As Earnings Are Upon Us, Some Goldman Thoughts

While earnings season is officially underway, investors have been bypassing the earnings appetizers and awaiting the main course, which begins serving this week.

Alcoa (AA) is the standard torch-bearer, but it’s not a bellwether for much more than aluminum prices these days. (you can read my earlier notes on Alcoa at the end of this post on the ISM report).

Alcoa did about what I expected, and after selling off more than its sector mates prior to earnings, the stock ended the week essentially unchanged.

But this week we get real meat & potatoes, as leading companies in nearly every sector will tell us crucial information about what was, and more importantly what they see on the horizon. I’d love to say we’ve got filet mignon coming our way, but investors had better be ready for the sirloin and just hope it’s seasoned well.

• Transports - CSX Corp. (CSX) reported Monday; AMR Corp. (AMR) reports Wednesday
• Financials - Goldman Sachs (GS) reports Tuesday, JPMorgan Chase (JPM) on Thursday, Bank of America (BAC), Schwab (SCHW) and Citigroup (C) on Friday.
• Healthcare - Johnson & Johnson (JNJ) reports Tuesday; Abbot Labs (ABT) reports on Wednesday
• Consumer - Yum! Brands (YUM) reports Tuesday, Harley-Davidson (HOG) reports Thursday
• Technology - Intel (INTC) report on Tuesday, Xilinx (XLNX) on Wed., Google (GOOG) & IBM (IBM) on Thursday
• Industrial - General Electric (GE) reports Friday

What Tone to Expect

This is always tough to gauge, but if you’ll notice above most of the major financials will be out this week. In addition, new SEC Chair Mary Schapiro will be on the Hill Tuesday to testify on oversight and the proposal to create a new consumer protection agency.

And in what is sure to be a soundbite-laden exchange, Hammerin’ Hank Paulson will finally present himself to the same peppering of “questions” (and I use that word ever so graciously) on the BofA/Merrill deal that Ben Bernanke received a few short weeks ago. (If you’re up for a nice little rant on what a pathetic waste of resources our Congress has become, check out my earlier post on Bernanke’s day before the pitchfork squad)…

Before I waste all my good ranting on Paulson - he’s a big boy, he’ll take care of his own - I’ll just say that the guidance, not the earnings, from the financials will determine whether the S&P 500 next hits 900 or 850. Bulls want to hear that the yield curve is bringing in truckloads of money, and also that said money is making its way out the door (via shiny new loans) and/or back into the hands of the desperately broke U.S. taxpayer. So far the banks have only been doing a good job of staying away from the front page every day and hoarding cash. Yes, we all know they’re still scared of future markdowns on shaky real estate assets.

But we’ve got enough data points of our own to assess debate the health of commercial and residential real estate. What we need now is to hear that new loans are being granted…more to the point, after all we’ve done for them, we need to see that they’re putting their butts on the line. Period.

I see the overall tone as being optimistic, mainly because Jamie Dimon will be talking to us again on Thursday. I don’t know precisely when or how it happened, but the guy is the George Clooney of the financial sector. Whether we feel we’re base enough to fall for it or not, the market loves him, and he just seems like a guy you want to have a beer with. He’ll tell us that from where he sits, the economy will have a strong second half, and we’ll believe him…at least for a few days. Now whether the S&P will have dropped or risen 15 points prior to Thursday, it’s a close call, but I’d give the 60/40 edge to higher, as I think we’ll see positive results from Intel, Yum, JNJ, and Goldman Sachs. I also think the PPI and CPI, due out mid-week, will show us that producer prices are still favorable and consumers aren’t seeing any undue hits outside of the gas pump.

One Last Rant - Why All the Goldman Haters?

I’m going to do my best to keep this to a single paragraph (or four), and I say that because I’ve written and deleted several, much longer posts on the topic of Goldman. Somewhere between the scathing Rolling Stone article and the daily postings of a website run by fictional movie anarchist avatars (I won’t link, sorry if you don’t know), Goldman has become the dartboard photo of every conspiracy theorist who has been pained by the financial collapse of the past 24 months.

Let me back up a second and say that I in no way wish to make light of the real hardships, setbacks, and tragedies suffered by millions of Americans and global brethren. It’s been real, and hurtful, and there’s plenty of blame to pass around. But to pin this all on Goldman just baffles me to no end.

