Market Talk

Big show today, markets trying to rebound after yesterday’s sell-off, earnings from Goldman and J&J as well as a look at this afternoon’s earnings, and author, economist and sometimes actor Ben Stein comes on to talk about the U.S. debt issues, the future of the economy and the importance of diversification.

Now, at very nearly $107/barrel, you might think crude oil prices are pricing in all manner of supply shocks and disruptions. There seems to be a very large “fear premium” being baked in there, right? Well, not exactly. Our colleague Sarah Kent writes the following:

1314 GMT [Dow Jones] The risk of gas supply disruptions spreading from Libya into other countries in the Middle East and North Africa has not yet been priced into the market, even though as much as 3% of global gas supply is at risk, says Goldman Sachs in a research note. Potential disruptions on this scale would have a significant price impact, according to the bank. “Even if Algeria were the only [other country] to halt gas supplies…we believe that global gas markets could face a negative supply shock,” it adds.

I’m not trying to send you over the edge here, just trying to make the point simply that gas prices are going to keep rising. Would you be surprised at all if there were another disruption somewhere? But the markets would be?

Addendum: Eagle-eyed Ron Paul 2012 points out that in this particular snippet, Goldman was talking about natural gas, and I was talking about gasoline, and he’s right. My mistake. However, I do believe that if the Jasmine Revolution spreads in a material, even violent way to another oil producing nation, Algeria, or say Saudi Arabia, that you will naturally see another spike in crude oil.

Also, while I’m writing this we’ve got Fox Business on in the newsroom, and they’ve got some reporters out at gas stations interviewing people. With prices above $3.50, this is also going to become a big media story, which is only going to reinforce the anxiety people are already feeling at the pump.

Another place where additional supply disruptions apparently aren’t being priced in is in equities. DJIA up 54 here in the early going, as the market is just completely ignoring any and all news related to oil prices and the Middle East.

There are still people out there saying we can “handle” high oil prices. They’re probably the same people who were saying it in the summer of 2008.

Every now and again, the true mindset that exists on Wall Street escapes out into the wider world. That happened today within the context of Goldman’s now-scuttled private placement of Facebook stock. Read this line from today’s story in the Wall Street Journal on the deal:

Goldman worried that the media spotlight surrounding the private offering might violate U.S. securities laws and expose the firm to legal action.

So, can we assume that had there not been a media spotlight, Goldman wouldn’t have worried about violating securities laws? If you’ve been around for the past five years, or 10, or 20, or 40, you know the answer to that question.

There’s no doubt this was a back-door IPO, and I’m sure Facebook, Goldman and the rich clients it was pitching the deal to all thought they were pulling a fast one and getting over on the system. But there’s so much hype and hysteria over Facebook that it once it all splashed onto the front page, so to speak, the jig was up.

“Wall Street” is a nice movie with a memoriable performance by Michael Douglas, but it doesn’t even begin to get at the heart of the matter. This is, incidentally, why the government must impose rules on Wall Street. Why leaving derivatives unregulated in 2000 was such a huge mistake, why lifting the leverage ratios on the investment banks in 2005 was such a big mistake. Left unregulated, there is nothing these guys won’t do to turn a profit.

Yves Smith, who knows far more about this stuff than I do, sums it up over at naked capitalism:

But perversely, Goldman’s truthiness is an accurate account of the real state of affairs. Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting.

And you thought today would be all about earnings. Nope, it’s really all about the dollar (and am I nuts, or is the central bank in China coming to the rescue of the dollar, at the same time as the central bank in the U.S. is doing its best to cut it down to the size of a postage stamp. Strange days.)

- Facebook and Skype are poised to announce a major partnership that integrates SMS, voice chat and Facebook Connect, Kara Swisher reports at All Things D, . Move is a “big win” for Skype and makes sense for Facebook, especially since it helps its international push and overall goal “to mesh communications and community more tightly together,” Swisher says.

- Some unintended consequences come from the Fed making it clear it won’t abandon its ZIRP policy anytime soon, Yves Smith writes at naked capitalism. “I’d feel a lot better if we’d forced more clean-up of bank balance sheets, in particular write-down and restructuring of loans, so that we would be on a path to getting the banks off the official dole.”

