What Goldman taketh away, Goldman giveth. That appears to be the motto of the past few days, with Fraudulent Friday now a distant memory as the market basks in the warm glow of yet another solid quarter from the good ship GS.
Obviously, the financial sector generally has been helped by favourable market conditions, which have boosted sellside trading revenues (if not, alas, the performance of your average macro directional punter.) And in fairness to GS, their effective tax rate of 33% was no doubt higher than that of many of their most strident critics. No more 1% tax rate bonanzas in this environment!
Still....Macro Man has to wonder if we're now at the top for financials, whether the tide is high and set to roll back out. Over the past year, the SPX has returned 42%....a handsome return, to be sure, but trounced by the financial sector's nearly 58%.
Friday's SEC announcement was perhaps only the opening salvo of a popular and regulatory backlash, however. The Obama administration is clearly aiming to wheel out some sort of financial reform package, no matter how flawed, to parade in front of voters ahead of midterm elections.
In the UK, meanwhile, Greedy BankersTM are about the only subject on which Moe, Larry, and Curly can agree. It's not a question of whether to tax Greedy BankersTM back to the Stone Age.....it's how.
And now, enter the IMF. Tired of waiting for that phone call from Athens and too timid to take on the challenge of international currency politics, the Fund has now proposed a suite of broad-sweeping financial levies and taxation. While the IMF's call for universal compliance is unlikely to be met (check out the history of OPEC compliance, for example), it nevertheless offers a strong suggestion that after more than two years of being on the receiving end of public largesse, the financial sector (and banks in particular) may now face pressure to become net contributors.
In this context, Macro Man really has to wonder how much longer XLF outperformance can be sustained. Not that the news is all doom and gloom. At least Goldman's Board can sleep soundly at night, knowing that they're protected from shareholder lawsuits by none other than AIG. Ah, the sweet taste of irony......
Obviously, the financial sector generally has been helped by favourable market conditions, which have boosted sellside trading revenues (if not, alas, the performance of your average macro directional punter.) And in fairness to GS, their effective tax rate of 33% was no doubt higher than that of many of their most strident critics. No more 1% tax rate bonanzas in this environment!
Still....Macro Man has to wonder if we're now at the top for financials, whether the tide is high and set to roll back out. Over the past year, the SPX has returned 42%....a handsome return, to be sure, but trounced by the financial sector's nearly 58%.
Friday's SEC announcement was perhaps only the opening salvo of a popular and regulatory backlash, however. The Obama administration is clearly aiming to wheel out some sort of financial reform package, no matter how flawed, to parade in front of voters ahead of midterm elections.In the UK, meanwhile, Greedy BankersTM are about the only subject on which Moe, Larry, and Curly can agree. It's not a question of whether to tax Greedy BankersTM back to the Stone Age.....it's how.
And now, enter the IMF. Tired of waiting for that phone call from Athens and too timid to take on the challenge of international currency politics, the Fund has now proposed a suite of broad-sweeping financial levies and taxation. While the IMF's call for universal compliance is unlikely to be met (check out the history of OPEC compliance, for example), it nevertheless offers a strong suggestion that after more than two years of being on the receiving end of public largesse, the financial sector (and banks in particular) may now face pressure to become net contributors.
In this context, Macro Man really has to wonder how much longer XLF outperformance can be sustained. Not that the news is all doom and gloom. At least Goldman's Board can sleep soundly at night, knowing that they're protected from shareholder lawsuits by none other than AIG. Ah, the sweet taste of irony......
12 comments
Click here for commentsReally? Would have thought the tories are more likely to stick with some of their biggest contributors in these times of "political need", lib dem have always been the more erm "unworldly" of the lot.
ReplyYep, financials seem to have hit the high point but question is which investment sector hasn't?
GS execs are unlikely to need sleep aids , after all, they can simply amuse themselves by counting the threadcount on their very expensive sheets.
MS and WFC earnings now being digested in pre-mkt...some key numbers on XLF the 7/08 low of 16.53 and the 11/08 high of 16.75...off the 5.74 low to 23.55 high gives a fib at 16.74, or take that low up to the spring 2008 high gives a fib right near the high of 17.12
Replythe trusty 5MA on euro still untouched!!
Agreed.
ReplyEspecially if US/UK governments start to reverse the news flow, so we see less Happy Clappy Recovery stories and more tales of Greed By City Toffs - we are about to enter into a period of Regulatory Arbitrage.
Keeping half an eye on the bonds of southern european countries, as usual?
Well, I thought it may be time to hear some more bearish arguments so rather than the usual morning ritual of dragging Rosenberg's daily "Coffee with Dave" into the archive folder, I decided to have a look. Here goes:
Reply"According to the Shiller P/E ratio, the S&P 500 is now 35% overvalued — a full one standard deviation event."
Yawn. one SD is hardly an event. He goes on to concede that valuation strategies are not meant to be timing strategies but, nonetheless, "Defensive income-oriented strategies, at this point, make perfect sense from our lens."
I agree with your take on financials, but feel that other sectors and industries could take the baton. overall, risk assets and equities still seem attractive, if for no other reason than the bearish arguments are so unconvincing.
I do not think it is the time. Perhaps part of my reticence bases on staring in the face a local real-estate market that is like the crash never happened. Then you have super high spreads on deposits combined with continued government subsidies all around. What's going to catalyze a drop in profits? In this environment, nothing.
