Goldman on the Hot Seat Once Again

Posted on March 14, 2012 by John S. Hopkins, Jr.

By now you may have seen the article in the New York Times where a London based executive director of Goldman Sachs resigned with a vengeance. Greg Smith laid it all on the line in the article basically confirming what many of us have thought and expressed for a long time now; that the culture at Goldman is all about making money, and the hell with the client.

Mr. Smith isn’t some lowly guy who just decided to dump on his former employer. This is a seasoned veteran who started out with an idealized view of a storied Wall Street firm and found out that it wasn’t at all what he expected it would be. In fact, he had this to say:

“The place has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify what it stands for…I am sad to say I look around today and see virtually no trace of the culture that made me love working for the firm for many years.”

Ouch.

Then there’s this zinger, aimed right at the top of the heap:

“When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Larry Cohn, lost hold of the firms culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”

Take that, Lloyd!

Smith hints that Goldman sells products to clients strictly for the money, even if they are wrong for them. This pretty much mirrors what others have said about how Goldman conducts itself.

So, does the market – and Goldman’s clients – really care what this guy has to say – or might it be seen as sour grapes? In looking at the stock, it’s had a nice run lately, up 33% since the beginning of the year. But, where the S&P and Dow are at multi year highs, Goldman is still down 26% off its annual high; that tells you something right there.

Shortly after the article hit the papers, Goldman came out with a memo to its employees that leaked to the press. As expected, Blankfein pointed out that Smith was for the most part an anomaly; that everything was peachy at Goldman, as expressed in feedback surveys by its employees. Please. If you worked for a company where the bulk of your compensation depended on the success of the business, would you go out of your way to bad mouth the company and paint a bleak picture? Hardly. That’s where Smith comes in. He’s no longer beholden to the big, bad beast on Wall Street.

Another year begins

Posted on January 4, 2012 by John S. Hopkins, Jr.

Here’s what we know about the market in 2011. The S&P ended at 1257 as of December 31, 2010, and ended at 1257 as of December 31, 2011. So, over a period of 365 days, the S&P was totally flat for the year.

It’s hard to fathom that after 365 calendar days and hundreds of trading days that the S&P would not gain or lose one point, but that’s exactly what happened. It’s hard to imagine that with everything going on during 2011, including a stalemate on balancing the budget, the near implosion of Europe, millions of people losing their homes and unemployment remaining high that the S&P didn’t move. If you had decided to bury your head in the sand for a full year, put your money into the S&P Spiders with hope that your portfolio might jump, you discovered a year later that you hadn’t made a dime; nada. In fact, inflation adjusted, you would have been in the hole.

Of course, the market did move throughout the year, with the S&P getting as high as 1370 on May 2 when it peaked and then falling as low as 1074 on October 4. Thus, the S&P was up as much as 9% at its peak for the year and then fell over 20% from that May 2 high to the October 4 low.

Still, 2011 required a unique set of trading skills and discipline to keep the average trader from losing his/her shirt. Yes, that sounds a bit odd; if the S&P broke even, at least one should be able to preserve 100% of capital. Sorry, doesn’t work that way.

Instead, those individuals who like to call themselves “trend traders” were pretty much forced to approach the market more like “day traders”, or risk losing heavily, when, for example, news from Europe overnight left them vulnerable to heavy losses. You would think this would be a big boon to companies like Charles Schwab who rely on heavy trading to make their money, but this was not the case. In fact, despite the churning throughout the year, Schwab lost 33% of its value over the course of the year, so even the brokers suffered.

Bank’s were hit particularly hard during 2011, with Bank of America itself losing nearly 60% of its value over the course of the year; Goldman Sachs lost 45% of its value; Morgan Stanley lost over 40%. This is compared to a flat S&P, so it gives us some perspective on how poorly the banking sector did perform for the year.