- Pundits seem fixated on picking out the next Black Swan event, and Josh Brown at The Reformed Broker, frankly, sounds tired of it. “Sometimes, it’s just an ordinary Black Duck,” Brown says. “A negative event or possibility that is processed and dealt with, that doesn’t necessarily lead to contagion, panic and meltdown.” Don’t dismiss warning signs, he says, but “the more we learn not to get hysterical over every Black Duck, the better the chances are that when the real things comes along, we will be cogent enough in our reaction to them.”

- The unofficial start to earnings season is around the corner, but Forbes blogger Sy Harding notes the 3Q earnings “warning” period — already underway — isn’t providing positive clues. Harding notes 112 of the 500 companies in S&P 500 have issued pre-announces — 34 have said their results will beat analysts’ estimates, while 78 have said they won’t. “That 2.3 to 1 ratio is running considerably more negative than the second quarter earnings warning period,” Harding says. If the trend carries over, it could be one disappointing reporting season.

- Non-voting Fed member Charles Plosser said additional asset buying won’t speed up a recovery in the labor market and, conversely, could actually damage the Fed’s credibility. “If one thing is for certain, the debate in the Fed leading into the November FOMC meeting will be heated over the decision whether to continue to push the envelope with monetary policy,” says Peter Boockvar, a Miller Tabak equity strategist. “While Plosser’s comments are welcome from my point of view, the voting members have a much more dovish slant.”

- There’s a reason this “recovery” doesn’t exactly feel like a true recovery; it’s merely a “statistical illusion,” Mish says. He notes government spending extracted from GDP doesn’t paint a recovery picture. “All this talk of a ‘recovery’ is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending.”

- With 3Q earnings season kicking off next week, Bespoke Investment Group notes the financial sector is expected to see biggest quarterly earnings growth. Financials earnings estimated to rise 48% from last year, while industrials, tech, energy and materials also are expected to outpace the broader S&P 500.

- “Despite what we hear — the recession is over and the upside is ‘easy’ — let me tell you something you already know: it’s not easy and it ain’t over,” Todd Harrison writes at Minyanville. “I consider myself an optimistic realist, meaning I hope for the best but call it as I see it. I foresee another side of the financial storm before the epitaph is written on this Great Recession.”

- Goldman Sachs (GS) CEO Lloyd Blankfein issued a veiled warning today that GS could sidle out of Europe if regulatory crackdowns get too harsh, FT reports.

- Google (GOOG) must do whatever it takes to buy Twitter, Henry Blodget writes, in his long-standing advocacy for such a deal. “Whatever it costs Google to buy Twitter today is worth it.”

Let's just remove 'vampire squid' right here.

I’ve long thought that advertising is the most important industry in America, and that’s not just because I’ve seen every episode of “Mad Men.” No other industry is tasked with the all-important task of getting people to spend money they may or may not have on products that almost never need, or may even be harmful to them. That’s quite a task, but year in and year out, America’s ad men get us buzzing over all manner of nonsense, and spending money like drunken sailors.

Which brings us to a very special Market Talk snippet that ran on the Broadtape today. Apparently, Goldman Sachs, perhaps you’ve heard of them, embarked upon an advertising campaign (along with a spiffy website) to clean-up its image with the masses. They bought a full-page, full-color ad in today’s Journal (page A7), bragging about how through its expertise in the capital markets it helped some wind company create, you know, windmills, and…wait for it…jobs!

Goldman Sachs, progress is everyone’s business. Makes you feel warm all over, doesn’t it?

Needless to say, we had a lot of fun trying to come up with a headline for this one. An item like this is a cynical headline writer’s nirvana. Most of our ideas were unprintable. What we finally came up with was printable, and we thought, hey, let’s have some more fun.

So, dear readers, today’s challenge is to come up with the sharpest, wittiest headline for the following item. Be creative but keep it clean (dashes and symbols are acceptable,) this is a family blog. Submit your headlines in the comments below. Winner gets a t-shirt (okay, that’s not true. We don’t have t-shirts. The truth is the winner gets absolutely nothing. But if we had t-shirts, we’d give you one.)