I guess they’re the easy target because the company flat out gets the smartest, most Machiavellian young people on the planet to join its ranks, and it’s been that way not just for years, but for decades. Think about that from a purely Darwinian perspective for a moment, and then ask yourself if it’s really a mystery why they consistently find ex-colleagues in high profile positions within the government, regulatory agencies, and even heading up competitors (or former competitors).

Here’s a small anecdote that typifies the Goldman culture. When I was in college, one of the most fascinating times of year was in the Spring when the “big boy” firms came to recruit the seniors on campus. Having attented a technical (read: geek-laden) university that spat out engineers like double bubble, the biggest recruiters at the time were the Big 5 consulting/accounting firms. Those of us underclassmen who thought of ourselves as future captains of industry naturally wanted to take in all the news and buzz we could. And at that time, while there were 5 firms recruiting dozens of well-qualified, bright individuals, there was one company that everyone secretly knew was better than the other 4. And that one happened to be Andersen Consulting, or what is now Accenture (ACN). Didn’t matter why, it just was. And every single hotshot super-stud (or studette) on campus considered working for Andersen to be a rite of passage. If you were good but didn’t have a dog-eared copy of The Prince on your dresser, you were happy working for Ernst & Young or KPMG.

Now there may actually be two morals to this little aside, the first being of course that Authur Andersen actually ended up being a pariah. But let’s call that a coincidence for a moment…or, if you’re a loyal fan of said fictional movie anarchist, let that be the slight confirmation you needed and move on to the next article that dared to mention Goldman in a non-evil way.

The second (and key) moral is that to any - and I mean ANY - newly-crowned meritocracy king, the only bedpost worth getting your first investment banking notches on is Goldman Sachs. I’m not saying that every single employee of the company pisses excellence, but there is a reason why they’ll probably earn $4.00 per share this quarter. If you’ve created a culture that consistently attracts the smartest folks like flies, chances are you will outperform your rivals. Does that make them inherently evil? I say no. And if they do cross the line one day, I feel confident that in the new world order of 2009 and beyond, they’ll get their proverbial nuts in a sling just like anyone else in the financial world will.

Sorry if I breached the PG-13 barrier here, but those words have been weighing on me for some time. As a final note, yes, I think Goldman is a good investment, but I don’t hold it personally. It is held proudly in the Secular Trends Portfolio, and it has performed quite well, thank you very much. And yes, the dark pools and program trading are scary-sounding ways to make money, but in a market where the daily volatility has been higher than at any time in the past decade, that’s the best way to make money. So that’s what they’ve been doing. When volatility (not as measured by the VIX, but real, session-to-session volatility) settles down, so will the program trading.

Disclosure: Author does not hold a position in the companies mentioned. GS, IBM, and AA shares are held in the Secular Trends Model Portfolio.

Comments

[Alan Young:]

If you like GS, then you must LOVE the merging of corporate and federal power.

The US Treasury has increasingly become a subsidiary of GS, using public money to benefit private bankers. When it was just a little back-scratching, nobody cared much. When it came to Hank Paulson seizing the power of life and death over major banking firms, and using it to enrich GS, the protests started. And it's only gotten worse.

This *baffles* you? Wow... good thing there's no useful information in your article, because it would be really sad if some naive reader were to rely on advice from someone so out-of-touch with the fundamental values of fairness and economic opportunity.

Jul 14 02:49 AM

[Angry Banker:]

Obviously the commenter above didn't read your entire article. Your point that GS hires the best, so it is no wonder that those same people end up in the upper echelons of government, is right on point. This does not make them evil. It just means they are good at what they do.

And all this rubbish about Paulson basically using the government to save GS is also ridiculous. I get tired of hearing about the government indirectly "secretly funneled" billions to GS through AIG. Wasn't the whole point of bailing out AIG so that it could meet its obligations? If it didn't then use some of its bailout money to pay on claims that were due, then why bail them out? GS paid a fair price for the CDO's etc that it purchased from AIG, so when AIG paid what was due to GS, that was the natural consequence of AIG's bailout, not some sinister government conspiracy.

