Money Morning Staff Reports
The shrewdest U.S. investors understand that future profits will come from overseas.
But Goldman Sachs Group Inc. (NYSE: GS) is apparently getting those profits now.
Wall Street analysts are predicting that Goldman – which only recently repaid billions in government bailout money – will report a "blowout" quarter today (Tuesday), thanks to its own shrewd ability to trade its way through the overseas markets. Indeed, analysts are looking for profits in excess of $2 billion for the March-June quarter.
In an odd financial irony, Goldman's good fortune could well underscore that many problems remain in the U.S. financial sector, meaning the U.S. economic recovery remains in the distance.
Goldman Sachs is "taking opportune risks that others aren't taking," Charles Geisst, a Wall Street historian and author of the forthcoming "Collateral Damaged: The Marketing of Consumer Debt to America," told The New York Times. "They are scooping up all the risks that are available."
Goldman's shares surged $7.57 each, or 5.34%, in trading yesterday (Monday) to close at $149.44.
As Money Morning has reported, less than a week into corporate earnings season – where U.S. firms are posting their second-quarter results – investors are anticipating a lackluster showing, but are hoping that big banks and high-tech leaders will report strong enough results to at least stop the stock-market's current decline, or perhaps even to ignite another stock-market rally.
The Standard & Poor's 500 Index and Dow Jones Industrial Average delayed declined for the fourth straight week last week – the longest string of losses since stocks hit their low point in March. The Nasdaq Composite Index lost 2.47% in the week ended Friday.
Earnings reports this week from computer-chip giant Intel Corp. (Nasdaq: INTC) and several big banks – including JPMorgan Chase & Co. (NYSE: JPM)– could provide investors and economists some insights on where the U.S. economy appears to be headed.
Earnings are expected to improve over the last quarter, even though they'll still be down substantially on a year-over-year basis, Binky Chadha, chief U.S. equity strategist at Deutsche Bank AG (NYSE: DB), told MarketWatch.com.
JPMorgan Chase & Co. (NYSE: JPM) reports Wednesday. Internet-search juggernaut Google Inc. (Nasdaq: GOOG) will report on Thursday. Other firms that report this week include Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C).
"A necessary condition for the markets to go up from here is that earnings have to deliver, and we need a dissipation of the uncertainty about earnings," Chadha said.
Thomson Reuters predicted that S&P 500 earnings will decline by 36% from last year's levels, with financials (-53%) leading the way and techs (-24%) performing better than other sectors. This should represent the eighth-straight quarterly decline, though analysts seem more concerned about the ensuing management comments on future operations, since that will shed some light on where the economy is headed.
Late last week, Dow component Alcoa Inc. (NYSE: AA) kicked off the corporate earnings season with a lower-than-expected loss.
Goldman Takes Risks, Goes Global
If Goldman posts the $2.17 billion in profits that many analysts are forecasting, it will stand as solid evidence that the investment bank has deftly navigated the ongoing financial crisis – with perhaps even better days to come. Goldman earned $2.05 billion in the second quarter last year and $2.29 billion the 2007 second quarter.
Traders said Goldman made several key moves during the quarter:
- Played the whipsaw volatility in the global credit markets by trading bonds to generate part of its quarterly fortune.
- Properly played a similar pattern in U.S. stocks this year, profiting as an early-year plunge reversed course and turned into one of the most-powerful short-term.
- Capitalized on such commodities as oil, while also trading volatile currencies.
- And made the most of its position as one of the few remaining heavyweight-investment-banking firms willing and able to service the deal-making market. It reaped lucrative fees from the high-margin business of underwriting stock offerings, which have surged anew this year as other more-troubled financial institutions raced to raise capital.
A look at a common risk-taking measure – so-called "value at risk," or VAR – shows that while other investment banks were playing it conservative, Goldman was clearly game to take risks. VAR, an estimate of what an institution could lose in a single day, zoomed by more than 20% in the first quarter and analysts believe that figure was probably even higher in the second quarter, The Times said.