Here’s the item:

MARKET TALK: Oh, We Know Who You Are

12:20 (Dow Jones) Goldman Sachs (GS) rolled out a new advertising campaign today designed to clean up its image by showing how it promotes business growth and job creation by financing companies, governments and institutions. The full page ads, which depict wind turbines and a hard-hat wearing worker, ran in the Wall Street Journal and New York Times and are set to run in other national and regional papers, including USA Today. GS, which has taken a public and political beating in the last year, is using the ads to explain “who we are and what we do,” a spokesman says. GS down 0.7% at $143.93. (liz.moyer@dowjones.com)

Don’t leave us hanging, Raymond, Tyler, J., Brad, Beverly and everybody else.

- The main difference between Citigroup’s (C) $75M settlement with SEC Goldman Sachs’ (GS) $550M settlement is GS was guilty of misleading clients while Citi was guilty of negligently misleading shareholders. But the public is much angrier over GS case, which the “Kid Dynamite” blogger finds hard to fathom. “People should be furious about this Citi case and settlement, but you’ve probably hardly heard a whisper about it.”

- Prospects aren’t looking bright for the restaurant industry. Same-store sales and customer traffic both declined for a third-straight month in June, Calculated Risk reports. “Restaurants are a discretionary expense, and this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.”

- Roughly 25% of Americans sit in FICO’s least-creditworthy category, a significant jump from only 15% before the recession. “Some people will lament this, but it has a silver lining,” FusionIQ CEO Barry Ritholtz says. “Deleveraging is certainly a good thing, and forcing consumers off of the credit treadmill may actually help these folks over the long haul.”

- The commercial real estate market is getting ugly, slowly but surely. Delinquent unpaid balance for CMBS increased $3.1B in June to $60.45, and has more than doubled from a year ago, according to Realpoint. “This isn’t quite the disaster in the making that subprime was,” Yves Smith notes. But “I’m not sure why people say there isn’t a CRE crash. It’s just happening in slow motion, so far.”

- ISM manufacturing index fell for a third-straight month in July, but at 55.5, it exceeded economists’ expectations. “Bottom line, while the ISM remains firmly above 50, just ten of the 18 industries surveyed reported growth, with four reporting outright contraction and the drop in new orders is worth watching,” writes Miller Tabak’s Peter Boockvar. “With this said, the market is breathing a sigh of relief that while down for a third month, the ISM is still hanging in as inventory builds, albeit at a slower pace, and export growth continuing.”

- Newspaper advertising sales were less bad in 2Q vs a quarter ago. “But less bad is not the same as good — and the outlook for the remainder of the year is decidedly murky,” writes Newsosaur blogger Alan Mutter.

- A new website — JailbreakMe.com — has sprung up offering an easy way to hack, or “jailbreak,” an iPhone to run applications not authorized by Apple (AAPL).

- “This market is one that moves largely on the basis of economywide hopes and fears,” NYT’s Floyd Norris says. “Company specifics take a back seat.”

- “Remember when we weren’t allowed to say the word ‘recession?’ Like it was anathema?” Todd Harrison says at Minyanville. “Or when we weren’t ‘patriotic’ if we weren’t ‘bullish’ after 9/11?,” he recalls. “Is ‘deflation’ the modern day equivalent of ‘recession?’”

- Battle over the proposed Ground Zero mosque is picking up steam.

- If Google (GOOG) can grow revenue, why can’t Yahoo (YHOO)? That’s the question Eric Savitz poses at Barron’s Tech Trader Daily blog. “[Yahoo CEO Carol] Bartz inspires confidence, she’s big on taking decisive action, but for all her efforts, the company still isn’t growing,” he says. “At some point, Yahoo is going to need a more clearly defined growth strategy — and it will have to execute on it.” Yahoo shares drop 8.5%.

- Google issues a 20-page response to FTC’s staff discussion draft about the future of journalism in the digital age. Main takeaway: Don’t blame Google for the newspaper industry’s troubles. “The large profit margins newspapers enjoyed in the past were built on an artificial scarcity: Limited choice for advertisers as well as readers,” Google says. (Hat tip, Jeff Jarvis.)