There were also some big names, what I like to refer to as “cult” stocks, ones that traders love to get involved in. Research in Motion (RIMM) was one that got hammered for the year, down over 70%; Netflix (NFLX) was down roughly 60%, and over 75% from its peak to year end.

The combination of a dismal financial sector and such uncertainty abroad made it nearly impossible for the market to advance. 2011 was the year that Europe took center stage, with investors in US stocks being held hostage day in and day out, never knowing what the morning might bring. This was a dramatic shift from the norm, where most investors around the globe had become accustomed to letting the patterns in US stocks dictate the move in world markets.

Yields in US treasuries fell off the cliff, with the yield on the 10 year Treasury Note falling over 40% from the end of 2010 to the end of 2011. In that respect, one could argue that US equities did well to break even, as investors around the world fled to safety.

What will it take for US equities to shine during 2012? For starters, banks need to perk up. When you have banks like Bank of America, Goldman Sachs and Morgan Stanley faltering, it’s a sign of uncertainty – i.e., what might be lurking on the collective balance sheets of the banks? Next, the consumer needs to perk up, and that’s going to be tough as long as unemployment remains high. It has been encouraging lately to see weekly jobless claims fall, down under 400,000 for more than just one week at a time, and the unemployment rate is back below 9%. But, rest assured that corporations will do everything they can to increase their respective bottom lines without adding bodies, leading to the continuation of skeptical consumers.

One other thing. When the US implemented its TARP program back in 2008, it took almost 6 months for the market to bottom, when the S&P reached 666 in March, 2009. So though it may appear that Europe has made progress with its banks, we may yet see a delayed affect that will affect markets around the world.

Bottom line for 2012? Honestly, it’s just too hard to tell. It’s a presidential election year, so that could affect the market, depending on the outcome. Banks could continue to struggle as more loans go sour and as the realities of dealing with so much bank owned real estate. And, without the banks participating, it is hard to imagine the market able to make much headway. Expect corporations to squeeze as much as possible out of the work force; no one is going to hire unless absolutely necessary. It’s also quite possible that the effects of recent actions in Europe will continue to be felt in the US, keeping a significant number of investors on the sidelines.

On the other side of the spectrum, if the banks can make headway on their bad loans while minimizing real estate related losses while open up lending in an even bigger way to small businesses, that would be a net positive. It’s also possible that the affect of all of the Fed‘s efforts the past many months will kick in big time, stimulating the economy and the market as well.

A potential huge impediment? Rising oil prices, particularly if it translates to higher prices at the pump. That could be a deal killer. It certainly had a near devastating impact when oil neared $150 a barrel back in 2008; we all saw what happened to the market and the economy in general. The US economy is not yet strong enough to withstand a repeat of 2008.

Which gets me to my 2012 forecast…see me in about 12 months and I’ll give you my number then!

Market Chatter for October 18, 2011

Posted on October 18, 2011 by Tom Bowley

As part of our free fall preview of Tom Bowley’s Market Chatter, we’re going to be posting the Market Chatter on our website every day for the rest of the month. If you want to have it delivered via email every day, you can sign up here.

TECHNICAL ANALYSIS:

PRICE/VOLUME COMBINATION:

Volume is telling us little about the current state of the market. NASDAQ volume has been at or below 2 billion shares for the last six trading sessions. Prior to this weak volume trend, the NASDAQ had traded at or ABOVE 2 billion shares for 13 consecutive sessions. So it’s difficult to read too much into the recent rally as few are buying into it technically. That doesn’t mean the rally can’t continue, it’s just difficult to avoid being cautious.

The NASDAQ has set up quite interestingly in the near-term. If you look at a 60 minute chart, you’ll see a potential near-term head & shoulders top with the neckline established at the October 13th low and this morning’s low – both around 2585-2590. A potential right shoulder could form anywhere in the 2630-2640 area. Of course, a head & shoulder really isn’t a pattern to act on until the neckline breaks with force (volume). So for now, I’d just keep in mind that the pattern exists.

