Commentaries

from Rolfe Winkler:

Meredith Whitney asks the tough questions

----Not to beat a dead-horse here, but I thought I'd blog one last interesting thing on Goldman. This from today's conference call. (Transcript via Thomson Street Events, no link)----

Guarantees for certain liabilities aren't the only way Goldman has benefited from government largesse. They've also made money handling trading volume that is driven by the Fed...

Meredith Whitney, Analyst: I have a few questions. The government purchase program was supposed to end this quarter. They've extended it to next quarter. How much of that us a driver of velocity of flows? And how are you positioned when they exit, if they exit, for any type of principal risk? And what do you think that impact is going to be in the larger market? That is my first question. Start off with an easy one.

Is MW on to something here? Perhaps: Note the non-answer answer.

David Viniar - Goldman Sachs Group, Inc. - EVP, CFO: Not a problem. Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing. I think that they are going to do it carefully. They are going to do it slowly and over time. I think they are signaling the market. I think they are doing a very good job of letting people know they are going to continue for a while, but they aren't not going to continue forever. As far as our positioning, I don't think it really matters at all. As you know, as I said, most of what has happened has been the velocity, not the positioning. And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

MW: Okay, but in terms of the flow volume, right -- so you have been the greatest beneficiary of increased flow volumes. How are the flow volumes going to be influenced as they exit?

DV: I think that they will try to time their exits for the market being healthy enough to pick up that flow. And so I think the flow will continue.

Another non-answer. But MW persists...

MW: And then who would you imagine would be the substitute buyers?

DV: The various market participants. I think it will be the various financial institutions, funds. I think the whole variety of buyers. And there is a lot of cash out there to buy.

MW: Okay. And then just a last one. I was teasing when I said it's the easiest one. But it was easy for you. The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

DV: Oh, I would say that it was much more markups than sales...I don't have the exact number, but it would be much more markups than sales.

JP Morgan sure to point out it’s giving back to the community

JP Morgan’s PR machine was sure to give a shout out to loan modifications as a counter to the embarrassing amount of riches reported in their third quarter report. The press release of course leads with its eye popping net income of $3.6 billion in the quarter. But before the bank details all the glorious gains in investment banking fees and fixed income, Jamie Dimon takes a moment to say how much the bank is doing for the community.

We recently announced the decision to revamp our overdraft policies to make it easier for customers to have more control over the fees they pay. In addition, our Card Services business has developed new innovative products that enhance the way customers manage their spending and borrowing. We are also aiding communities by working with struggling mortgage customers to modify their loans. We have approved more than 262,000 new trial modifications under the U.S. Making Home Affordable Program and our own modification program, nearly 90% of which include a reduction in payments for the homeowner. Since 2007, we have helped families by initiating 782,000 actions to prevent foreclosure, and we are committed to doing our part to support economic recovery going forward.”

First, the overdraft fees were shameful to begin with, and its doubtful loan modifications would have gotten off the ground without the government pushing it.

The banks are going to work a lot harder than that if they want to manage their pr. Record bonuses this year aren’t going to go over very well with taxpayers who have recently lost their jobs or fear losing them even though their money helped shore up the financial system to begin with.

Barclays’ yo-yo balance sheet

Talk about deleveraging. By far the most striking number in Barclays’ first-half profits concerns its balance sheet:

Our total assets decreased by £508bn to £1,545bn over the first half of 2009.

Given the stated desire by regulators – and investors – for banks to shrink their balance sheets, a 25 per cent reduction in total assets in the space of just six months has to be applauded, right?

Not so fast. While it is true that Barclays’ asset base has shrunk since last December, it’s still higher than it was a year ago, when total assets were £1,366bn. So all that has happened is that its balance sheet, which ballooned in the second half of last year, has shrunk to something approaching its former size.

It’s not entirely clear what is going on. When it reported full-year results in March, Barclays attributed the explosion in its balance sheet largely to the devaluation of sterling, which boosted the value of its giant dollar-denominated derivatives book.

Derivatives are also the culprits this time. Total derivatives assets on Barclays’ balance sheet collapsed from £982bn at the end of December to £555bn at the end of June. Investors perplexed by this change will have to turn to page 97 of Barclays’ earnings announcement, where it offers the following one-sentence explanation:

The £428,757m decrease (2008: increase of £584,793m) in the gross derivative assets has been predominantly driven by movements in market rates and initiatives to reduce the derivative balance.

Tech results give few clues to economy: Eric Auchard

By Eric Auchard

LONDON, July 24 (Reuters) – Investors have proved all too ready to interpret positive earnings trends from Intel, IBM and Apple as signs of economic recovery and to justify a continued rally in technology stocks.

Now they are taking the wrong lessons in reverse by reading disappointing results from Microsoft Corp as evidence that a nascent rebound in the economy has stalled.

By the same token, it’s mistaken to read the best quarterly results in two-and-a-half years for Samsung Electronics, the world’s biggest maker of memory chips, as any indicator of progress on the economic front.

Look past the headlines and you’ll find factors specific to each of these companies that say little about any fresh demand for technology in this economy.

The truth is that technology companies have done a terrific job of cutting costs and preserving cash flow, even as revenue growth has continued to shrivel or turn negative. (See Reuters analysis).

But demand for new products and services remains scarce, except in isolated pockets. Apple and Blackberry-maker Research in Motion make must-have gadgets that resist economic penny-pinching.

That little thing called cash burn

Ford Motor Co, which could be referred to as the Big One after GM and Chrysler’s fall from grace, has investors cheering after it posted a $2.26 billion profit in the second quarter and a smaller than expected operating loss. But it’s still burning through lots of cash. Sure it’s less than before, but $1 billion in a quarter still isn’t anything to sneeze at, especially since it’s been trying to turn itself around since 2005.