Jul 14 03:48 AM

[Davewmart:]

Angry Banker,
Perhaps you would explain why Adam Smith was wrong, and actors in the economy do not collude at every opportunity?
Presumable the campaign contributions by the financial community was money wasted too, as it bought them no influence.
Financing, and the huge bonuses of the leaders in it, now takes up a much larger slice of the economy than in, say, the 80's.
Would you care to explain what has been the added value, as to the rest of us it simply seems that they have reduced the economy to smoking ruins, impoverished the middle classes and laden them with debt, and for so doing rewarded themselves merely with the odd few hundred million and control of all of the positions of influence?

Jul 14 07:43 AM

[Gravity404:]

"...the middle classes and laden them with debt..." The system didn't make this group run up credit cards, buy the cheapest Mercedes models “putting on the dog” when they could have paid $15,000 less for a Chevy, secured a 5 year ARM, interest only, for the $2 million house when they knew all they could afford is $500K, etc, etc.

This demographic and their president has laid down a huge tax burden on the responsible people because they make over $250K per year. The American dream [fine print: as long as the dreams aren't too big]

Don’t blame GS for doing their jobs.

Jul 14 09:24 AM

[Davewmart:]

I blame GS for doing their jobs for their tiny rewards no more than I blame a bankrobber for doing his job.
The bankrobber however has the disadvantage that his does not own the legislature, and so his theft remains illegal.
GS has no such disadvantage.

Jul 14 12:18 PM

[Gravity404:]

Dave, interesting skewed perspective; I’m worried about you. I think you need a CAT Scan.

I wonder how many bank robbers have advanced degrees that cost 100s of thousand of dollar and millions of hours of study, so they don’t have to become bank robbers.

Do you really think that Nancy and Harry care about GS, except only to increase their taxes on earnings, capital gains, health care, real estate, death, SS, Medicare, Medicaid, etc. to pay for those bank robbers??

Oh, BTW, your CAT scan is scheduled for November 2010. Don’t be late or we will have to reschedule.

Jul 14 01:28 PM

[Davewmart:]

Gravity404,
You are either very corrupt or very naive.
TPOTIWID - the purpose of the system is what it does.
Goldman Sachs and the rest of the elite were rescued by the taxpayer, when the correct thing to do would be to have let them go bust and the bondholders suffer, with only parties such as retirement funds shielded.
Continuing to run these vast gambling enterprises, which have nothing capitalist about them as they are protected from going bust, they have loaded untold liabilities on to the taxpayer, when they did not incur the liabilities and stood to make no gain.
Mortgage relief just has not happened for average people, who are being evicted onto the streets, whilst the money has been grabbed by banks.
They have been able to do this because they control the legislature - they are the ones who pay for it with campaign contributions.
If you have any seriou points to make, rather than peurile comments about cat scans, please do so.
The bunch at the top are about as public spirited as in any other Third World oligarchy.

Jul 14 03:44 PM

[watchdogg:]

I hate GS. I hate most banks but Goldman has a special place in my heart. The claim that they are wildly successful because they "hire the best and brightest" is infantile. There are plenty of young whiz kids at MorganStanley and BearStearns also. There used to be plenty at Lehman Brothers also. The main reason GS is so successful is because it utilizes it's privileged position at US Treasury to it's greatest advantage. To a banker, this may seem like "just good business". Maybe that gives you some clue as to why I hate bankers. A corporation is awarded the same rights as individuals, according to the Supreme Court (another den of thieves). But they will work the Treasury to their own advantage, no matter who suffers. GS is the scum of the Earth.

Jul 14 04:22 PM

[tintoys:]

One right thing in the article: Andersen Consulting (now Accenture) was the best place for a very bright, aggressive, technically-savvy college graduate to work. It still is.

Jul 14 04:42 PM

[Sailorman:]

You don't call this Outrageous

But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

The retail world doesn't get to play. This is a game only for big boys who can afford to pay for the "arms" needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.

Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea.

All this "algo" (algorithmic) trading also gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false "algo" trading, that volume isn't really there. You may have a position that will be a problem if you want to exit, and not know it.

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don't even know it." (Themis Trading)

We are literally talking billions of dollars here. The SEC needs to step in and stop this, and soon. This is a lot more important than the salaries of investment professionals, for which the Obama administration today suggested new rules, which would allow the SEC to oversee salaries at member firms. Seriously? They don't have enough to do already?

The link to the white paper is www.themistrading.com/.... Themis Trading is at www.themistrading.com/.