Analysts are concerned that many of these profit-making opportunities will disappear in the year's second half – which looks much more challenging. Part of that challenge will be for the company to deal with the heightened group of regulations it is now subject to after having converted from an investment bank to the more-heavily regulated bank-holding company.
Goldman Sachs is betting on the markets – just as the markets are betting on Goldman, whose stock price has soared 68% this year. The stock closed at $141.87 on Friday – and remains about 76% below its record high of $250.70, reached in 2007.
And if the expectations are correct, the second-quarter financial report will extend a successful run for Goldman, which has only ever been marred by a single quarterly loss – a $2.12 billion loss last fall, The Times said.
That turnabout should allow employees to reap a major windfall, with top producers earning in the millions, The Times reported. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees – an average of $600,000 per employee, the newspaper reported.
Goldman's shares were upgraded to a "Buy" from a "Neutral" rating by the Meredith Whitney Advisory Group LLC, MarketWatch reported early yesterday. Principal Meredith Whitney, who announced back in February that she would leave Oppenheimer & Co. (OPY) to form her own firm, is a Wall Street maverick who was one of the few mainstream analysts to really understand in advance how deep the U.S. finance crisis was destined to become.
Whitney says her firm's bullishness on Goldman's shares is based on its bearishness about the outlook for the U.S. financial-services sector – and for the U.S. economy in general. Whitney expects a frenzy of debt issues from federal, state and local governments in the United States, as well as by governments abroad, in order to finance the massive budget deficits, bailout programs and stimulus packages that continue to be announced.
Furthermore, Whitney says that with the number of consolidations, conversions to conventional bank holding companies and outright failures and consolidations in the investment-banking sector – coupled with the aversion to risk being manifested by the remaining survivors – Goldman will have more of this market to itself than ever before.
Indeed, expect Goldman to gain market share in these areas, and in such businesses as derivatives, where growth is projected to resume, iStockAnalyst.com reported.
Whitney has a 12-month target price of $186 on Goldman's shares, which would represent a 31% gain from Friday's closing price.
However, Peter S. Cohan, president of venture-capital and management-consulting firm Peter S. Cohan & Associates, says the excitement over the projected Goldman Sach's profits is way overblown.
"When Goldman Sachs Group reports on its second quarter tomorrow, analysts estimate that earnings will total $2 billion," Cohan wrote in a column for Daily Finance early yesterday. "That sounds like a big number, but two years ago, when it paid its workers an average bonus of $661,000, it earned $2.3 billion in the second quarter. It looks like Goldman is going to try to pay near-record bonuses in 2009 despite less-than-record earnings."
[Editor's Note: Make sure to read Money Morning later this week when Contributing Editor Shah Gilani, a retired hedge-fund manager who is also an avowed expert on the global credit crisis, analyzes the long-term profit potential posed by the investment-banking sector.]
News and Related Story Links:
- The New York Times:Goldman Sachs Likely to Post Huge Profits, Analysts Say.
Value at Risk.
- Money Morning Week Ahead Column:
Investors Looking to Tech to Pull U.S. Stocks – and the Economy – Out of Their Doldrums.
Stocks hang hopes on tech, financial earnings next week.
- Money Morning Mid–Year Forecast Series:Rebounding Tech Sector Stars Could Play Key Role in U.S. Economy's Second-Half Rebound.
- Money Morning News:
Dow Component Alcoa Kicks Off Lackluster Earnings Season With a Lower-Than-Expected Loss.
CIT Group, Goldman Sachs, Fastenal in spotlight: MONDAY MORNING'S TOP STORIES.
- Money Morning News Analysis:
Major Lending Pullback Predicted by Maverick Wall Street Analyst Could Have Dire Implications for U.S. Economy.
- IStockAnalyst:Goldman Sachs (NYSE:GS): Upgraded To Buy At Meredith Whitney Advisory Group.
- Meredith Whitney Advisory Group LLC:
- The New York Times:Whitney Leaving Oppenheimer to Open Own Firm.
- Peter S. Cohan & Associates:Official Web Site.
- Daily Finance:
Why Goldman's $2 billion profit is no big deal.
- Amazon.com:"Collateral Damaged: The Marketing of Consumer Debt to America."