MarketView for April 20

Summary 

Share prices were higher on Tuesday as oil prices lifted energy stocks and Wall Street remained relatively upbeat over the ongoing recovery in corporate profits, even as some high-profile companies fell short of lofty expectations.

Goldman Sachs earnings trounced forecasts, but its share price fell 2.1 percent to $159.98 as UK regulators launched a probe into alleged fraud by the company, thereby adding to worries caused by fraud charges here in the United States.

The broad market benefited from the view that earnings are indicating beyond a doubt that the economy is recovering, even though some of the big names that reported solid results, such as UnitedHealth Group, ended the day lower.

After the closing bell, the latest companies to release earnings included Apple and Yahoo. Shares of Apple rose more than 6 percent to $260.99, extending its record high in after-hours trading. Apple reported results above expectations, led by strong sales of the iPhone. Meanwhile, Yahoo gave up 1.9 percent to $18.03 in extended trading after its earnings exceeded Street expectations but revenues did not.

During the regular session, more than four stocks rose for every one that fell on the New York Stock Exchange, while on the Nasdaq, three stocks rose for every decliner.

Energy shares led the upside as oil rebounded when some European flights resumed with the threat from Iceland's volcanic ash cloud receding. Crude was up more than 2 percent at $83.45 per barrel, though trade volumes for the May contract were low on the contract's last day.

IBM posted better-than-expected earnings but disappointing gross margins. The stock eased back 1.9 percent to $129.69 and was largest drag on the Dow Jones industrial average, followed by Coca-Cola, which fell 1.5 percent to $54.47. Coke reported mixed results; Johnson & Johnson exceeded quarterly estimates but trimmed its full-year profit forecast, while UnitedHealth soared past estimates. Johnson & Johnson saw its share price fall 0.1 percent to $65.99 and UnitedHealth was down 0.8 percent at $30.98.

Potential Fraud at Goldman Sachs Overshadows Dramatic Earnings Increase

Goldman Sachs reported blow-out quarterly earnings on Tuesday, but investors appeared to focus on the fraud case against the bank as Britain's market watchdog launched its own probe. Goldman's results, which failed to send its shares upward, came four days after the Securities and Exchange Commission accused the dominant Wall Street bank of defrauding investors by failing to say that a prominent hedge fund manager bet against a Goldman subprime debt product that he helped design.

Goldman's troubles also caused political reverberations. A top Republican congressman questioned whether politics affected the timing of the government's case, while in Britain, the Liberal Democrat party's leader said Goldman should be banned from UK government contracts until the case is settled.

Goldman reported that its first-quarter net income nearly doubled to $3.29 billion, due in large part to the strength in fixed income trading and principal investments. Earnings were $5.59 per share. The bank also reported its lowest-ever first-quarter compensation ratio, but it still set aside $5.5 billion for compensation and benefits in the period.

The reduction in money set aside served to bolster earnings that could bring more public scrutiny to the 141-year old bank, last year described as a "giant vampire squid wrapped around the face of humanity" by Rolling Stone magazine.

Goldman shares fell 2.05 percent to close at $159.98, even as many other bank shares, including archrival Morgan Stanley, rallied. Furthermore, the shares are down 19 percent over the past week.

The bank's co-general counsel, Greg Palm, rebutted the SEC charges during the bank's earnings conference call. Palm said the firm was "very disappointed" that the SEC brought charges and said Goldman "would never mislead anyone." He also said investors who lost money on the subprime mortgage product that is the focus of the SEC suit had a wealth of experience and background in such deals.

Palm faced questions about Goldman's failure to alert investors when it first received a "Wells Notice" from the SEC regarding the agency's investigation. Palm insisted that Goldman would disclose any investigation or inquiry that it considered material. "We do not disclose every Wells Notice we get because that would not make sense," he said.

Goldman's forecast-beating earnings came as Britain's Financial Services Authority (FSA) said it had started a formal investigation into Goldman Sachs International in relation to the SEC allegations. FSA said it would work closely with its U.S. counterpart.

Goldman was "distressed" by the wave of negative publicity and said that most customers remain loyal, Chief Financial Officer David Viniar said. "We are out talking to our clients," he told analysts on the conference call. "You can see from our results last quarter that our clients still support us."

Some financial institutions are reviewing their dealings with Goldman during the financial crisis to see if they have any legal recourse. American International Group Inc took a loss of up to $2 billion last year as it ended credit default swaps it had written on some Goldman collateralized debt obligations.

Meanwhile, Goldman has deregistered Fabrice Tourre with the UK financial regulator, the bank said, given that the employee at the center of the case is on paid leave and was therefore not undertaking his registered activities.

The bank said that it had concluded in an earlier internal investigation that Tourre had done "nothing wrong."

Political tensions were heightened by a split along political lines among SEC commissioners last week in a vote on whether to file suit against Goldman. A top Republican lawmaker is raising questions about the SEC's fraud case against Goldman Sachs, implying political motives -- a charge that the SEC denies.

"The timing of the SEC's filing of a civil securities fraud action against Goldman Sachs has created serious questions about the commission's independence and impartiality," said Darrell Issa, the top Republican on the House Oversight Committee, in a letter to the SEC on Tuesday.

Republicans have raised questions about the timing of the case, filed on Friday just before the Senate was to start debating a bill that would usher in new rules for Wall Street.

SEC Chairman Mary Schapiro told reporters on Tuesday that the agency's decision to charge Goldman was "absolutely not" politically motivated.