved with higher oil prices.

As readers may know, I am more bullish on oil stocks that come with little geo-political risk. It is my belief that oil supplies are in jeopardy of being nationalized in the years to come as oil prices continue to rise. Oil reserves are money in the bank, and I find it easy to imagine that certain countries could simply cancel contracts held by major like Exxon.

I very much favor U.S. and Canadian oil companies. And I love the small companies working the Bakken oil pool in the Western U.S. "Official" estimates for Bakken reserves seem conservative at around 5 billion barrels. Because this is oil in a shale formation, the estimates of how much is truly recoverable may not be reliable. Horizontal drilling technology is very successful in the Bakken. I suspect there is upside to the recoverable estimates.

If you're interested, you can find some of top Bakken recommendations HERE.

*****The U.S. pay czar, who is in charge of compensation issues for executives at companies that still owe the U.S. government for TARP loans, has issued guidelines for 2011 compensation. And the results probably won't sit well with most Americans.

AIG CEO Robert Benmosche's salary stands at $3 million, with $7.5 million in stock, for a total of $10.5. AIG needed a shocking $182 billion in bailouts and is 92% owned by the government. With a current market cap of $62 billion, I have a hard time seeing how this money gets repaid.

The top dog at GM will be getting $9 million in salary and stock. The U.S. has recouped about half of GM bailout money.

Interestingly, the compensation at Chrysler is much more in line with what we might think is appropriate for a company with an outstanding debt to the government. The CEO is a Fiat employee, and doesn't fall under U.S. pay guidelines. The next highest paid executive will receive a total of $1.18 million in salary and stock compensation.

I get the fact that companies need to pay up to attract top talent. But the simple fact remains that the financial crisis did little to change the corporate or regulatory climate. And that's just sad.

Now right on cue, here are some of your comments regarding the David Sokol/Lubrizol LZ situation...

*****Richard S.:  I work at a Fortune 100 company and just remotely have advanced notice on some financial reports.  As such, I am considered an insider and restricted from trading except in the "open window".   What Mr. Sokol did would seem to me more sinister than what I would ever know and yet he is not covered by the SEC rules?

It sure seems like if what he did isn't covered by the SEC, it should be.

*****Joe P. : I disagree with your comments about the Sokol-Buffet incident.  If, in fact, Sokol told Buffet that he was an owner of Lubrizol stock, as has been reported, then he did nothing wrong.  It is not an insider trading violation. In fact, it is materially no different than if you buy a stock and recommend to me that I buy it because you think it is a good company.   I would agree with you if Buffet indicated to Sokol that he was thinking about buying Lubrizol, and then Sokol went out and purchased the stock, THAT is insider trading.  But that is not consistent with the release of information regarding the discussion they had and the subsequent purchase.

In addition, Martha Stewart did not go to jail for insider trading.  Martha Stewart was convicted of obstruction of justice resulting from having obtained insider information regarding Imclone stock.  Obstruction of justice is a very serious crime, and she deserved to be jailed.

While what Sokol did may not be "insider trading" according to the current rules, I still think he used his influence in a way that would benefit himself over Berkshire-Hathaway shareholders. Sokol stated that he thought there was only a 5% chance the Buffett would buy out Lubrizol. But that's immaterial. He still used his influence to enrich himself to the tune of $3 million.

*****Don M.: Agree fully that Sokol's case is a perfect example of where there is a serious default in the US regulatory system. For the average citizen it must seem incredulous that someone can actually get away with what is clearly taking advantage of inside info. If his actions are within the letter of the law it only underlines how many others are doing exactly the same on a daily\weekly basis. This is where real "teeth" are required in dealing with such activity which clearly undermines confidence in the entire stock market system for the average investor, many of whom are convinced that they lose out daily to such insider action and in general manipulation of the market by the large financial institutions and funds.

*****Bruce J.: I enjoy and look forward to your newsletter very much.  It's timely and authoritative.  Thank you for your good work.

Regarding the Sokol scandal, you are absolutely right respecting every single point you made.  Nobody is above the law and Sokol should be prosecuted.  As hands off as Buffet is regarding the operations of his organization, I would imagine he acted to acquire Lubrizol without knowledge that Sokol was cooking a deal to line his own nest.  I certainly hope that was the case and that Mr. Buffet had no knowledge.   This kind of insider activity, whitewashed to make it appear to the public at large that “there was no (real) wrongdoing”, typifies the greed mongering that goes on inside Wall Street.    

