Three Reasons to Freak Out

Foolishness demands that we don't overreact to short-term news. Still, it often pays to watch the headlines; they can reveal what's not so wise about the wisdom of crowds, and help us figure out where our next opportunity may be. Here are three of the reasons to freak out that I'm watching today:

1. Google obeys the law of financial physics
In a rare Wall Street disappointment yesterday, Google (Nasdaq: GOOG  ) managed to actually miss earnings estimates by a few pennies a share, producing a measly $6.45 instead of the $6.52 to which Mr. Market felt entitled. Sadly, even Google can't grow at better than 25% all the time. It's already giant. And it's only got one line of business, which it already dominates.

The problem is, of course, Google's inability to diversify. While the press constantly throws the word "innovation" at the company, there's honestly nothing all that innovative -- or bottom-line-building -- about buying small, bolt-on Internet services and putting your name on them; giving out free phone operating systems (also bought, not developed); or letting Interneters use free versions of office productivity programs with 15-year-old functionality.

Despite a lot of hiring (enough to worry analysts), it's also falling behind in some places it used to lead. See Microsoft's (Nasdaq: MSFT  ) Bing maps and search, from which Google has started to crib ideas lately. For now, Google is the world's powerful advertising broker, and nothing more for now. Some shareholders are sure to freak out when they comprehend the obvious.

2. Goldman must obey the rules of fair financial dealings ... whatever those are
Goldman Sachs
(NYSE: GS  ) will pay a huge (but not record) fine for duping investors in a Frankenstein's-monster mortgage-securities derivative custom-built for billionaire hedge-fund client John Paulson to short.

Under fire from the SEC and in court, the firm finally coughed up $550 million and acknowledged its "mistake" -- namely, claiming in its marketing materials that its synthetic mortgage bond was created independently by a third-party Dr. Frankenstein. In fact, Paulson, who made billions shorting the housing bubble, was giving direct input on the bond's contents, thereby increasing the odds that he'd score when the thing went bonkers and tore up those who took the long side.

After swearing up and down that Goldman had done nothing wrong -- how could it, since he previously swore that the company does "God's Work"? -- CEO Loyd Blankfein managed to keep his job, and the firm didn't have to admit any wrongdoing, as is usual on these occasions. I think the only reason Goldman caved and paid up was because it needs a steady supply of villagers to feed its stitched-together creatures. It's hard to sign them up if stories of their financial dismemberment keep gracing the front pages of the newspapers.

3. The unintended consequences start now
Everyone sensible agrees that we need some kind of regulatory overhaul to interrupt the current status quo. Right now, firms like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) privatize profits based on horrible decision-making, then benefit from trillions of dollars in taxpayer-backed loans and indirect monetary stimulus when their horrible decisions come back to wreck the economy. Unfortunately, sensible people aren't in charge of making the changes. Politicians are.

Much of the newly passed financial reform bill looks great in concept: disallowing banks from making gambles with their own money; tighter restrictions on derivatives which formed the shadow banking industry; and a consumer finance watchdog charged with making sure burger-flippers making $13,000 don't sign up for $300,000 mortgages. But according to the Wall Street Journal, there are now 10 agencies charged with translating more than 2,000 pages of outline into even more pages of specific rules, and they'll be getting heat from well-heeled financial-industry lobbyists the entire way. I guarantee there are 30 to 300 more reasons to freak out as a result of this bill. We just won't see them for years ... until the next crisis reveals them.

At the time of publication, Seth Jayson had no position in any company mentioned here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 16, 2010, at 2:16 PM, plange01 wrote:

    obama's resignation to come as early as next week.with the country sinking into a depression unemployment well over 20% of the workforce and 1,650,000! forclosures already this year obama has been given the choice of resign or suffer the disgrace of being removed from office.a change had to be made the country does not have time to wait for his term to end...

  • Report this Comment On July 16, 2010, at 2:35 PM, sid2286 wrote:

    I think that you are confusing Obama with Palin Plange01.

  • Report this Comment On July 16, 2010, at 2:37 PM, jrod87 wrote:

    any proof of his "resignation to come as early as next week"?

  • Report this Comment On July 17, 2010, at 1:17 AM, MyDonkey wrote:

    plange01: Please don't blame the puppets for a bad puppet show. Replacing incumbent politicians is the same as attaching new puppets to the same old strings. It has no effect.

    The puppet masters must laugh at our stupidity. The question they're asking us these days amounts to something like this: "Would you rather be decapitated or have your head cut off?"

    Some day we'll hopefully be able to overthrow the questioners. For now, let's at least try to ignore the question. Let's not be so stupid as to argue over the answer.

  • Report this Comment On July 18, 2010, at 1:39 PM, Tradersinfo wrote:

    Obama is a puppet of the Establishment. Democrats and Republicans alike should go, in my opinion. In relation to earnings "surprises" they are, well, speculative nonsense. They can often be predicted by observing pricing biases in stock options prior to the announcements.

  • Report this Comment On July 19, 2010, at 1:14 PM, Danl48 wrote:

    Is this a financial forum or a place for idiots to parrot Fox (FAUX) News garbage?

  • Report this Comment On July 19, 2010, at 1:50 PM, plange01 wrote:

    1) unemployment in the US is over 20% of the work force and growing.2) forclosures are at a all time record and rapidly rising 3) the US does not have a president!!

  • Report this Comment On July 19, 2010, at 1:58 PM, Darwood11 wrote:

    Doing "God's Work" - isn't a variation of that quote the line Al Qaeda also uses?

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