From the release:

Automotive operating-related cash flow was $4.7 billion negative during the first half; on track with Ford’s plan.

What would things have looked like without a plan?

Here are all the details. Conference call with execs is at 9am and you can listen in here.

The hollow ring of tech earnings reports: Eric Auchard

By Eric Auchard

LONDON, July 17 (Reuters) – For technology investors looking for clues to how the sector is faring, Intel Corp sent a false positive signal with its upbeat quarterly report this week. Subsequent reports from IBM, Nokia and Google show how hollow any recovery for growth stocks is proving to be. Even though the growth sector has defied the broader market sell-off in recent weeks, all the signs point to weak trading in months ahead.

Nokia, the world’s largest mobile phone maker, offered a harrowing reminder of what life is like for companies exposed to the wider vicissitudes of consumer demand. It is struggling in a handset market set to decline around 10 percent this year, even though Nokia signalled the industry may be stabilising.   

Intent on keeping its dominant handset market share, the company said it was prepared to sacrifice profit margins in the second half of the year as it engaged in a price war with rivals. Meanwhile, its networks joint venture, Nokia Siemens, will lose market share instead of remaining flat as previously expected.

Adding to its woes is a shortage of components for its phones that will hurt its third quarter performance. Revenues are likely to fall a massive 25 percent for the full year. Any recovery in margins next year will depend on it showing improvement in the competitiveness of phone designs.

Or take IBM. Second-quarter revenues slumped 13 percent from a year ago, but record improvements in margins helped it top earnings expectations thanks to years of financial engineering efforts in which it has exited PCs, storage and memory chips.

Once the world’s largest computer maker, IBM has transformed itself into a supplier of technical services and niche software, from which it derives 90 percent of its profits and massive operating leverage. What is missing is much improvement in demand.

Don’t read too much into Intel’s success: Eric Auchard

By Eric Auchard

LONDON (Reuters) – Intel Corp has cheered up investors by once again making forecasts about its financial performance. The trouble with reading too much into its rebound, however, is that this is largely due to productivity gains of its own making, rather than a broader awakening of demand.

To be sure, Intel’s revenue, profit and margins surged past all published analyst expectations for the second quarter. Partly, this was merely the “snapback” that occurred after Intel throttled back production to as low as 25 percent of factory capacity in the first quarter, amid a glut of unsold chips and shriveling demand.

Things got so bad that it quit commenting on its outlook for the first two quarters of 2009.

The bigger news was its answer to the question of what was happening in the second half: Third-quarter margins should improve to around 53 percent on revenue around $8.5 billion, and could move up toward historic high levels by year-end. The comments sent Intel shares up as much as eight percent and sparked broad-based buying in technology shares around the globe.

However, there is little here to bolster confidence in other bellwethers of the technology sector reporting this week. Intel is benefiting from healthy demand in China and — to a lesser extent — the United States, among consumers rather than businesses. But these are not swing factors for the likes of Nokia, IBM or Google.

Moving Goldman

So the big news to come out Goldman Sachs’ conference call is that it will start to move into its new building in the fourth quarter. And that means higher short-term occupancy costs as it will temporarily be located in two buildings.

Any suggestions on a moving firm?

I think they should go with Two Men and Truck.

Goldman Sachs earnings call

Goldman Sachs had a blowout second quarter, exceeding high expectations on its strong trading gains.

At a time when much of the financial industry is still struggling with the legacies of debt and leverage, the success of Goldman is riveting.  Yet as Matthew Goldstein has written, exactly how Goldman makes its huge gains remains largely a mystery.   Maybe, just maybe, some light will be shed when the firm holds a conference call on the results at 11 a.m. today.  Reuters columnists will be live blogging the call here.

Member of the public can listen in by 1-888-281-7154 (sorry, I earlier gave the replay number).

And the fascination with Goldman is also about the role the firm plays in the mind of the public — as emblematic of all that is successful, powerful and suspicious about Wall Street.  Indeed as Felix Salmon noted the other day, thanks to Matt Taibbi’s Rolling Stone article,  “It’s pretty much impossible now to talk or even think about Goldman without a squid springing to mind.”

 Think squid.

Bank of Goldman

Lloyd Blankfein, chief executive officer of Goldman Sachs and banker-in-chief of the US/world, didn’t disappoint as his investment firm once again proved that it’s second to none on Wall Street when it comes to printing money and profits.

By now you know the headline news that Goldman generated blowout second-quarter earnings on record net revenues of $13.8 billion. Net revenues from trading and principal investments were $10.78 billion, up 93% from the year ago period.

Remember that trading code theft case with Sergey Aleynikov? No worries here.

The firm exceeded even the most widely optimistic analyst forecasts and demonstrated that the financial crisis, which pushed Goldman’s stock down to $51 last November is a distant memory–for Goldman at least. BTW, Goldman’s stock is now trading around $150. Talk about stock appreciation.

And it looks like maybe Goldman will be able to pay those fat year-end bonuses afterall. In the quarter, compensation and benefits expenses were $6.65 billion. That amount is higher than the second-quarter of 2008 because of higher net revenues. Fatter Goldman bonsues will make all those luxury real estate brokers in Manhattan happy.

But while everyone is singing Goldman’s praises, let me point out a few blemishes–albeit small ones.

First, Goldman continues to do investors no favor by failing to publish a detailed financial supplement along with its earnings release (something every other big bank does) to help decipher its quarterly numbers.