Goldman Sachs continued to navigate the credit crisis better than any of its peers. It reported just an 11 percent drop in profit in the first quarter to $2.1 billion.
The Financial Times says the investment bank is capitalizing on the woes of its competitors, picking up market share with hedge funds from a staggered Bear Stearns and recording near record sales from helping other banks raise capital.
The Wall Street Journal on its Money & Investing front says Goldman thinks its rescue of a $7 billion structured-investment vehicle may be a sign that the market may be near a bottom, but Bloomberg quotes the firm’s chief financial officer saying the bottom was in March.
The New York Times on C4 quotes an analyst who question’s Goldman’s accounting, seeming to suggest that its results may be too good to be true:
“How did they manage through this difficult period with so little in markdowns?” Michael Hecht, a Banc of America Securities analyst, said. “Everyone else is kind of opening up the kimono and giving us a lot more exposure than Goldman.”
But Goldman’s stock analysts issued a “dire” report saying the bust won’t hit bottom until early next year, the Journal tells us in a separate C1 story. That helped send financial stocks sliding nearly 3 percent and pushed the stock market down 108 points. The analysts said financial firms need to raise another $65 billion in capital, something that will be harder to do since they’ve already raised hundreds of billions of dollars from investors who are sitting on sizable losses for their help.
“There is a lack of clarity at every level of the financial system right now, from regulators to companies,” said floor trader Ted Weisberg of Seaport Securities, a New York brokerage. “That breeds uncertainty, and the uncertainty breeds volatility, and that ultimately drives people away from the table.”
As evidence of the volatility, Lehman Brothers and Washington Mutual were each off about 8 percent.
Stagflation worries continued to grow as an inflation report came in high and home construction continued to fall.
The producer-price index jumped 1.4 percent in May from a month earlier, the Journal says on A3 and the NYT on C8. Bloomberg says it was the largest increase since November and exceeded forecasts by nearly half a percentage point. Producer costs are up a significant 7.2 percent from a year ago, mostly because of energy prices (minus those and food costs, the “core” increase was 0.2 percent).
Producer prices are key because they measure how much it is costing companies to make goods. They can try to eat rising costs for a time to remain competitive in their respective industries—the FT notes that companies are cutting staff and giving the employees who remain fewer hours—but eventually they attempt to pass much of the new costs on to consumers in the form of higher prices.
Combine that with the “stagnation” part of stagflation. Factory output declined 0.2 percent in May, while housing starts tumbled to their lowest level since 1991, falling 3.3 percent last month (32 percent from the previous May), and April’s numbers were revised sharply downward. Construction permits also declined, by 1.3 percent. Two regional homebuilders became the latest to fold, the Journal says.
The reports put the Federal Reserve in a tough spot. If it raises interest rates to tamp down inflation, it will hurt the already-anemic economy. If it lowers rates to help the economy, it will boost inflation.
Welcome to the developed world, China!
The NYT on page one reports on how rising costs in China are leading companies to look elsewhere in Asia for cheap manufacturing.