Archive for the ‘US Markets’ Category
Goldman As Humpty Dumpty
Goldman Sachs’ disastrously unfortunate year is halfway over, and questions about its conduct during the credit crisis linger on Wall Street and in Washington. The firm has made plenty of money, of course, amid the political criticisms and federal investigations questioning its ethics and business practices. But Goldman has lost something money can’t buy, something vital that must be reclaimed. And it isn’t just a big chunk of its reputation that’s at stake. Goldman has lost that special something that has always made its long-term greediness, to use a late chairman’s phrase, seem special, and that made the firm appear smarter than other banks. Indeed, that quality helped Goldman command top dollar, euro and yen for its services. Now, Goldman seems to be in danger of being viewed like any other bank, except somehow suspect for performing too well during the credit crisis. Wall Street knows any investment professional who is any good at what he does encounters potential conflicts, and the expectation is that those conflicts should be handled appropriately. If Goldman proves to have failed in this regard, its stock (ticker: GS), recently at $132, could be taken down a few more notches.
The shares already have been bashed, having fallen 23% during the past two years. They are wilting ahead of the second-quarter earnings release, scheduled for July 20. Analysts are lowering earnings estimates, and expectations suggest even Goldman’s stable of star traders had difficulty, like everyone else, making money in the second quarter.
As this harsh year for Goldman began, the bank seemed unable to extricate itself from a leading role in a polarizing post-credit-crisis news cycle. At the time, Goldman was preparing to pay $16 billion in staff bonuses, which indicated political tone-deafness and an arrogance that seemed to bode poorly as the financial crisis entered the recrimination phase that always occurs after Main Street has lost a lot of money on Wall Street.
There are always rumors that Goldman — which might have done absolutely nothing wrong, remember — will settle some sort of case with federal investigators, which could boost its stock price.
Goldman could say something on its earnings call that makes its troubles seem manageable, or it could even reveal massive profits and an optimistic view of the future that overshadows everything. In the markets, making lots of money always does that.
But, most likely, Goldman will end the call with a reputation that still isn’t commensurate with its distinguished past. Fixing Goldman’s public image is a huge challenge for the company’s chief executive, Lloyd Blankfein. For now, Goldman seems destined to remain Wall Street’s version of Humpty Dumpty, who, as everyone knows, suffered a big fall.
Should all the king’s horses and all the king’s men fail to put Goldman’s reputation together again, Blankfein will preside over a company that has become like any other bank, and that could be quite bad as Wall Street seems more and more like an assembly line.
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The Dow Jones Industrial Average Starts a Recovery
Last week’s volatility in global stock markets appears to have resolved positively, and the Dow Jones Industrial Average is very close to confirming key reversal signals that could prompt a recovery of up to 7% from current levels to the 10,920.3 level. Last week’s bullish engulfing candle (see the weekly chart below) provides the catalyst for the optimistic outlook. This weekly candle was preceded by a sharp 68.2% Fibonacci Correction bouncing off the April high, and can be seen as a three-pronged minor correction phase. Check out the Weekly Chart below.
This is the way the Weekly Chart looks:
A mere 87 points stand between 10,211.1 and the 10,298.2 level needed to be broken in order to leave the 9757.5 low behind and written to history. It is this event that would create the opportunity for a recovery to 10,920.3. Please check the Daily Chart below.
This is the way the Daily Chart looks:
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U.S. Firms Build Up Record Cash Piles
U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.
While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe’s debt troubles lead to a new market freeze. ”Cash is still king,” said Jeff Hand, chief operating officer at Ross Controls, a Troy, Mich., maker of pneumatic valves and other products that is holding more cash as it struggles to recover from a sharp drop in business last year. “We’re coming out of that, but the uncertainty is still there.”
The rising corporate cash balances could represent a longer-term behavioral shift in the wake of the deepest financial crisis in decades. In the darkest days of late 2008, even large companies faced the threat that they wouldn’t be able to do the everyday, short-term borrowing needed to make payrolls and purchase inventory. ”We just went through this liquidity crunch that’s made them realize the value of a dollar in hand,” said John Graham, an economist at the Duke Fuqua School of Business.
Even now, banks continue to pull back on lending. The Fed reported Thursday that net lending by the financial sector–including banks, credit unions and other lenders–was down 5.4% in March from a year earlier. The comfort of having cash on hand, though, comes at a high price companies may not be willing to pay for much longer. They are earning almost no interest on their holdings of cash, making it more difficult for them to achieve the returns shareholders typically expect from them. That will put pressure on companies to pare down the cash holdings eventually. “Stockholders don’t want them to keep sitting on cash at a zero return,” said Paul Kasriel, an economist at Northern Trust. ”They’re going to use it either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks”, he said.
Earlier this week, retailer Target Corp. raised its quarterly dividend to 25 cents a share from 17 cents, saying that the company’s cash holdings were “well above the amount needed for optimal reinvestment in our core business.” When it reported results for its fiscal quarter ended May 1 on Monday, Philadelphia auto-parts and service retailer Pep Boys–Manny, Moe & Jack said it had $87.8 million in cash on its balance sheet, versus $21.3 million a year earlier.
But in a call with analysts Tuesday, Chief Financial Officer Ray Arthur suggested the company would soon be putting the money into capital investments. “I just wouldn’t plan on seeing $80 million or $90 million at the end of every quarter on our balance sheet,” he said. In a recent survey of company chief financial officers that Duke’s Mr. Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9% over the next year, compared with 1.5% when he asked the question in December. They expect employment to grow by 0.7%, compared with the 1.4% drop they expected six months ago.
Cash has piled up at Hooker Furniture Corp., based in Martinsville, Va. The company has seen increasing demand for the upholstered furniture it makes in the U.S., which it has found usually leads demand for the other furniture it imports from China. Hooker is being cautious nonetheless. When it reported results Monday, the company said it had $38.7 million in cash and other highly liquid assets on its balance sheet in its fiscal quarter ended May 2, up from $26.2 million a year earlier. “We’re a fairly conservative company, and keeping our powder dry makes sense to use,” said Hooker Chief Financial Officer E. Larry Ryder. Mr. Ryder says he sees the cash as a sort of insurance fund to make sure he can buy the raw materials and other inventory he will need to meet demand if business picks up. The company has cut its inventories to $38.5 million from $47.1 million over the past year. “We don’t want to tie our cash up to the point that we don’t have the liquidity we need to accumulate inventory when we need it,” said Mr. Ryder.
Companies’ willingness to use their cash will play a major role in the strength of the recovery at a time when consumers need jobs to support their spending and many people are still trying to repair their finances. The Federal Reserve data showed households making some progress in paring down their debt, which fell at a 2.5% annual rate in the first quarter as credit remained tight and more homeowners defaulted on their mortgages. Household net worth– the value of houses, stocks and other investments, minus debts– rose for a fourth straight quarter as markets continued to rebound. At $54.6 trillion, though, it was still $11.3 trillion below its 2007 peak of $65.9 trillion.