Goldman Sets The Pace

Goldman Sachs reported better than expected earnings but more importantly it is the first financial firm to raise equity in the public markets. The $5 billion offering being issued this morning will be used to return TARP funds. If successful, Goldman will garner a competitive advantage in hiring the best and brightest who will want to migrate from other banks that will have compensation restrictions set by the U.S. government.

The markets have been strong for a month now as the bull has raged from its low levels in early March. We have been anticipating a pull back as earnings season could bring many negative surprises. Most analysts have reduced their expectations for earnings and unless companies project much weaker numbers for the rest of the year, stocks may not get back to the previous low. Boeing has already disappointed but GS and J&J beat expectations. Intel reports later today and their words of wisdom could drive the tech sector.

This morning retail sales numbers for March showed a disappointing 1.1% drop and investors will view that as another sign of continued weakness in the economy. We continue to expect a soft economy for the rest of the year but it appears that the rate of decline is moderating. Let's not forget the impending corporate bankruptcies, the consumer credit defaults, and the looming commercial real estate problems.

Our trip to the UK during Easter break gave us some insight to the European economy. Consumers are not hiding in their homes as plenty of shoppers filled the retail stores but for sale and for rent signs were everywhere on homes and commercial buildings. We conclude that the economy is not dead but struggling as it is in the U.S.

Have the lessons of the past not been learned? Barclays sold its iShares unit last week to a private equity firm. The bank has been looking to raise capital and improve its liquidity situation. The asset sale appeared to meet that goal but 75% of the sale price was financed by Barclays. In our opinion such a transaction is great for the buyer but only improves Barclays liquidity slightly while leaving the risk of the business on its books. The financial crisis was created with similar transactions. We are also quite surprised to see HBOS, a subsidiary of Lloyds Banking Group, offering home mortgages for 100% of the value of a home. This may be a method to keep customers current on their mortgages or to sell some foreclosed homes but it is not going to be the solution to fixing the housing problem. 90-100% mortgage financing led to the housing crisis so it hardly seems to be the method to use in cleansing the system.

The markets have been grasping on to all the positive tea leaves but all the news is not rosy and it won't be for awhile. Caution needs to be used and the bottoming process is a long way from complete. Hope may drive stocks but reality will keep the volatility high.