MACD DIVERGENCES:

Price action has been fairly predictable short-term as the bearish divergences on the 60 minute charts suggested a 50 hour SMA test. We’ve since seen those 50 hour tests to “reset” the 60 minute MACD back to its centerline. Therefore, the slowing momentum has now been accounted for and the reset takes the market to the next question. Is this simply a short-term pullback to reset that MACD or could the selling be much deeper? It’s hard to answer that question, but the daily MACDs are suggesting that we’ll bounce off 20 day EMA tests should we fall that far.

MOMENTUM OSCILLATORS:

The stochastics and RSI are as follows on our major indices:

Dow Jones: 88-55 S&P 500: 92-56 NASDAQ: 92-58 Russell 2000: 88-54

Volatility continues to make it very rough on traders, but the RSI and stochastics tell us that the bears are still in control of the action overall. A break on the RSI above 60 across the board would begin to change that thinking, however.

SENTIMENT:

The VIX approached 35 this morning, just two days after seeing a major breakdown beneath 29.50. Would the REAL direction in the VIX please stand up? This insane volatility really adds a layer of risk to trading that I simply don’t like. I know the thought process is to use these swings to make HUGE amounts of profits, but I want to remind everyone that this “potential” profit doesn’t come without an inordinate amount of risk. Apparently, the high volatility CRUSHED Citigroup (C) traders in the latest quarter, so if you’re struggling in this current environment, don’t feel alone. At Invested Central, we simply try to avoid overtrading and keep trading sizes smaller than usual.

The equity only put call ratio (EOPCR) is at .68 as of 11:30am EST. Relative COMPLACENCY is at 9.71%. Complacency is still “in the air”. But we’re still not at a level that would suggest a reversal is imminent.

MAX PAIN:

This past weekend there was a max pain video done to highlight the possibilities. I indicated that the market appeared susceptible to downside action this week, especially on the NASDAQ and S&P 500. We’ve already seen an initial push lower to confirm that belief. Is the market done selling off? We’ll soon find out.

HISTORY:

The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.

The major indices will be NEUTRAL all week, but will turn VERY BEARISH at Friday’s close as next week is the worst performing week of the year historically. More on that later this week.

SECTORS:

It’s great to see financials leading the action today. Bank of America (BAC) reported and while their numbers weren’t great, traders are excited. Industrials are also outperforming, while the defensive sectors – utilities, healthcare and consumer staples – are the primary laggards.

The 10 year treasury yield has fallen back to 2.12%. If you recall, it was the recent breakout above 2.11% that helped to fuel the equities rally. Therefore, it makes sense that we’d like to see the yield hold this 2.11% support. In addition, the 20 day EMA and 50 day SMA are at 2.06% and 2.07%, respectively. That combines for a LOT of support in the 2.06%-2.11% range. The bulls do not want to see the yield lose this support level because it would be an indication of a rush back into treasuries. More defensive posturing does not make for a bullish backdrop for equities, so keep an eye focused on treasuries.

Transportation issues are rallying again today, and are less than 1% from that key resistance level of 4700. CSX is set to report its Q3 results after the bell today. That could go a LONG way in determining which way transports are heading. A break above 4700 adds to the bullish case of the market, while another failure there would be bearish.

ECONOMIC AND EARNINGS REPORTS:

September PPI shot higher, rising 0.8% vs. 0.2% estimates, but the core PPI was only slightly higher, with an increase of 0.2%, just above consensus estimates of 0.1%.

In earnings news, BAC posted better-than-expected results, as did Johnson & Johnson (JNJ). IBM was beaten down this morning based mostly on top line results. Bottom line, IBM beat expectations and raised guidance. Thus far, traders are not impressed. Goldman Sachs (GS) has been downtrending for some time and this morning we found out why. GS posted only its 2nd quarterly loss in 12 years, steeper than expected. Much of that bad news appears to be priced in, however, as GS was actually ahead slightly today – at least at last check.