This incident is probably untenably scandalous as far as Buffet is concerned.  In his February letter to his operating managers, he makes clear that they must always conduct business in such a way as to be able to answer straight questions from an unfriendly yet intelligent reporter and do so in such a way that there is never a perception of any impropriety.  He stated that it's OK to lose money but it's not OK to lose one shred of integrity.   Brand destruction by way of impropriety is a powerful force and leaves a long-lasting, negative impact.  BH will feel the impact for some time to come.  I'm not sure what could be done to restore equilibrium in this case other than for Mr. Buffet to pressure the SEC himself to prosecute one of his very own.  Frankly, he'd be wise to do so.  If nothing more, it would set an example and let the rest of his managers know that similar behavior will not just only not be tolerated, but will also buy you a one way ticket to prison.  It would be a very reassuring gesture to his stockholders.

No doubt, Warren Buffett is horrified at the damage to his and his firm's reputation. I'm sure that's why Sokol resigned.

*****Jeff C.:  Mr. Sokol said...on CNBC he had no influence on the deal; insisting he had no authority to commit any Berkshire Capital.  Those decisions, he stated, were made by Mr. Buffett   He presented a timeline of his purchases.  He also said he had informed Mr. Buffett of his purchase of Lubrizol shares before any meeting with Lubrizol executives and was not told to either sell his position or not have a meeting.  I believe the question is: Did Mr. Sokol know he was going to present Lubrizol to Mr. Buffett prior to him purchasing the stock and did he continue to purchase the stock after presenting Lubrizol to Mr. Buffett and knowing he was going to have a meeting with Lubrizol executives.  If he knew the former, that does not mean he is guilty of insider trading.  Bad judgement, perhaps, but not insider trading or front running.  If he did the latter, that is definitely suspect.  A person in his capacity should not be buying stock in company that is a potential target.

    I suggest you not rush to judgment until more facts are known.

In my business, I maintain strong rules about stocks any of my advisory services might recommend, that are in special reports, or even in advertisements. I am very aware that my employees could have the opportunity to "front-run" a stock, i.e. buy it, and then recommend it to readers to run the price up. That's why I keep a regularly updated "restricted list" of stocks that are off limits for a certain period of time.

Whether or not a reader eventually buys a stock does not matter. No one in my company will own a stock that gets recommended. Period. It seems pretty clear cut to me...

*****Gerald D.: I thought your comments and observations...were "right on." These kind of situations are a large factor in why the "average" investor will not come back to the market. This scenario perpetuates the notion that the investment climate is rigged and not to be trusted. It seems as if no one is being held accountable for their actions and to hear Buffet explain things away is sadder yet.

Wall Street does seem to have no problem killing the golden goose sometimes.

*****William H.: Get your facts straight--Martha Stewart was never convicted of insider trading--she went to jail for lying to the FBI.

I stand corrected. My apologies.

Mike M.: Little guy like me fighting to get ahead and this guy crushes my optimism.

Ivan I.: I never respond to group e-mail or the request for my view, however the matter of David Sokol's purchasing Lubrizol LZ stock prior to recommending that Berkshire-Hathaway purchase the company to Warren Buffett I feel compelled to make a comment.  As long as Sokol bought the stock before making the recommendation to Buffett I don't see any wrong doing: neither in letter nor in spirit.  Sokol did nothing more then the rest of us do when we like a stock we buy:  recommend it to our friends.  It just so happens that Sokol's friend, Buffett, could agree with Sokol that LZ was indeed a good buy, and buy the whole company.  I know that to the average person who doesn't have a friend like Buffett "something" appears to be amiss, however as long as the order is correct, Sokol purchases THEN Sokol recommends I don't believe he did anything wrong.

Tom G.: Should these crooks, or “banksters”, as my colleague Kevin McElroy from Resource Prospector calls them, be doing time in the Big House? Are regulators doing their job or are they asleep at the switch? I'd love to hear from you.

Not only the "banksters" but also their enablers.  Don't expect anything to change until regulations and programs apply to the rule-makers as well as the citizens they "serve"  (congressional retirement, health care etc.)  The taxpayer will always be called upon to pay the bill.  (Can you say GE?)

If the economy depends on the spending of the consumer (taxpayer), how is it to happen with so many hands in his pocket?