How Wall Street pros size up recent news developments
After bidding up financial shares on July 13 in advance of Goldman Sachs' (GS) second-quarter earnings release, traders' initial impulse on July 14 was to "sell the news" after Goldman reported stellar results, briefly taking major stock indexes lower. It seems the market had already priced in strong profits from the Wall Street powerhouse. (Equity indexes did manage to nudge into slightly positive territory by early afternoon.) Goldman's 65% profit jump on higher-than-expected revenues raises the bar for other financial firms reporting second-quarter results in the weeks ahead.
What did Wall Street pros have to say about Goldman's results, and some key economic numbers released July 14? BusinessWeek compiled a sampling of comments from analysts and economists:
Matthew Albrecht, Standard & Poor's Equity Research
[Goldman Sachs] benefited from inexpensive funding, a surge in underwriting, and active clients. The firm was also able to hold costs down, aided by a lower head count. We believe Goldman Sachs is gaining market share and benefiting from low-cost funding, and will see continued strong results throughout 2009. We are raising our 2009 earnings-per-share estimate to $17.12 from $12.34, and upping our target price by $28 to $178.
Cubillas Ding, Celent
This quarter's results [for Goldman Sachs] far exceeded most analysts' forecasts, but this is not a sign that the good times are back. For the moment, delivering such stellar results in a still choppy market is a reflection of the markets showing a period of buoyancy as well as the firm's trading prowess. It is also a symptom of competitors being distracted by merger integration activities or reduced appetites for risk-taking.
Goldman has possessed a sharp eye to jump into areas where others fear to tread. Being swift to remove the constraints of government TARP arrangements also means that the firm can capitalize on opportunities to lure investment banking talent from faltering peers.
David Greeenlaw, Ted Wieseman, Morgan Stanley
[The June] Retail Sales report was weaker than we expected (overall sales +0.7%, ex autos +0.3%) although all of the downside surprise in June was concentrated in the gas station component (up 5.0% vs. an expected gain of 9.2%). This miss—together with slight downward revisions to retail control in prior months—pushed our forecast for real consumption in Q2 to –0.9% from –0.7% . This took our tracking estimate for Q2 gross domestic product down to –1.3% (from –1.1% previously).
An enormous further surge in gasoline prices (which will clearly be soon moving sharply in the other direction) and a rebound in food after an unusually large drop last month boosted the headline [producer price index] to a 1.8% surge, though this still left it down 4.6% from a year ago. The core posted an unusually large 0.5% surge (+3.3% year-over-year), but almost all of the upside was accounted for by a spike in motor vehicle prices. We consider PPI auto numbers unreliable and would instead focus more on only a marginal advance in the core ex autos.
Beth Ann Bovino, Standard & Poor's
U.S. business inventories fell 1.0% in May, near the 0.9% decline expected by markets, but after a revised 1.3% drop in April (previously –1.1%). Business inventories are down 8% over last May. Retail inventories fell 1.6%, led by a 4.2% drop in auto dealer inventories. Shipments slipped 0.1% in May, after falling 0.3% in April, and are down 17.8% over last May. Retail sales were up 0.5% in May, after declining 0.3% in April. Manufacturer shipments dropped 0.9% in May, after falling 0.5% the month before. The inventory-sales ratio fell to 1.42 from 1.43, down from the cycle high of 1.46 seen in December and January.
Coming in about as expected, the data will likely have a modest impact on the markets today.