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Episode 10: Goldman, BlackRock, consumer sentiment and inflation

Episode 10 - Part 1

Goldman & BlackRock – starting off corporate earnings season strong?

Published on: January 14th, 2020 • Duration: 8 minutes

In this episode, we discuss the potential effects on Goldman Sachs’ and BlackRock’s stocks and the general health of the market as a result of their upcoming corporate earnings reports. In the After section, we review the numbers from the US payroll report and whether the data met investor expectations or not.

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08:12
  • This is before and after from Refinitiv. I'm your host, Johanna Botta. 

    As investors, we all know that we can make big profits or losses around major economic and corporate data releases. So in this show we're going to look at which ones could move markets in a meaningful way. This week, we'll get the first batch of market moving corporate earnings reports. Banks will be reporting, and often as the bank stocks go, the market goes. Last year, the banks were one of the best performing sectors, shrugging conventional wisdom about what bank securities should do when rates are going lower. 

    While all the bank stocks tell a unique story, this week, we're going to focus on investment banking titan Goldman Sachs. 

    While David Solomon has focused on broadening the bank's revenue model, their earnings are still deeply tied to Capital Markets. So while we'll get a nice look at the broader earnings environment for financial companies, traders get a unique view of what asset classes are driving the story and the overall health of trading in general. 

    Last year, Goldman's shares were on fire. The stock rose 37.5% and finished the year on highs. If we look back long term, you can see that Goldman's share price, even pre great financial crisis, had trouble clearing the 250 level. And here we're looking to beat the high level that the stock reached in early 2018. 

    Of course, the world has completely changed since then, and most importantly, the Fed went from raising rates, which tends to be good news for banks to cutting them again. So what's the bottom line? What will drive the next move? Is there a key catalyst that will appear in Goldman's earnings report that can justify breaking the 250 resistance? The bank has shifted its model to growth areas. The investment banking footprint has expanded, as has their customer base, across different spectrums of financing. Last quarter, they showed a bit of growth in some traditional business lines that they depend on. For example, FIC trading in the third quarter was up 7.9% year on year and equities sales and trading was up 4.6% for that same period, bucking a negative trend for equities across the rest of the U.S. Banks. 

    Along with growing the right parts of its business and attracting a more diverse customer base, Goldman has more closely tethered their fortunes to that of the growth elements of the U.S. economy. So, you could view it as a higher beta financial play on the continuation of the U.S. growth story. 

    But what's the likelihood that Goldman's stock continues to grow as well? Normally, when a share rallies 37% the previous year, you wouldn't expect the word cheap to come to mind. But with price earnings ratio of 10 in book value of one point one seven, Goldman remains relatively inexpensive. Perhaps it's because the firm's exposure to markets and investment banking is higher than its peers. For instance, Goldman gets more than 80 percent of its revenue from investment banking, compared to 32 percent of JP Morgan and 22 percent at Citi. And that could have been a good thing during the most recent quarter. 

    The market has been very strong, and Goldman should reflect that in their numbers. Expectations are for five dollars, 49 cents a share, and a total revenue of eight point five billion. If Goldman beats on the top line in earnings growth comes from investment banking, or any of their new growth initiatives, expect the stock to top the 250 level. And that's about what the options markets are predicting, a 3 percent rise in the day after earnings. If its numbers are mostly positive and strong, and the stock does poorly, this would be a sign of buying exhaustion for growth stocks in general in the U.S., and you might end up watching the markets follow Goldman's lead. 

    BlackRock is another financial company that will help round out the picture for the sector. The asset manager trades at an industry high with a price earnings ratio of 20, and is perhaps the best example of those who have benefited from the passive investment craze. With nearly seven trillion dollars under management, BlackRock is the big fish. But with this massive power comes greater accountability and, of course, scrutiny. Many see the market's current ecosystem as unevenly balanced thanks to passive flows that have driven returns. You can see that imbalance If you look at how companies that are listed in key stock markets outperform their peers, the share prices of those companies rise in part because firms like BlackRock buy them. And they buy into them through investment funds, to try and replicate the behavior of the markets where those companies are listed. 

    And much like our previously discussed case for Goldman, BlackRock's earnings are even more closely tied to the market, as fees based on AUM are everything. 

    This will be BlackRock's first quarterly earnings report since some of America's largest discount brokerages cut their commission levels. So it will be interesting to see whether the firm felt the effect of those changes. 

    The Bottom Line: last quarter, BlackRock beat expectations with one point two billion dollars in earnings, against an estimate of one point zero eight. Fixed income, cash and inflows from alternative strategies led BlackRock to outperform the industry with total inflows of eighty four billion. But some investors may ignore any positive news in the firm's numbers, if they already expect good earnings because the overall market is performing so well. And given the pressure of fees across its industry, BlackRock may need to show it has attracted more inflows than any of its competitors, if a rally in the stock price is to be justified. 

    The new payroll numbers came in slightly weaker than expected while the unemployment rate was in line with estimates. And since the payroll data was not exactly earth shattering, neither was the market reaction. However, the numbers did confirm the consensus opinion that the economy will slow slightly. And that, in turn has strengthened another consensus view that the Fed will not change rates in the near term. 

    Perhaps the only real interesting data nugget came in the average hourly earnings growth. The month on month growth came in a point one versus the expected point three. And that dealt a blow to the case that wage growth might spark inflation. 

    The bears will argue that the low unemployment rate, coupled with these weak hourly earnings, are signs that real wages, which reflect consumer’s purchasing power, are under serious pressure. But at least the bulls can claim that the threat of wage inflation, which could force the Fed to take a more hawkish stance, is off the menu at this moment. 

