More Banking Upside Surprises - Analysts Caught Napping Again - 4 / 14 / 2009

First: Followers should move stop loss on GE from $7.95 to $9.60, maintaining the 20%down side protection. GE closed yesterday at $12.20. Dell at $10.40 needs no chnages.

Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.

Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?

At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.


But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*

Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.

Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).



*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.

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Brad van Siclen