ReplyFD: no positions
From 9:01 a.m. EST, Wed, April 21st
ReplyOne Stock Does Not Make A Market...Downside Risk Grows
ABC last night -50 and back to lows of the year led by personal finances. Now one cannot cling to one data point but add in NFIB (small business survey) hitting 6-month low in April (last Tuesday), Jobless Claims (484k) last Thursday break of trend and Consumer Confidence 69.5 which was lowest since November 09. Point being, how can there be job growth with sentiment moving in the opposite direction. Reminder, the SPX 1500 employes 30% of public labor force and 70% is small business. The 30% are not where jobs are created. Conclusion, if tomorrow's claims data does not improve to sub 350k, risk assets will have to acknowledge that job growth of 200K+ was not realized in April. Risk and net long positioning is too high based on this alone and eanrings thus far are already discounted in prices. With respect to today's trade. Key currency is Yen, a lot of risk was put on yesterday and impact on crosses is obvious. Until or if the SPX takes out 1185, the AUD will probably hold up due to fact Euro is the liability more than USD. Equities, all AAPL has to do is come off 6 usd and the weight of the other names will be enough to take NDX lower. I think we are very close to a good trade here down here. I did not even mention Greece which is what everyone else has filled your inboxes with overnight....
Macro Man -- Over the last week, shorts in regional banks have factually capitulated. Hence, the pair of long money centers and short regions has been largely unwound and at best regional shorts have been replaced with long put positions for a defined risk profile. Rather than look at SPX vs. XLF or spend time intra-sector on that favored pairs trade, I would be looking at XLF relative to XLE (Energy). Most people are looking for 100 crude by June and potentially 120 by Q2 ending. But the impact of higher crude prices will be somewhat muted this time because people are not paying their mortgages. hence, they still have 30-35% of their disposable income to spend which will offset higher prices at the pump. Add in the fact that global energy is cheap from a bottoms up perspective and the supply/demand profile in crude oil is postive for 2H 2010, there is an arguement to be long energy from a macro standpoint. Watch, you are going to see companies increase capex in that space soon which will be greatest felt in engineering and construction companies as the back channel trade. Technially, long XLE vs. short XLF also lines up. Just giving a thought or safer view as to how to play Financials now...
ReplyRight Field - leaving aside for the time being the fact that you change your market opinions at least as often as your underwear, one imagines that the macroeconomic impact of people not paying their mortgages has probably been overstated, and if not, then surely the banks are all toast !!
ReplyLeftback – First, I always appreciate a spirited debate. I have only been contributing to this site for less than 2-3 weeks, if my views are not received well, I am happy to go back to being a spectator.
ReplyUp until last Friday, I have painted only one picture that was biased bullish Equities due to real money being in control and professionals not willing to embrace their mindset. Last Friday that changed and all communication that I have since entered has been consistently biased negative, i.e. Friday, Monday, Tues and Today’s call. That view changed due to the new asbestos claims, derivative inflection points in positioning, data related to sentiment and employment read through, China down 5-7% in A shares and Property, and acceleration of spread widening in Greece. This is also off the top Equity price where we failed, i.e. the Friday morning call before the asbestos claims were made which I am happy to share again with you. One change in 2-3 weeks in market psychology is not unreasonable given my business is predicated on a absolute and not total return investing mindset. Hence, I will not compete with a PHD model or framework over 12-18 month time horizon and when inflection points hit, I will trade and change views to what is in front of me now….that could be often btw….
Second, 30-35% of disposable income traditionally is directed to pay your mortgage. I am not sure what the count is as to who has not been paying but I would simply argue on the surface that 3-9 months of millions not paying allows you to spend money into the other real economy. Here is a great example, my sister in law used to be a mortgage broker and got blown up at New Century and then Countrywide. Now she is being foreclosed on in Las Vegas herself, i.e. what goes around comes around. I recently asked her what she has been up to and she said, I just came back from the Super Bowl and a 4-day party. She said she was able to pay for it because she has more money in her account than she has ever had and all her secondary bills have been paid. Don’t figure but I guess 13.5 billion of this money just went into Apple revenues and Iphones and Ipads, otherwise, where is that money coming from with unemployment this high? Another example, as to why professionals are offside’s in consumer sectors and these sectors have been the best performers YTD.
Finally, I agree that the can will only be kicked down the road for so long and this will impact banks. But the important read through is not foreclosures which many have and will continue to reserve for. I would be more focused on breaches in reps and warranties going forward and how many investors will be “putting back” mortgages to banks as a result. That seems more dangerous to me going forward…
Right Field - Apologies, old sport.
ReplyNo worries, mate, just tweaking you a bit. Quite enjoy reading your analysis du jour, as a matter of fact. So party on, Garth.
@RF - Regarding large scale mortgage defaults, I didn't believe it when I first started hearing it, however, it is now coming through on so many channels that I feel there must be some truth to it. Anecdotally, it seems as though there are some consumers who have been enjoying payment holidays for up to 2 years and have not yet faced eviction.
ReplyIn re 30-35% of disposable income traditionally is directed to pay your mortgage, viz http://www.federalreserve.gov/releases/housedebt/
ReplyHomeowner household debt service as a percentage of disposable personal income is ~16%. That's a superset of the mortgage, currently under 11%. Yes, this includes all homeowning households, including the many who have paid off their mortgages, but I gather you were speaking in the aggregate as well.