INDIVIDUAL STOCK TRADES:

The last two days really summarizes how difficult trading can be in this current environment. It appeared the bulls were being whipsawed after their Friday afternoon breakout and Monday failure. Then, this morning, the action was clearly bearish and suddenly buyers emerged and our major indices shot higher. It’s really difficult to trust anything we see from day-to-day. Therefore, we’ll continue to play it very cautiously for now and avoid any additional trades.

SUMMARY:

It’s a little interesting to see the NASDAQ 100 lag on a relative basis the day of Apple’s (AAPL) quarterly report. Normally, this is a stock that gets the market very excited. 420 seems to be an area of resistance. It’ll be very interesting to see where traders close this one before perhaps the biggest earnings report of Q3 is released after the bell. While I would certainly expect a very nice report tonight, especially since the 70 point run up off the early October lows, that line of thinking was proven incorrect for IBM, which had seen a similar run up in price.

Grab some popcorn and fasten your seatbelts!

Happy trading!

Warren Buffet’s Big Bet on BAC

Posted on August 25, 2011 by John S. Hopkins, Jr.

Warren Buffet is one of the greatest investors in the history of the world. So, far be it for me to question anything he does on the investment front. Still, I’m puzzled by his recent $5 billion investment (loan) to Bank of America.

In case you hadn’t noticed, BAC has fallen off a cliff lately. BAC was over $15 per share earlier in the year and got at low as 6.01 just the other day, a level it hadn’t approached since March, 2009, the last time the market bottomed.

Buffet did something similar with Goldman Sachs when it was falling apart along with the rest of the financial sector in 2008/09, and his Berkshire Hathaway group was handsomely rewarded. But, what puzzles me is why BAC needs the money in the first place and why they couldn’t have gotten a better deal than the 6% interest they will need to pay for getting access to the $5 billion.

To me, the whole deal is just another red flag; BAC is in big trouble. Rumors started floating around yesterday that JP Morgan would be buying BAC, and that’s why the stock price rose yesterday. But, as we can see, it wasn’t JPM, but Warren Buffet who has come in as a White Knight.

It is possible that the $5 billion cash infusion is just a stop gap. Maybe President Obama called on his friend to pony up the money to make BAC look in better shape that it is in. Buffet apparently said the idea came to him when he was taking a bath earlier in the week. Whatever the case, I’m going to keep a close eye on BAC in the near future to see if the initial boost to its share price will hold. If not, they might have more to worry about.

Time to Buy Banks? Hardly

Posted on August 18, 2011 by John S. Hopkins, Jr.

I recently read a story on the CNBC site, “It’s Time to Buy Banks: Sandler O’neil’s Albertson” (You can watch a video of the interview below)

I’m always amazed when an analyst comes out and recommends a sector that has had no life for such a long time. It’s certainly a bold call if it works, but I keep looking at the charts of some of the major banks and I just don’t see it.

In fact, one of the reasons the market is stuck in a rut is because financials have been so weak. BAC, C, GS, MS, they are all a mess. And, like it or not, there’s no way this sector recovers as long as their respective balance sheets remain a mystery.

Take Bank of America. Apparently they are into settlement talks regarding their Countrywide Home loans operation. But, they’ve got a lot more loans on their books than Countrywide loans, and what shape are they in? Further, when BAC slipped to $6.31 per share last week during the heavy selling, the market was on pins and needles, wondering if BAC was the next Lehman in waiting. It has recovered some since then, but as long as investors have these lingering doubts about such a major financial institution, it’s going to be tough to get the sector moving to the upside again.

Maybe Albertson sees something I don’t, but the charts don’t lie, and right now the charts are showing a negative picture. Many of the major banks have been cut in half. Just look at Morgan Stanley. The stock has fallen from $32 in February to $17 and hasn’t been this low since the market bottomed in March, 2009. So, does Albertson think we are hitting a bottom here? If so, and it turns out to be true, I will have to give him credit for a great call.