Earnings

Confidence data is used as an indicator to predict future commerce. For example, if you’re confident that your personal financial situation will improve tomorrow you may feel encouraged to spend today.

In the confidence game, who is coming out on top: Consumers or Businesses?

business confidence Consumer vs. Business Confidence

consumer confidence Consumer vs. Business Confidence

Contrary to popular belief, business and consumer confidence levels are at approximately the same level today. However, you can see that consumers are coming off of an extreme high which may be why the current consumer confidence levels feel shockingly low. It’s the same feeling you had at 6 years old when your parents made you leave Splash Mountain to spend the afternoon in the Epcot center.

Nevertheless, the drop may be positively contributing to higher rates of saving and decreasing debt rates occurring among consumers. So while lower confidence levels may not be helping our economy grow, they are helping households rebalance out of the red and into the black.

View on The Wall Street Geek’s business website Price Capital.

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gdpprojections Consumer vs. Business ConfidenceOne of the more bizarre characteristics about me is that I love taking exams.

Not only is it a thrill to jog farther or lift more weight after weeks of training, it’s also exhilarating to knock an exam out of the park after weeks of studying. The brain is a muscle too and needs love, people.

I’ll bet you $80B TARP dollars, however, that the 19 bank CEOs don’t feel the same way about the stress tests their banks are being given by federal banking regulatory agencies.

Think back to when you were about to graduate from school, and imagine if the dean pulled you and 18 friends aside to give you an exam to determine if you are either:

* Ready to graduate this year
* In need of a more tutoring to help you graduate this year, or
* Not ready to graduate and need to stay in school

The exam would measure your ability to perform under 12 dire situations that you may encounter after graduation when you’re out on your own, and the results would be measured by university staff.

While the intent is good, how effective is the test really? Not only can an exam not measure whether you’ll actually not sleep with a guy on the first date or not drink that fourth whiskey in the cigar room with your new powerful colleagues, what is the opinion of university staff worth if they’ve never been in those situations themselves?

In my opinion, it’s a good idea to double check proactively whether a bank has the capital to survive mortgage or credit loan defaults if, for example, unemployment rises over 10%.

But a test measures a response in a controlled, less emotional situation. For that reason, the results will only give us part of what the real outcome may be.

It’s the same scenario uncovered in retrospect with the electronic trading models that became popular in the late 90′s. The rules of the models were built upon the assumption that housing prices would likely never fall, and mortgage-holders would likely not default en masse.

When this all started to happen, we saw massive automated sell-offs that dragged down the market rather than catches already predicted and coded in the software that would prevent the sells from being triggered in a way that seriously moved the market downward.

Given how political Washington is and how cynical Wall Streeters are, both parties surely know that the tests won’t tell them the real answer.

Instead, it’s actually a way to build confidence in our economy and our government by showing proactiveness on the government’s part, and positive news about our financial sector (because I will bet you money that even if a bank fails the exam, it has to be in very obvious bad shape before that news is released to an already skittish public). And confidence is a critical mental state for investors and consumers before investing and spending can happen.

The results will be released on May 4th. But understand that as with all news coming from Wall Street, it won’t be the whole story. If you’re invested in financials, all you can do is ensure that you’re on the right side of the trade.

And if you’re a bank CEO concerned about passing this stress test, give me a call (that is, unless the exam is given under the honor system).

Image via The Wall Street Journal

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goldman sachs 475x314 Consumer vs. Business ConfidenceGoldman Sachs announced much higher than expected profits today.

What does that mean? It’s like expecting your child to get a C+ on an exam, but her getting an A+ instead, and with a gold star!

But in a period in our economy where the Dow is still down 45% year to date, how did Goldman manage to rub two pennies together and make a quarter?

And does this mean that the banking crisis is over and TARP (gasp!) worked?

Goldman reported on at least three lines of business:
1. Investment banking
2. Trading and Principal Investments
3. Asset Mgmt and Securities Services

Investment banking revenue was down 30%–no surprise as few companies would’ve chosen to go public or even try to raise capital in the stock market last quarter because they wouldn’t have found many stock buyers.

Asset Management and Securities Services revenue were also down by 29%. Once again, even the wealthy last quarter were holding onto their money and not investing as much as usual, lowering the commission and fee production for the firm.

Also, fewer opportunities to create structured products and derivative instruments likely presented themselves (check out Three Little Securities Pt 3 to understand securitization).

This leaves #2: Trading and Principal Investments, where Goldman’s revenues were up 40% last quarter.

Specifically, they profited from their Fixed Income, Currency and Commodities businesses which apparently offset their losses in Real Estate and investments in other businesses.

Regarding Fixed Income profits–they may have bought distress, low-valued junk bonds where even a small increase in value would net a big profit if enough money is invested. Also, making money off the spread of loaning money from depositors is possible.

For Commodities–certain commodities did perform well recently, including coffee (and no surprise there…I drink several cups a day and my coffee beans are getting pricier!).

And regarding currency investing–you can make a great deal of money if enough money is invested.

Perhaps Goldman benefited from being well-capitalized and as a result able to rub two pennies together to make more pennies in their trading business. But was any of that money TARP money? If so, was that a permissible use of TARP money? Perhaps, since trading is classified as part of Goldman’s business model.

Nevertheless as banks announce their earnings, I can’t help but question if these banks would’ve been profitable without accounting rule changes and stimulus money (which, as it was pitched by the government, was intended to stimulate lending and not necessarily profitability).

As an investor, I want to know if they are truly able to make money via a sustainable business model.

Despite Goldman and Wells Fargo’s positive earnings news, this does not mean that the crisis is over. Both firms are well-managed and well-connected. They are also in niche businesses compared to the larger, more diversified Bank of America and Citigroup.

If the latter two report good earnings, perhaps we can breathe a little easier that the overall banking industry may be stabilizing. But I still want the transparency of understanding how they do business and where their profits came from before I completely exhale.

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