MarketView for January 19

Summary

Wall Street felt the chill on Wednesday as Goldman Sachs and Wells Fargo reported results that indicated that they too are not immune from the travails of Wall Street. Both the S&P 500 and then Nasdaq indexes chalked up losses in excess of one percent. For the Nasdaq, it was its largest daily loss since November 16.

Goldman Sachs saw its share price decline 4.7 percent to $166.49, its largest daily percentage decline since April 30, after the Wall Street firm posted a 53 percent drop in earnings as trading revenue fell sharply. Shares of Wells Fargo were down 2 percent to $31.81 after the company posted a fourth-quarter profit that missed expectations.

After the close, F5 Networks saw its shares tumble 20.7 percent to $110.08 after the network equipment maker posted a weaker-than-expected quarterly revenue and forecast second-quarter revenue below Street estimates. The stock has been one of the big momentum plays during the past year and could serve to extend the sell-off on Thursday.

Financial and technology stocks have been driving force behind the rally that began last December, which many on the Street believe has stocks primed for a pullback. Consider that Apple fell 0.5 percent to $338.84 after the company reported greater than expected quarterly earnings on strong sales of iPhones, iPads and Mac computers. No one would disagree that part of that decline was due to the announcement of Steve Job’s declining medical health. Nonetheless, Apple has already demonstrated that it can perform under its current bench of managers.

The Dow's loss was limited to some extent by IBM, which ended the day up 3.4 percent to close at $155.69 on strong earnings after the close on Tuesday. Shares of Cree and its rival LED lighting makers fell after it reported weaker-than-expected sales, profit and a current quarter outlook late on Tuesday.

Rubicon Technology was down 7.7 percent to $$20.75 and circuit maker Linear Technology took a hit of 4.4 percent to close at $34.56. American Express fell 2.4 percent to close at $45.24 after it said restructuring charges would reduce fourth-quarter earnings.

Volume was slightly below average with about 8.35 billion shares on the three major exchanges.

Earnings Down at Goldman

Goldman Sachs posted a 53 percent decline in fourth-quarter earnings as trading revenue declined sharply, making it clear that the preeminent Wall Street powerhouse was just as vulnerable as everyone else in the currently difficult trading climate within the debt markets. Goldman’s bond trading revenue, including commodities and currencies, fell 39 percent from the third quarter as worries about European sovereign debt and rising Treasury yields kept investors on the sidelines.

"Things were just dead" in December, though "it's sure a lot more active" in January, Chief Financial Officer David Viniar said on a conference call.

Earnings fell for a third straight quarter, and revenue fell short of estimates, with year-over-year declines in investment banking and most other business segments. Viniar said Goldman's backlog of investment banking business fell from the third quarter, which may dampen revenue in the current quarter.

Goldman shares closed down $8.19, or 4.7 percent, at $166.49, their largest one-day percentage decline since last April 30. That result weighed on other stocks, as the Standard & Poor's financials index closed down 2.2 percent.

The results capped a year that has tested Goldman Chief Executive Lloyd Blankfein, and also tested the bank's reputation for having the smartest bankers on Wall Street. Goldman has been criticized for activities such as its management of a private offering by social networking company Facebook, and its marketing of a mortgage-related security that led it to pay $550 million to settle regulators' civil fraud allegations last July.

Despite the weakness, Goldman shares have held up far better than those of many rivals, and trade around where they were when the financial crisis exploded in September 2008.

Goldman said it would pay out nearly 40 percent of full-year revenue in the form of compensation and benefits, a higher percentage than in 2009, though 2010 profit fell 37 percent and revenue declined 13 percent. Compensation per employee dropped 14 percent to about $431,000.

Quarterly net income after payment of preferred stock dividends fell to $2.23 billion, or $3.79 per share, from $4.79 billion, or $8.20 per share, a year earlier. Net revenue declined 10 percent to $8.64 billion. If you exclude one-time items, earnings came in at $4.11 per share, according to Thomson Reuters I/B/E/S.

Blankfein said in a statement the bank is "seeing signs of growth and more economic activity" in 2011.

Results so far have raised questions as to how much banks can make from bond trading in 2011. Fixed income accounted for about half of revenue before the credit crisis, but is expected to account for less in the future.

Quarterly investment banking revenue fell 10 percent from a year ago to $1.51 billion, though Goldman reclaimed from Morgan Stanley its crown as the top mergers and acquisitions adviser.

Viniar declined to discuss Goldman's dealings with Facebook, including its decision this week to limit a private offering of Facebook stock to non-U.S. investors.

Goldman made more money from trading for its own account. Revenue from investing and lending rose 11 percent from the third quarter, accounting for 23 percent of total net revenue.

Viniar said new regulatory rules might limit some of the bank's investing and lending activities.

The bank said its average value at risk, or the amount it could lose from one day of trading with a 95 percent confidence level, was $120 million, down 1 percent from the third quarter and 34 percent lower than a year earlier.

For all of 2010, Goldman's profit after preferred stock dividends fell to $7.71 billion, or $13.18 per share, from $12.19 billion, or $22.13. Net revenue fell to $39.16 billion from $45.17 billion.

Long known for generous compensation, Goldman said total pay and benefits fell 5 percent to $15.38 billion in 2010. As a percentage of revenue, pay and benefits totaled 39.3 percent in 2010, up from 35.8 percent in 2009 but more than 6 percentage points below the average in the last decade. Goldman ended 2010 with 35,700 employees, up from 32,500 a year earlier, and Viniar said staffing could grow by a mid- to high-single-digit percentage in 2011.