As Earnings Are Upon Us, Some Goldman Thoughts

by: Ryan Barnes

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

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