In Goldman vs. Rest of the World, Goldman's Winning
Sorry, Roubini. The market only wants to hear good news.
This week has seen yet another round in the battle between Goldman Sachs (GS) and the Rest of the World. On Monday, Goldman Sachs analysts Richard Ramsden and Brian Foran upgraded their outlook for big banks from neutral to attractive. The news sent shares of JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC) sharply higher. And yes, even Goldman Sachs shareholders benefited from the news, as its shares jumped nearly 4%.
The upgrade baffled many banking analysts and it came against a backdrop of negative opinions. And these aren't just slightly bearish views -- they're downright scary outlooks that suggest some of the worst still lies ahead for banks and the rest of the economy. Here's a sampling:
- Meredith Whitney, the analyst who made her name as a banking bear at the start of the credit crisis, penned an op-ed for the Wall Street Journal last week in which she predicted that small businesses will become the next victims of the crisis since their access to credit is being denied by banks and other lenders. She believes "we are only in the early stages of the second half of this credit cycle."
- George Soros reiterated his gloom for a roomful of global financial policy wonks in Istanbul yesterday, saying that the US economic recovery will be extremely slow thanks to the "basically bankrupt" banking system at its core.
- Nouriel Roubini, perhaps the greatest lover of gloom, agreed with Soros, predicting that the S&P 500 will fall below its March 9 low. "For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability," he said.
- Chris Whalen, managing director at Institutional Risk Analytics, said yesterday he believes the fourth quarter will "be a bloodbath" for the banking sector. The reasons? Banks' assets continue to shrink, more write-downs are coming, and access to government money is going to shock the system.
- Joseph Stiglitz said that the stock-market rally is little more than irrational exuberance and that the economy can't grow fast enough to slow unemployment, which he said "will continue to get worse."
Many of these comments came as the World Bank and the International Monetary Fund prepare to meet in Istanbul, but it was once again Goldman Sachs that came down on the opposite side. From Bloomberg:
"In a separate Bloomberg Television interview yesterday, Goldman Sachs Group Inc. Chief Economist Jim O'Neill said the International Monetary Fund meetings in Istanbul are 'stuck' in an outdated mentality that doesn't reflect the rising power of emerging economies following the global financial crisis. O'Neill also said the dollar probably isn't the No. 1 concern for US policy makers, and predicted 4.1% growth for the global economy next year. Many countries will be 'surprising' in their economic growth in 2010, he said, while adding that there is potential for more 'positive surprises' that could help fuel global expansion."
Perhaps not surprisingly, the stock market continues to favor Goldman's unfettered optimism. The views from the banking analysts and its chief economists are opinions, of course, but they're opinions from the bank that perhaps suffered the least during the credit crisis. It's the bank that continues to come out on top, whether its in American International Group's (AIG) survival or in CIT Group's (CIT) bankruptcy. If it has reason to be hopeful, that's all that plenty of investors need to hear.
But the reality will likely be somewhere in between the doomsayers and the wearers of rose-colored glasses. As Todd Harrison pointed out last week (Will "Write-Ups" Bolster the Financials?), the banking sector could get a boost from write-ups as certain credit markets have thawed, but that may only mask the deeper problems that remain.
The ugly numbers that lie ahead for the banking sector -- and there will certainly be some -- are still an unknown, and investors are choosing instead to focus on the positive ones that are known today: An IPO market showing signs of life, the return of merger Mondays, the raising of funds to pay back governments both here and abroad. Even investment bankers themselves are bullish on their own financial outlook: One-third of Wall Street workers expect their bonuses to be higher in 2009, according to a recent poll.
But the good signs won't likely be enough to fuel a recovery. Hope for the best, prepare for the worst. At least we've all learned the first part of that lesson.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter