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Posts Tagged ‘Goldman Sachs’
Corporate earnings continued at a fast and furious pace this week, and we started to hear from a wider variety of companies.
Again, however, it was a mixed bag. Solid earnings and outlooks from the likes of Apple Inc., Qualcomm Inc., Morgan Stanley and eBay Inc. were offset by disappointing earnings, outlooks or both by Yum Brands, Starbucks, IBM, Goldman Sachs Group and others. This resulted in a topsy-turvy stock market, which should be expected. Not only is that one of the trials and tribulations of any earnings season, but it is amplified by where we are in the domestic economic recovery.
Or not.
While some may cut to the quick and ask, “How can he say that?” I would quickly point to Federal Reserve Chairman Ben S. Bernanke’s semiannual report to the Senate Banking, Housing and Urban Affairs Committee on Wednesday. At the heart of Mr. Bernanke’s testimony, he stated that the Fed continues to forecast moderate growth for the domestic economy this year despite a “somewhat weaker outlook.”
Mr. Bernanke went on to pronounce the outlook as “unusually uncertain.”
While many investors kept one eye on the Greek financial crisis and what might have been done by Germany, the European Central Bank and the International Monetary Fund to stave off any meltdown, the other eye was on the plethora of corporate earnings both this week and last.
Assembling and understanding what so many companies report can be daunting even for the professional investor and money managers, particularly when trying to gauge the underlying strength of the domestic economy. Based on company earnings, the majority of which have beaten Wall Street expectations, it would appear that things are getting better. I can say the majority because as of the end of last week 172 of the 500 companies that make up the S&P 500 had reported their earnings and, according to Thomson Reuters, a record 83 percent of those 172 had beaten Wall Street expectations (typically 61 percent of firms exceed expectations).
What that may or may not mean about analyst expectations is fodder for another day. The real question is whether or not companies beating Wall Street expectations means that things - the economy in general, the industry in which a company competes, or that company’s position - are getting better.
The quick answer is “maybe; maybe not.”
To say a company beat its earnings makes for a good headline but, as we know, we have to dig deeper to understand how a company gets such a “beat.” There are several items we as investors need to watch out for - a gain or loss that is nonrecurring in nature, like the sale of a business or product line; an unexpectedly low tax rate that is not sustainable; ongoing cost containment that masks tepid revenue growth, and so on.
What it comes down to is breaking down a company’s income statement and understanding the moving parts that compose its revenue line, cost structure above the operating income line as well as those parts between the operating income line and net earnings. Understanding these parts lets us understand the quality of a company’s earnings.
Compared with the past few weeks, the earlier part of this week was rather quiet in terms of fresh economic data. Later in the week, we’ll get renewed views on the industrial economy and housing, but anecdotal evidence from companies that have reported their earnings suggests the former to be good while the latter may be tepid.
But I digress. As I started to say, there has been a lack of economic data and while the current earnings season has started to pick up steam, the slow news cycle early in the week focused attention on Goldman Sachs and what it may or may not have done regarding mortgage-related instruments.
Personally, I try to invest in industries and companies that I can understand, and candidly the financial industry is not one of them. I know, I know, it sounds strange thinking that a person in the financial world does not invest in financial companies, but what can I say.
I have never been a fan of deposits, credits, buybacks and book value, not to mention trying to figure out how to foresee what a bank can do on its proprietary trading or derivatives desk. I prefer data points that I can track, be they economic, demographic or some other. But again, that’s me. With financial companies making up roughly 20 percent of the S&P 500, there clearly is no shortage of investors for those companies and their corresponding securities.
What I can say is that the flare-up surrounding Goldman Sachs seems fairly well timed to coincide with the Obama administration’s efforts to reform the financial industry. Whether or not Goldman Sachs is guilty I have no idea, but more likely than not the civil charges filed against Goldman Sachs last week will lead to closer scrutiny of the way financial firms conduct their business. Transparency is good, in my view, as long as it does not interfere from a competitive perspective.
The question to be raised is who will watch the watchmen? Not so much the actual “who” per se but what kind of background should these overseers and regulator have? I mean, didn’t we have a cast of characters overseeing these institutions previously and how did that turn out?
Reregulating simply to do so is one thing, but it is quite another to have the foresight and understanding as to where the financial industry is going or needs to go in order to head off any new fiascoes. Will any reregulation be all-inclusive and prevent any further crisis from happening? Doubtful in my view. As my dad used to say, when you spend too much time watching the left hand, the right hand tends to get into trouble.