- Any worries that the iPad would hurt Mac sales were put to bed in Apple’s (AAPL) 3Q results. Apple set a quarterly record by selling 3.47M Macs in 3Q, a 33% increase from a year ago. “If the iPad is having any effect on Mac sales, it’s an additive one,” Digital Daily blogger John Paczkowski says. “Like the iPod once did, the new slate from Apple seems to be having a halo effect on Mac sales thanks to the publicity and Apple Store floor traffic it has generated.”

- Just how impressive were Apple’s quarterly results? Look no further than the 3.27M iPads sold during 3Q, TechCrunch says. Put into context, that’s only 200,000 fewer units than all the Macs sold. And 3Q was the best Mac sales quarter ever. “In other words, in just about any other quarter, the iPad would have outsold the Mac,” TechCrunch says, while expecting the iPad to blow past Mac sales next quarter.

- Bulls once again get rejected trying to rally S&P 500 significantly above its 50-day moving average. Bespoke Investment Group reports this is the fourth separate time since the “flash crash” in early May that the index has turned back at its 50-day moving average. “Bulls had been hoping that strong earnings would be the catalyst to take the S&P 500 to the other side of its 50-day, but so far the bears (and Bernanke) are having none of it.”

- Yesterday’s trading showed “the high-frequency-trading nerds were in full swing, but to the upside this time,” Doug Kass writes. “I have written that few complain when the algorithms take the market up (like yesterday). But I would prefer to be intellectually honest, even when the programs take the market up, and I will not stop writing about this subject until the SEC acts responsibly and curbs certain high-frequency-trading strategies.”

- The housing market is stumbling, once again. “In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans,” WSJ says.

- “Returning to a sensible, fundamentals-based housing market is painful, but ultimately, it’s something we’re going to have to do, one way or another,” Barbara Kiviat writes at Time’s Curious Capitalist blog.

- A stumbling housing market offers clear evidence that the housing tax credit was a “clear and unequivocal failure,” Bill McBride writes at Calculated Risk. “Not only did most of the benefit go to people who were going to buy anyway, but the credit didn’t reduce the overall supply,” he says. Ultimately, the tax credit merely pulled demand forward. “This is a textbook example of bad policy.”

- “At just 12 times prospective earnings and with prodigious cash flow enabling it simultaneously to keep up its pace of small acquisitions while still repurchasing shares, the market may soon realize that its diagnosis of J&J was overly dire,” Lex says.

- Are Goldman shares worth a flier at current levels? James Stewart weighs in.

Earnings season is starting to produce some high-profile disappointments, like IBM and Goldman Sachs, which is what we’re discussing today on the Markets Hub. (By the way, I have no idea why I said “International Business Machines” at the top instead of just IBM. Who doesn’t know IBM? Weird.)

Of course, we’re also taking a look at Apple, which will disappoint absolutely no one. Those guys are masters at playing the expectations game.

You saw it out of IBM and Texas Instruments. You saw it this morning with Goldman Sachs. Revenue, it’s down. So, what’s keeping earnings up? Margins. That’s the focus of today’s Upshot column:

More than two years after the recession put corporate America on a cost-cutting binge, companies are still finding ways to squeeze more profit out of smaller operations.

Second-quarter margins are looking great for companies reporting thus far, and the higher margins are keeping the three-quarter-long rebound in profitability running.

Toy maker Hasbro Inc. on Monday posted a surprising 11% jump in earnings, even as revenue fell 7%. The Pawtucket, R.I., company’s operating margin, or profit from ongoing operations, increased to 10.8% from 9.2% a year ago as royalty payments including for its Transformers and GI Joe toys were down 32% and advertising costs fell 12%.

The only problem with this, is that right now magins are running ahead of historic norms, and history suggests they will eventually come back down to those levels. If sales don’t rise over the next couple of quarters, margins will come under pressure. It’s amazing, actually, that companies can still find places to trim, more than two years after the recession started. That, of course, doesn’t say much for prospects in the jobs market, incidentally.