There are many ways to watch the markets. There are many methods and indicators traders and investors use to gauge where the markets might be going, some technical and statistical measures, others more intuitive, and some that are a combination of both. Some of these are in depth, highly sophisticated and complex, while others are not so much.
One indicator of the broader markets that gives professionals a feel for the direction of things is monitoring investment banking and brokerage stocks. The reasons for this are simple: when the markets are robust, investors and traders flush with cash pour more money into stocks; hence the brokerages, mutual funds and the like reap the benefits of this activity. The bull markets are reflected in the bull market which happens in brokerage stocks. This links Main Street with Wall Street.
On the Wall Street level, professional investors and traders like to look at the investment banks. Investment banking involves professional institutional stock and bond trading in all its simplest and most exotic forms, from purchasing shares of well known large cap stocks to managing hedge funds and everything in between. Also, debt underwriting, initial public offerings, and managing assets of high-end clients is a large feature of Wall Street investment banks. When they are robust you can be sure the bulls are running in the markets.
So with all the downturn in the credit market and the erosion last year of such mega-banks as Citigroup, with this virally spread to stocks and the markets overall, it’s important to note how the investment banking firms were affected. All were touched, including such well known names as Merrill Lynch (NYSE: MER), Lehman Brothers (NYSE: LEH), and Bear Stearns (NYSE: BSC). All faced a downturn in business and their prospects—perhaps Bear Stearns worst of all–and their stock prices subsequently showed it. The flagship of this fleet, however, Goldman Sachs Group, Inc. (NYSE: GS) had remained relatively unscathed.
While the other firms were writing down billions of dollars in bad subprime loans, (worldwide, banks and investment banks had written down approximately $150 billion), Goldman showed a $3.17 B fourth quarter profit, this in the face of its competitors’ mounting losses. Although its stock price had fallen along with the others, in Goldman’s case from a twelve-month high of 250 down under 200, its earnings prospects remained surprisingly good, unlike the other investment banks and global banks. It was expected to surprisingly keep earnings aloft for the first quarter, unlike its competitors.
After the fourth-quarter solid earnings report, however, Goldman reported it may have to write down as much as $1.7 to $3 billion or more in bad debt for its first quarter upcoming (reporting next month), which will significantly dent projected earnings. The original EPS estimates in the $5 plus range have now fallen under the $4 mark, and like all of these write downs, investors and traders hold their breath, as news of write downs seems to come like a ball bouncing down steps, observers watching and wondering when the ball will stop. So traders and investors in these times are on high alert.
What does it mean? Well, for one thing, even a great company such as Goldman Sachs, which by Wall Street accounts features some of the finest high-finance talent in the world, cannot fully escape the secular downdraft that has blown its way through the credit markets and the rippling effects it so inexorably has worked on the capital markets as a whole.
With Goldman’s prospects for the near-term downsized, it also shows that these events and their subsequent bearish consequences will continue to take some time to work their way through the markets. On the positive side, Goldman has still fared far better than its competitors, so it is still well positioned to be on the head end of the recovery in investment banking and the markets when that turn occurs. Goldman will likely lead the investment banks and power ahead signaling the better health of the markets into not only recovery but their next bullish phase, whenever that comes. Keep watching Goldman for signs.
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