Goldman Sachs' first quarter earnings may temporarily divert attention from the government's civil fraud case against the firm.
Already, investors were focused more on Goldman's potential for huge profits in its Tuesday morning report, than on the government case, which was announced Friday. In fact, a Bloomberg report that the Securities and Exchange Commission voted to charge Goldman in a three-to-two split along party lines sent stocks higher.
The Dow ended the day up 73, at 11,092, and the S&P 500 was up 5 at 1197. Financial stocks were top performers, up 1.1 percent on the day.
"I guess people read that and said it's not unanimous. It's not as clean or as dirty, as the case may be, and I guess that gave people a sense of encouragement," said David Ader, head of Treasury strategy at CRT Capital.
"When that came out, the market turned. It showed it (the government case) was more political in nature," said one stock trader. Traders said the stock market also held up and Goldman shares reversed losses because there was no new negative news about the firm, and it was unclear how strong the government's case actually might be.
Michael O'Hare of LaBranche Financial said traders Monday were setting up ahead of Goldman's earnings. "No one wants to be short the stock when they report because it's likely to be an overwhelming number..that's why the market has kept itself in place," he said. That does not mean, however, that traders won't short it after the report because of concerns about the SEC charges.
Goldman is expected to report profits of $4.04 per share. According to Capital IQ, Goldman has beat the consensus quarterly estimate in each period since third quarter, 2005, and in the past 10 quarters, it beat the consensus by an average 37 percent.
Goldman's report follows Citigroup, which beat analysts estimates when it reported Monday. Citigroup said it earned $4.4 billion, after payment of preferred dividends, compared to a loss of $696 million a year earlier. Citigroup earned $0.15 on revenue of $35.4 billion, beating analysts expectations for a per share loss.
Citigroup holds its annual meeting Tuesday, as does US Bancorp, Humana , Northern Trust and Firth Third Bancorp. Calpers, the California Public Employees' Retirement System, said it plans to oppose Citi's reappointment of two directors for their accountability in the financial crisis.
Tuesday is an important day for earnings news. Coca-Cola, Delta Airlines, Coach, Johnson and Johnson, US Bancorp, United Health, State Street, Illinois Tool and Novartis report along with Goldman, before the bell. After the bell, tech darling Apple, Yahoo, Stryker and Juniper Networks report. Goldman holds an investor call at 8 a.m.
There are no economic reports of note, but investors will pay close attention to a House Financial Services Committee hearing on the failure of Lehman, which features Fed Chairman Ben Bernanke, Treasury Secretary Tim Geithner and SEC Chairman Mary Schapiro. Former Lehman CEO Dick Fuld also testifies. Meanwhile, the Senate Finance Committee holds the first in a series of hearings to consider taxing large financial institutions.
The dollar Monday rose as investors worried about the charges against Goldman Sachs. Goldman has denied that the allegations that it stacked the deck against some investors by not disclosing that it had structured a sub prime investment vehicle with the help of Paulson and Co, a hedge fund that wanted to short the product.
There was also concern about Greece, which was unable to hold a scheduled meeting with the IMF and EU because of restricted air travel in Europe due to the heavy clouds of ash from the volcano in Iceland. Spreads between Greek bonds and the German bench mark widened sharply. Bundesbank President Axel Weber reportedly told German lawmakers Monday that Greece could need as much as 80 billion euros to avoid default .
Mark Zandi, chief economist at Moody's Economy.com said the potential for Goldman Sachs to impact the economy is small at this point, although it could drive Congress to develop even tougher new regulations for the financial services industry. "The odds of overshooting are now higher," he said.
"The only other incident is if it's a catalyst for a major downturn in the equities market," he said.
Zandi also said the volcano, which has grounded aircraft across Europe for the past several days, would likely only have a small impact on the European economy. He likened the impact at this point to be much like a major snow storm in terms of economic disruption.
O'Hare said stocks ignored these factors Monday. "They're not even looking at the fact the euro is down and the dollar is up. The fact that crude is having a hard time with this Iceland situation....nobody's talking about that. It's all Goldman," said O'Hare.
As buyers moved into stocks, Treasury prices eased Monday in mostly uneventful trading. Ader said Tuesday could be another quiet day.
"There's nothing that's particular to us (the Treasury market) that will be particularly telling," he said. "On the margin, a couple of corporate deals, sure. On Wednesday, the Senate starts this bank regulatory stuff under Dodd, and clearly the Democrats have it in to be more regulatory, and it will be interesting for the bond market to see how the banking stocks respond Wednesday. But for Tuesday, we're twiddling our thumbs."
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