Read the paper. Then, if you like, drop the very nice folks at the SEC your thoughts at tradingandmarkets@sec....

Jul 14 05:10 PM

[Old Trader:]

"I guess they’re the easy target because the company flat out gets the smartest, most Machiavellian young people on the planet to join its ranks, and it’s been that way not just for years, but for decades."

Being the "smartest" is certainly a good thing, and something to aspire to. Being "most Machiavellian" is, at best, a left-handed compliment, and something only a REAL POS would aspire to.

Jul 15 12:16 AM

[Gravity404:]

Dave
First, I’m sorry I hit a sore spot with the socialist healthcare system joke, as I see from the use of the word “whilst”, you have a lot of experience in socialized medicine. BTW - How are those dental plans working?

Second, I’m not corrupt or naïve…just ENLIGHTENED.

I stand to lose more than, what I’m told is 95 percent of the population (but I don’t believe it), because I have been successful. Apparently too successful; I need to give some, err… a lot back. Some of it in the form of stimulus checks (free money) to “the 95 percent”, and the majority in the form of free money to GS in an effort to pick Wall street back up, after they ran too fast for their legs to keep up. (That was the original moon walk.)

I can’t do squat about either, except to buy shares of GS or shares of the “95 percent “. Well, the 95 percent is a bad investment. So, I own shares of GS.

But don't worry my friend, the captial gains I make off GS will be increased by at least 65 percent next year, and that can go back into the machine...or pay for another Czar. Maybe a Goldman Czar?

If Mr. Original (Fight Club) and the rest of the GS basher want to truly do something about it, buy shares of GS and vote me onto the board. Then, we will take the $700,000 bonus per employee and feed Darfur or New Orleans.

Spread the wealth brutha!

Thirdly, if GS and the "Elite" control the legislature; then vote them out. Who are these controlled politicians, please name names?

On Jul 14 03:44 PM Davewmart wrote:

> Gravity404,
> You are either very corrupt or very naive.
> TPOTIWID - the purpose of the system is what it does.
> Goldman Sachs and the rest of the elite were rescued by the taxpayer,
> when the correct thing to do would be to have let them go bust and
> the bondholders suffer, with only parties such as retirement funds
> shielded.
> Continuing to run these vast gambling enterprises, which have nothing
> capitalist about them as they are protected from going bust, they
> have loaded untold liabilities on to the taxpayer, when they did
> not incur the liabilities and stood to make no gain.
> Mortgage relief just has not happened for average people, who are
> being evicted onto the streets, whilst the money has been grabbed
> by banks.
> They have been able to do this because they control the legislature
> - they are the ones who pay for it with campaign contributions.<br/&...
> you have any seriou points to make, rather than peurile comments
> about cat scans, please do so.
> The bunch at the top are about as public spirited as in any other
> Third World oligarchy.

Jul 15 09:28 AM

[Gravity404:]

Dave / Fight Club

seekingalpha.com/artic...

Quick! Spread teh hate!

Jul 15 09:59 AM

[Davewmart:]

Gravity 404,
Yeah, you are right, I live in a country which has healthcare for all of it's people - how terrible is that?
If you want the bought politicians, and really can't work it out for yourself, try Bush (oil interests, pure coincidence that Iraq happens to sit on a lot of oil)
Biden (tied in to credit cards, represented Delaware, which has the laxest laws on controlling these usurers, and his son, I believe, made a very nice living from them)
But why mess around?
Check out the campaign contributions to both the Democrats and the Republicans, and guess where the power lies.
You apparently couldn't give a toss that whilst the fat cats are protected, many are being thrown into the street after loosing their jobs or ill health.
Not my business since I don't live there?
The UK is caught in the same web by corrupt international chancers.
What goes around comes around.
I can't wait to hear the whining when a fraction of what the rentiers have dished out comes back to them.

Jul 15 10:58 AM

[Michael Clark:]

It's hard enough to get up the stomach to try to vote for the type of obsequious rats who run for political office every year -- but it's all we have. It's democracy (with all its bruises, pimples, and hairlips) or fascist or communist autocracy. Not really a choice. But as distasteful as it usually is to vote for the self-seeking corrupt politiicians we must choose from (used care salesmen with lipstick) how can we continue to do this when we KNOW that these smarmy, 'I'll say anything to get elected' attention whores are owned lock, stock and barrel by Goldman Sachs? We don't want our government to be a version of the Sopranos -- with Goldman Sachs serving as Tony S.