    Neither hot, nor cold, that's an outlook that has supported markets over the last decade. And given the current backdrop of aggressive valuation, this can be considered to be a good thing for market stability. 

    There it is. Goldman Sachs and BlackRock earnings, in before and U.S. payrolls in the after. Refinitiv data throughout. 

    This has been the Tuesday episode of Before and After. Please be sure to like, subscribe, and hit the notification bell. Share us with your friends, and we'll be back on Friday.

Episode 10 - Part 2

Consumer Sentiment & inflation - How will they affect stocks & bonds?

Published on: January 17th, 2020 • Duration: 7 minutes

In this episode, we discuss the potential effects on the equity market from continued strong consumer sentiment and inflation expectation’s potential effects on the long bond trade. We also look forward to Schlumberger’s upcoming earnings and the potential for a bounce back from the company and oil sector as a whole. In the After section, we review the numbers from the high-profile earnings reports of Goldman Sachs and BlackRock.

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06:37
  • This is before and after from Refinitiv. I'm your host. Johanna Botta. 

    This Friday will see the release of the Michigan Consumer Sentiment Index. This number is released once a month by the University of Michigan, and will give the market an instant gauge on the resilience of American consumers, given the perceived price of geopolitical risks. The consumer sentiment figure is obtained from a 50 question survey of 500 Americans, giving their assessments based on five key sections:

    Personal financial situation now and one year ago. 

    Personal financial situation one year from now. 

    Overall financial conditions of business for the next 12 months. 

    Overall financial condition of business for the next five years. 

    Current attitude towards buying major household items. 

    So even though this indicator is a survey, it will be hard to build a bear case on the economy unless this figure is well below predictions. That being said, with 70 percent of the economy consisting of consumer spending, it's worth paying close attention. The Michigan number is unique, because it involves very specific questions. Which means we can glean a lot of useful information about the psyche of American consumers and business owners. It can also be a stark reminder that market sentiments can at times, be disconnected from the consumer sentiment. In recent years, the two have tracked pretty closely. In fact, the sentiment number and the S&P have risen in tandem since a low of 2008. The bottom line - one key area to look at and pay attention to is the expectation for inflation among consumers. Last month we saw them set a record low with their five year expectations, which came in at two point two percent annual inflation. It will be interesting to see if even lower expectations appear this time around. That's because low inflation expectations could forecast a willingness among investors to be long on bonds, even at a time when relatively low yields continue to prevail. And if we see another record or a near record low, then one would expect this to lead to gains in the TLT. If that doesn't occur, though, we could use the market's inability to rally as a sign that the long bond, easy money days are behind us and we could be looking at some choppier moves in bonds this year. 

    Schlumberger, one of the world's top oil services companies, is reporting its earnings in the coming days. 2020 has already seen an entire year's worth of geopolitical drama in the first two weeks. So it's safe to say that crude oil and the companies that depend on oil prices will be at the center of market discussions, and also help drive broader market performance. With operations in 85 countries. Schlumberger is truly an international operation and like any other, and it's that broad operation that could be a strength, this earnings quarter The boom of U.S. shale production has transformed our understanding of what constitutes oil inventory equilibrium. Nowadays, long term spikes in the price of crude oil are vanishingly rare, despite increased geopolitical risk that once upon a time, would have been very bankable. That has left investors gun-shy about committing large amounts to the oil services sector, and in return, we've seen these stocks continue to lag. Just last week, Schlumberger came out to talk down expectations for shale production in 2020. They also used fifty-five dollars a barrel as a bare minimum for any new production growth. Under that number, and you'll actually see less U.S. production according to them. But is this temper talk a sign for how the quarter will look? 

    The bottom line - investors still have a lingering bitterness towards oil drilling companies. And we've seen how the fortunes of large cap oil conglomerates fare much better with any crude oil rebound. Given the expected shale slowdown could now be the moment that Schlumberger stock catches up with the XLE after two years of lagging behind? If they can show that they are expanding in growth segments of their business and tightening costs, any uptick in forward guidance could create a nice bounce. But of course, this is all dependent on crude staying north of the 55 level. Just two years ago, Schlumberger's share price was hovering in the 70-80 dollar range, with oil trading near 60. Today, it's over 40% cheaper. 

    Goldman Sachs had the unenviable task of following JP Morgan's record breaking quarterly earnings report, which was driven largely on the back of a massive increase in Fixed Income and FX trading. In the end, Goldman also had great trading results, but the FICC of Goldman is much smaller than that of JP Morgan. This was reflected in the reported one point seven billion FICC revenue compared to the three point four billion for JP Morgan. Lingering legal charges also hurt Goldman's earnings per share this quarter, which came in below expectations at four point six nine. And although the bank's top line number was a beat nine point nine six versus an estimate of eight point five six billion, the stock sold off pretty much instantly. The sell off can be partly attributed to the surprisingly heavy legal fees of over one billion. And naturally, investors will want to know just how deep the rabbit hole of litigation might go. However, we should not discount the need for instant investor gratification when it comes to the new growth sectors David Solomon is building. But if Goldman Sachs is still lagging behind J.P. Morgan, even when its trading is firing on all cylinders, then some investors might well start to question the overall business strategy. 

    So there it is. Michigan consumer sentiment and Schlumberger is earnings in The Before. And Goldman Sachs results in The After. Refinitiv data throughout. This has been the Friday episode of Before and After. Please be sure to like, subscribe, and hit the notification bell. 

    Share us with your friends, and we'll be back on Tuesday.