Market Review and Trends
US bank earnings underpin recent rally…
By Kevin Scully-Financial Blog  •  July 16, 2009
..where did the earnings come from - show me the money !! ....but Intel's positive guidance looks real Goldman reported a strong set of Q2-2009 earnings that beat analysts forecasts.  This triggered the current rally and reversed Monday's losses.   It is not unreasonable to expect other US banks which had access to the TARP money and have almost zero cost of capital to make good profits from spreads.   Goldman made net income of US$3.44bn in Q2-2009 65% higher than Q2-2008.  The growth in Goldman's top line is also not surprising given the collapse of a number of its competitors such as Bear Stearns and Lehman.  The key question here to me is "show me the money".   As I highlighted above, Goldman made exceptional profits with the benefit of tax-payers money (TARP) and the Fed guarantees.....and they are now ear-marking US$6.6bn in bonuses and compensation while US unemployment is rising. This is a huge political issue that could impact the sustainability of earnings and which the Obama Administration quickly needs to resolve.  The second point which I noted from the wire services is that Goldman increased its risk taking to an all time high.  Its Value at Risk was US$245mn per day from US$184mn in 2008.   I have not gone into the details of whether they have held at bay the mark to market of toxic assets which could have boosted profits further.    So I am cautious about US banks but if you look at the Fed's bank stress tests......you at safer investing in those at the top in terms of capital which include Goldman and JP Morgan.  These banks also have a lower likelihood of fund raising via rights to strengthen their balance sheets or in having the Fed emerge as a shareholder both of which are dilutive for existing shareholders. Read more...
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By Kevin Scully-Financial Blog
Kevin began his working life in the regional and economics division of the Ministry of Foreign Affairs. He then moved to the private sector analyzing equities before venturing out to start NRA Capital. After 25 years of watching stocks and living through financial disarray during the Pan Electric Crisis, the 1987 Crash, the Barings debacle, the Gulf War, Asian financial crisis - what can sub-prime do but add another scar to already bruised wounds. Ever since starting his blog, Kevin has been enthusiastically giving his personal views on the market. He discusses about equities, the market turmoil, and the broad economy.
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