We are disgusted with the corruption. We do not hate Goldman Sachs is successful. We hate Goldman Sachs because of the WAY that Goldman Sachs is successful: cheating, stealing, intimidating (, murdering? -- I would not put that past them.) And it would be bad enough if they were just isolated in the dirt of their own small island of corruption. Now they've taken over our government, stolen money from the taxpayers, and positioned themselves to steal more money in the 'global warming' fraud that's coming next. Let's make 'global warming' a version of monopoly -- and let's make Goldman Sachs both the bank AND the King of Marvin Gardens.

Jul 15 11:06 AM

[Michael Clark:]

The amazing thing, Gravity, is that these geniuses at Goldman Sachs, with all their education, have become little more than high-tech thieves. When they beat the bank and steal their living from the casino, they are geniuses; and when the casino wins, Goldman Sachs sends its hitman (Paulson) and its #1 bagman (Kneel and Carry the Cash) to Congress and gets the American taxpayer to pay for its losing hand. That's a fixed game. They're not just pathological gamblers (gambling with other people's money, pension funds, etc.) but they are control freaks who can't stand to lose at the high-stakes game to which they are addicted.

It's a great job, to lie and cheat and steal and win; and, if you lose, to threaten, cajole and extort....so you win even when you lose.

Scatter Goldman Sachs to the wind. Gives us back our poor little corrupt democracy again. Send the Titans to hell, where they belong.


On Jul 14 01:28 PM Gravity404 wrote:

> Dave, interesting skewed perspective; I’m worried about you. I think
> you need a CAT Scan.
>
> I wonder how many bank robbers have advanced degrees that cost 100s
> of thousand of dollar and millions of hours of study, so they don’t
> have to become bank robbers.
>
> Do you really think that Nancy and Harry care about GS, except only
> to increase their taxes on earnings, capital gains, health care,
> real estate, death, SS, Medicare, Medicaid, etc. to pay for those
> bank robbers??
>
> Oh, BTW, your CAT scan is scheduled for November 2010. Don’t be late
> or we will have to reschedule.

Jul 15 11:40 AM

[Gravity404:]

Dave
I actually agree with a lot of your thoughts. We just have different approaches to them.

Example: I own PM and MO as divy/defensive stocks. It doesn't mean I agree or even like the company (speaking of big evil corps) I don't smoke. I hate smoke. But, I would never criticze the freedom for people that want to. Does smoking cost Billions per year in tax and help jack up our healthcare system? Yes. But its fundemental freedom which is the basis of both our countries.

It's fun to antogonize some of the people on these boards - Like the guy above "GS murdering" OMG, please, these MB are for people to share thoughts on investments and some time it turns into a political forum, and thats ok, but statements like that are plain stupid and self serving. What? does Michael Clark have a short position in GS? Or is he writing the sequel to the best selling novel THE FIRM?

It's simple if GS has an unfair advantage and will profit for it, buy them and profit too, or not. But I want to get back some my hard earned money.

Jul 15 12:02 PM

[Gravity404:]

Michael, please share with us how GS has filled you with all this rage and hate. I could give a rat's ass if they are the best and smartest on Wall St or how they're profiting. I will just try to conitue to make money off of them, doing their thing. That's the best revenge isn't it?

Jul 15 12:06 PM

[Ryan Barnes:]

Wow, quite the spirited discussion here, even if some of it has gone off the proverbial rails. I have been looking into the campaign contributions from the last go-around, and yes, Goldman is at the top of the list in terms of nominal dollars. And yes, the % towards democrats was high at roughly 70%.

But let's remember that this is a company based in New York City. They've been consistently funneling their contributions towards the dems at higher than 60% since 1990. Oh, and they've also donated $11 million to the Republican party in that time.
www.opensecrets.org/or...

So a company located in a highly democratic-leaning state where lots of employees make truckloads of money did what they've consistently done for 20 years. It just so happens that this time, their horse won the race.

Oh, and to boot, the total contributions from GS amounted to less than 1/2 of 1% of what Obama received in contributions. And they guy had close to $30 million in cash LEFT OVER once the election was complete. Objectively, I don't think the current Administration feels overly beholden to Goldman for anything.

Jul 15 05:47 PM