April 23, 2010

Here’s how we see things this week:

  1. Positive earnings: Are they ever what they seem?
  2. Financial Reform legislation is gaining momentum as financial companies report huge profits against a backdrop of middle class frustration and anxiety.
  3. Gold finished the week higher.

Positive earnings: Are they ever what they seem?

For some people, the idea of running a business and counting the dollars they’ve brought in once a quarter is a straightforward accounting of revenues set against expenses.

For others, the quarterly reporting season includes a combination of creativity and engineering.  Just counting the beans is a bit too old fashioned.

In that light, today we’ll look at the Financials – specifically Citi, as an example.  Citi brought in $4.4 billion for the quarter.  Are those pennies earned?  Is business better than ever?  The answer is yes and no.  Questions remain.

When the Fed turns on the money tap, Wall Street is the first to get wet.  There is a very real benefit.  But suspicious in the mix are the assets previously left off-balance-sheet, but now magically reappearing.  Also suspicious is the use of creative mark-to-make-believe pricing – assigned values that brought the quarterly statement of profits higher.  Masked are consumer-lending losses of $3 billion, up from $1.4 billion in Q1 2009.

In sum:  Wall Street seems to be fine, Main Street not so well.

Financial Reform legislation is gaining momentum as financial companies report huge profits against a backdrop of middle class frustration and anxiety.

From Obama’s viewpoint, the time is now for the White House to press the issue of reform (meaning control, influence, and a permanent structure to accommodate systemic bailouts).  Goldman is again at the head of the class, but this time not appreciating the approbation.  JP Morgan, Merrill/B of A, and Deutsche Bank all had similar deals offered to them:  Sell a rotten egg to one client and help another client bet on the gag reflex.

Main Street is surprised that Wall Street, in bespoke suit and silk tie, behaves like a common bookie.  But never fear, Congress is riding to the rescue with new legislation.  Our fear is that very few lawmakers have studied the legislation, let alone considered unintended consequences.  Though we consider accountability for one’s actions crucial, this initiative is feeling strangely like the legislative moves that extended the depression beyond 1933 to the beginning of WWII.

Gold finished the week higher as:

  • UK unemployment hit a 15-year high,
  • estimates of funds needed for a Greek bailout shifted from $40 billion to an even higher number by Axel Weber (head of the German Federal Bank/Bundesbank); some estimates are as high as $105 billion,
  • a German bond auction brought disappointing results,
  • oil rose (Transocean rig explodes),
  • wholesale prices measured by the PPI rose .7% over an expected .4 %,
  • food prices moved 2.4% higher (a jump not seen since 1984), and
  • earnings from Amazon, E-bay, Qualcomm, Microsoft, and others proved disappointing.

On the bright side, home sales rose 27% MoM (as banks begin to unload their stock of foreclosed homes).

All major trends remain intact … never a dull moment.

David Burgess
VP, Investment Management
MWM LLLP

2014-09-23T18:45:47+00:00