Tuesday, April 28, 2009

Nice Pop - Confidence Up?

I just saw the market pop 1% and went looking for some news (even though a 1% move is practically noise these days) . I immediately noticed a CNN story about a fish that swallowed a cell phone. With fish now eating cell phones, an entirely new source of demand appeared to be opening for the phone manufacturers. This would clearly be a boon to them and their suppliers, so the market pop seemed to make sense. Just imagine how quickly we could rebalance the global economy if we could also start feeding fish our excess cars, malls, mortgages, and economists. This theory was somewhat marginalized when I saw that the consumer confidence figures for April were just released.

It seems the cause for the pop was the Conference Board's Expectations Index which rose from 30.2 in March to 49.5 in April. We can't get into the heads of those surveyed to figure out just why they've become more optimistic (actually, less pessimistic), but it should be safe to assume that the 25%+ gain in the stock market since March 9th played a fairly significant role. The steady blather from the banks that they're in great shape, and the stream of reports from the media that the economy is bottoming were also likely influential.

Unfortunately, this indicator, like many, is of limited value. It doesn't correlate well with consumer spending, and consumers are about as accurate at predicting the path of the economy as the economists are (translation: not very). Like many economic indicators, the confidence figures had been in free fall. No one should have been expecting that rate of decline to continue. We would all be feeding ourselves to the fishes in another 6 months. A bounce is certainly not a bad thing, but buying stocks because lemmings with no money feel less bad AFTER the market has had a nice rally is probably not a great idea.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Tuesday, April 14, 2009

Goldman Sachs and the Financials

A few thoughts on Goldman's two announcements last night.

First off, I find it somewhat amusing that the entire financial arena is trading up in the pre-market on Goldman's earnings release (except Goldman which is trading slightly lower). Most of Goldman's business segments registered declines in the quarter. The quarter was really driven by a blowout performance in the fixed income, currency and commodity (FICC) trading group, where revenues more than doubled year-over-year. On the conference call, Goldman made a point of stressing that FICC benefited from less competition.

So, the business lines that the large competitors operate in are still in decline. The one bright spot is a business line that the competition pulled back from. This competitor retrenchment meant outsized profits for Goldman, but it also means that the competition won't be enjoying the same boost to revenue and earnings. Let's not forget that trading is extremely lumpy. Projecting this type of performance forward would not be prudent.

Goldman clearly benefited in the quarter due to an opportunity that the competition provided. Does it really make sense to view Goldman's report as bullish for the entire sector?

Also, Goldman reported that they will be raising $5 billion in equity to help fund the repayment of the TARP capital. The TARP funds cost Goldman 5% for the first 3 years and then 9% afterward. So, Goldman wants to dilute its shareholders to the tune of 8% to pay back funds that are costing it 5%. There is no way that Goldman could get access to a cheaper $10 billion right now.

Recall, the preferred deal that Buffett struck with Goldman last September. That will cost Goldman 10% (on $5 billion) every year. In addition, Buffett received warrants on $5 billion of new Goldman shares. So why isn't Goldman using the funds it will raise from the offering to pay off the Buffett preferred? Goldman would have to pay a 10% penalty, so the cost today would be $5.5 billion, but it would save $500 million a year. Over 5 years, that would work out to $2.5 billion. Instead, Goldman wants to repay TARP. A $5.5 billion repayment of TARP would save $275 million over the first three years (at 5% interest) and $495 million over subsequent years.

To sum up, paying back Buffett would save $2.5 billion over 5 years while paying back a comparable amount of TARP would save just over $1.8 billion over 5 years. Goldman could save $685 million over the next 5 years by paying back Buffett instead of the Treasury. The only logical explanation is that the cost of the TARP funds is more than just the 5% financial cost. Goldman doesn't want the government dictating how it runs its business. More specifically, I suspect, Goldman doesn't want the government limiting their compensation.

It looks like shareholders are getting a raw deal. They are being diluted to raise funds to repay inexpensive funds so management can extract more value from the company in the form of higher compensation which will be paid by the same shareholders. Furthermore, the folks at Goldman are bright people. They're not selling stock here because they think its cheap. If they're selling, I'm not buying.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Saturday, April 4, 2009

March Employment - Still Hard To Take Seriously

The March employment numbers came out yesterday, and the headline numbers were in-line with expectations. 663,000 jobs were lost, and the unemployment rate jumped to 8.5%. The Obama administration is modeling an unemployment rate of 8.9% by the end of the year. For us not to blow past that figure we're going to need to see a serious moderation in the pace of job losses, a hefty increase in the civilian labor force (the denominator of the unemployment rate), or a healthy dose of government data manipulation.

Speaking of data manipulation, the job loss figure for January was revised down by 86,000 jobs, a 13% revision two months after the fact. Interestingly, the February number was not revised -- yet. Also, the birth/death model (which I've written about previously) registered an increase of 114,000 jobs in March. It claims that 23,000 construction jobs were "born" last month. They must have been counting the people constructing tent cities across the country.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.