MarketView for January 18

 

 

Summary 

  

The major equity indexes hit their highest point since July on Wednesday as the International Monetary Fund sought to help countries hit by the European debt crisis, while forecast-beating earnings from Goldman Sachs dispelled some worries over bank profits.

 

The stronger-than-expected earnings from Goldman Sachs followed disappointing results from Citigroup on Tuesday and JPMorgan Chase last week. Nonetheless, Goldman shares closed up 6.8 percent to $104.31.

 

While the Goldman results supported financial shares, the IMF's willingness to bolster its crisis-fighting resources gave the sector a big push. Financials had suffered throughout 2011 on worries that Europe's debt crisis would hit banks globally.

 

The IMF is seeking to expand its war chest by $600 billion to help countries reeling from the crisis, even though some nations insist Europe must first do more to support ailing members, according to sources.

 

Home builders' shares rose sharply after data indicated that homebuilder sentiment was unexpectedly higher in January, hitting its highest point in 4-1/2 years.

 

After the bell, shares of Xilinx and Altera rose following their earnings reports. Xilinx was up 7 percent from its close of $35.30 and Altera was up 5.1 percent from its close of $40.72.

 

Despite the optimism over the IMF, investors watched cautiously as Greece and its creditors resumed negotiations on terms of a planned debt swap, hoping to overcome an impasse in talks and stave off a painful default.

 

The benchmark S&P 500 closed above 1,300, a key resistance point that analysts said signal more room to rally if the index stays there.

 

Within the tech sector, Yahoo was up 3.2 percent to $15.92 a day after co-founder Jerry Yang said he was severing all formal ties with the company he started in 1995. Shareholders had blasted Yang for impeding investment deals that could have transformed the Internet media group.

 

Bank of New York Mellon fell 4.6 percent to $20.30 after the world's largest custody bank announced a decline in fourth-quarter earnings.

 

Another large custody bank, State Street, was down 6.6 percent to $39.95 after stating that it had accelerated an expense- control program, a sign it still sees continued weakness in global capital markets.

 

Financial results will remain in the spotlight, with reports from Bank of America and Morgan Stanley due out later this week. Bank of America's closed up 4.9 percent at $6.80 and Morgan Stanley chalked up a gain of 6.8 percent to close at $17.35.

 

Approximately 7.3 billion shares changed hands on the three major equity exchanges, a number that was above the daily average of 6.68 billion shares.

                         

Goldman Sachs Outperforms Expectations

 

Goldman Sachs fourth-quarter earnings number fell 56 percent as trading and investment banking revenue declined sharply. Nonetheless, the bank did better than expected thanks to cost-cutting efforts and lower taxes, sending its shares higher.

 

Chief Financial Officer David Viniar said Goldman is targeting $1.4 billion in annual cost savings, up from an earlier goal of $1.2 billion, and has a "small amount" left to do in 2012. Viniar, speaking on a conference call with analysts, also said profit growth must come from higher revenue and not cost cuts. But he added that Goldman was investing in operations at a "more moderate pace" due to a weak business environment.

 

Goldman's results reflected the weakest year for Wall Street since the financial crisis. Meanwhile, as politicians and policymakers battled over how to best handle Europe's sovereign debt crisis, market volatility rose sharply and many investors headed for the sidelines.

 

The lull in business, as well as the prospect of reduced profitability amid tighter regulation, has forced major banks to cut more than 100,000 jobs globally and slash bonus pools. Goldman's payroll declined by 2,400 employees during 2011, reflecting job cuts across trading, banking and back-office operations. The bank slashed compensation 21 percent to $12.2 billion, or $367,057 per employee, from $15.4 billion, or $430,700 per employee, in 2010.

 

Wall Street rivals, including JPMorgan Chase, Citigroup and Jefferies, have reported similar weakness in capital markets revenue, and also responded with job and pay cuts.

 

Morgan Stanley is due to report results on Thursday. The expectation is that Morgan will report a loss, due largely to a $1.8 billion settlement with the bond insurer MBIA. However, Goldman's explanation of its own weak performance suggests Morgan Stanley faced revenue challenges as well.

 

"Ultimately, macroeconomic concerns, heightened market volatility, lower corporate activity and decreased risk appetite among our institutional clients translated into fundamentally lower level of revenue opportunities over the course of the year, hampering our returns," said Viniar.

 

In contrast, banks that focus more on business and consumer lending did better in the fourth quarter. US Bancorp and PNC Financial Services, two of the largest regional banks, said on Wednesday that demand for loans from business was increasing, a positive sign for the economy that has turned up in reports from the biggest banks as well.

 

Goldman earned $978 million, or $1.84 per share, during the last three months of 2011, down from $2.2 billion, or $3.79 per share, a year earlier. Goldman's profit for the full year was $2.5 billion, its weakest year since 2008, at the height of the financial crisis.

 

Each of Goldman's business lines -- investment banking, trading, investment management and investing and lending -- reported double-digit revenue declines during the fourth quarter. All but investment management reported lower revenue for the full year.

 

Goldman's return-on-equity, a key measure of profitability, was a meager 3.7 percent for 2011. In the years leading up to the financial crisis, it boasted returns of more than 30 percent. The returns are a stark sign of how higher capital requirements and a pullback in risk-taking after the financial crisis are hurting investment banks and raising questions about Wall Street's business model.

 

While Goldman's fourth-quarter revenue dropped 30 percent to $6 billion, the bank took steps to reduce expenses and reported lower taxes than in the year-earlier period. Operating expenses declined 7 percent to $4.8 billion, while the bank's tax provision of $234 million was down 78 percent.

 

The lower tax rate stemmed from the type of profit Goldman earned on a lower revenue base. The bank, which reported a loss in the third quarter, took big write-downs on some securities for the year, which helped lower taxes. Its tax advantage on holdings like municipal bonds was also more prominent in a year when its overall revenue pool was shallower.

 

Goldman's effective income tax rate for 2011 was 28 percent, compared with 35.2 percent for 2010. Viniar said he expected the rate to go back up to the more typical low 30 percent range in 2012.

 

The lower expenses in 2011 allowed Goldman to report a better profit than dour estimates released by analysts in the weeks leading up to the earnings report.