Mixed bag on the data front this morning. Investors are taking a breather after the huge rally of the last few days. Stocks are trading down by about 0.3%. This morning’s earnings reports didn’t shock too many investors. Goldman beat big and Citi continued to report a tough business environment. To no ones surprise, Goldman posted a big beat of $5.25 vs estimates of $4.24. Fixed Income, Currency and Commodities (FICC) generated quarterly net revenues of $5.99 billion which was almost half of their total revenue of $12.37B. Equities generated quarterly net revenues of $2.78 billion. Goldman said:
Net revenues in Trading and Principal Investments were $10.03 billion, significantly higher than the third quarter of 2008 and 7% lower than a record second quarter of 2009.
Net revenues in FICC were $5.99 billion, significantly higher than the third quarter of 2008. These results reflected strong performances in credit products and mortgages, which were significantly higher compared with a difficult third quarter of 2008. Net revenues in interest rate products were also strong and significantly higher compared with the third quarter of 2008, while net revenues in commodities and currencies were lower compared with the same prior year period. During the quarter, FICC operated in an environment characterized by solid client activity levels, tighter credit spreads and a general improvement in asset values.
Net revenues in Equities were $2.78 billion, 78% higher than the third quarter of 2008. These results reflected strong net revenues in derivatives, which were significantly higher than the third quarter of 2008, as well as a solid performance in shares. In addition, net revenues in principal strategies improved significantly compared with a difficult third quarter of 2008. Commissions declined compared with the third quarter of 2008. During the quarter, Equities operated in an environment generally characterized by a significant increase in global equity prices, favorable market opportunities and a decline in volatility levels.
Citi was a bit of a different story and continues to struggle:
Citi reported third-quarter net income of $101 million, and a 27-cent loss per share, on revenue of $20.39 billion. In the year-ago quarter, Citi posted a loss of 61 cents a share on total revenue of $16.26 billion.
The company said the latest quarter’s results included $8 billion in net credit losses and an $802 million net loan loss reserve build.
“While consumer credit trends are improving in international markets, the U.S. consumer credit environment remains challenging,” said Vikram Pandit, Citi’s chief executive.
Analysts polled by Thomson Reuters had produced a mean estimate of a 36 cents a share loss during the quarter. Analysts’ estimates for the results ranged from a high of just 2 cents a share loss, to a low of a $1.20 a share deficit.
In terms of economic news the data came in a bit mixed. The Philly Fed Survey came in lower than expected after several months of gains. Econoday reports:
Though mostly positive, this report definitely has material for the bears including the six-month outlook where optimism is fading just a bit, to 39.8 for an 8 point drop. Stocks are slipping but only very slightly in reaction to the report. Indications are mixed for October’s ISM manufacturing report, with this report pointing to no further gains in contrast to the Empire State report that is pointing to significant gains.
The Empire State Manufacturing index came in well above expectations at 34.57 which was substantially higher than the 17.5 reading analysts expected. This is the 5th straight month the index has risen and the 3rd consecutive month that we’ve seen expansion.
Despite the success of the reflation trade, we continue to see little to no sign of inflation in the real economy. The CPI came in at 0.2%. Excluding food and energy this was a 1.5% jump over last year. The reflation that we’ve seen in commodity and equity markets does not seem to be spreading throughout the entire economy.
Jobless claims fell to their lowest level since the first quarter, but remain at an astounding 514K for the latest week. The slow recovery in the labor market is certain to act as a drag on the recovery as we move forward. The fact that we are still seeing readings over 500K is quite alarming. Continuing claims did fall 75,000 this week to 5.99MM in a sign that some tepid hiring is taking place.
All in all a mixed bag for investors. The likelihood of a breather after the huge rally over the last few weeks is highly probable. Although there seem to be few negative catalysts on the horizon that could take stocks lower it’s also safe to say that investors are now pricing in a robust earnings season which leaves us with no real positive catalyst. Look for an extension of the housing credit or chatter of a second stimulus plan to provide the next lift to equity markets.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.