After initial weakness Tuesday during Chairman Bernanke’s prepared testimony to Congress, share price have climbed. Meanwhile, economic data have deteriorated, with Retail Sales figures causing most concern. Earnings reports have been reasonably good. An important bellwether, that we believe will foreshadow much of this earnings season, came from Johnson & Johnson. J&J reported quarterly earnings of $1.30 per share versus an estimate of $1.29. While certain areas of its business showed better than expected results, other areas presented headwinds; but the largest headwind came from currency adjustments. For multinational companies that operate in different economies and currencies, these adjustments can make a difference. That J&J faced these more generic performance drags suggests to us that other multinationals will show similar adjustments.
With economic data disappointing and corporate earnings positive but not fabulous, why are shares rallying? Answer: the Bernanke Bid. We have said for a few years now that markets have been trading on each and every utterance from the Fed, and little has changed. The slightly cloudier horizon signals Wall Street that the Fed must be closer to refilling the monetary punch bowl. A year ago a famous hedge fund manager said, “either the economy improves and stocks go up, or it doesn’t, and the Fed eases, and stocks go up.” He was right, but this logic can’t work forever. It still seems to be working this week, but we are ever cautious of that day when the music stops. We are intensely focused to ensuring that our clients will always have a chair.
Keith Davis and I have just come in from the sweltering DC heat and the Economics Club of Washington luncheon featuring Goldman Sachs CEO Lloyd Blankfein. The presentation was structured as a series of questions posed by ECW President David Rubenstein. David did an outstanding job covering not only the important topics du jour, but also probing into Mr. Blankfein’s upbringing as well as the circumstances behind his ascension to the of most powerful investment bank in the world. After watching Mr. Blankfein field often difficult questions for the better part of an hour and a half, it was easy to understand why he ended up where he is today. He is quite articulate about all the important issues, including the situation in Europe, the fiscal cliff and politics in general. But what struck me as most impressive was Blankfein’s eloquent defense of Goldman Sachs and the investment banking industry at large.
Goldman Sachs is unlike most “banks.” As Blankfein explained, the company has historically operated out of the public’s eye and consciousness. The company does very little business with individuals (except a few very wealthy ones), and therefore Goldman had a marketing budget of zero prior to the financial crisis. But since that time, Goldman has been at the very epicenter of controversy. The company has been accused of everything from betting against its own clients to driving up the prices of basic commodities and helping to create stock market bubbles. And while the most recent scandal involving the manipulation of LIBOR has nothing to do with Goldman Sachs, these never-ending headlines are making it very difficult for the financial industry to repair its reputation and get back to the business of helping America grow.
By Blankfein’s own admission, all of the major US financial institutions (including Goldman Sachs) must now accept the spotlight that has been cast upon them by virtue of their acceptance of taxpayer money during the financial crisis (TARP). Blankfein appears to accept this inevitable scrutiny. However, he also believes strongly that we are at risk of an overly punitive regulatory response to the crisis. The widespread public disdain for financial companies was the impetus for Dodd Frank, and the implementation of Dodd Frank will be affected by ongoing negative developments such as the LIBOR issue. Difficult decisions affecting the country’s future, Blankfein argues, should not be undertaken hastily in the heat of the moment.
As investors, we know that investment banks like Goldman Sachs perform very important functions for the global economy. These banks help companies raise capital and hedge their operating risks, while also providing invaluable liquidity for all types of investors. This liquidity ultimately lowers the cost of capital and helps facilitate economic growth and job creation. It is unfortunate that the functions of investment banks are not more widely understood. Fortunately, CEOs like Lloyd Blankfein and JP Morgan’s Jamie Dimon have been excellent spokesman for the industry and will continue to work to bring more understanding. At the end of the Q&A, Rubenstein asked Blankfein what he would like his legacy to be. We find it quite telling and a sign of the times that Blankfein mentioned that he would like to be known, among other things, for enhancing Goldman’s reputation after such trying days.