Farrell: Goldman's Stellar Performance And Releasing Oil Reserves
Chief Investment Officer, Soleil Securities
Goldman Sachs turned in another stellar performance under difficult circumstances with an earnings report that far exceeded expectations. Return on equity was 20% when other investment banks are posting losses. 52% of the revenues were from trading operations which are volatile and risky and that's why these stocks trade at what seem to be low price to earnings valuations. My guess is Goldman is picking up business by default as traders can easily justify doing business with Goldman.
The headline number for the Producer Price Index was a big gain of 1.4%. The core -ex food and energy- was a much better behaved .2% increase. Yes, we pay for food and energy, but the report shows that, so far, the headline is not percolating through to the rest of the economy and that's good.
It's also good that the bigger numbers on the PPI are not flowing to the Consumer Price Index which is registering increases that are smaller than the increases at the PPI level. Inflation is somewhat contained even if profit margins at the producer level are impacted. Now if only we could break the back of the oil price rise.
One thing we should consider is releasing oil from the Strategic Petroleum Reserve. It currently holds more than 700 million barrels of oil. The Saudis have a big meeting Sunday to discuss the issue of high prices with both producers and consumers. They realize that sky high prices could bring about permanent destruction of demand. They have increased their output and will probably announce a cut in the price of high sulfur, difficult to refine, heavy crude. We should back them up and release some oil.
Morgan Stanley will report tomorrow and I'm hoping but don't think they will surprise on a Goldman type scale. Fed Exalso reports and they usually give a candid and accurate economic overview.
Vincent Farrell, Jr. is a Principal of Scotsman Capital Management and a regular contributor CNBC.