Commentary: Shiny reports or dull reality? Future of markets uncertain

As long as businesses and states lose their credit lines, a real recovery is still a far-off dream.

By NITZAN COHEN
stock market 88 248 (photo credit: )
stock market 88 248
(photo credit: )
Wall Street couldn't be happier. This summer's financial reports started with a double blowout: on the financial front, Goldman Sachs trounced expectations and reported a huge net income of $3.4 billion in the second quarter. Intel, the global chip maker, also surpassed analysts' expectations and presented strong revenues of $8b.; more importantly, it gave a very positive outlook for the rest of 2009. Stock markets, which suffered from a negative trend over the past two weeks, responded with a wild rally, and the Dow Jones Industrial Average gained almost 500 points within two days. The strong earnings of Goldman Sachs overshadowed troubling news from another financial firm, CIT, a commercial lender to small and midsized businesses, which faced almost certain bankruptcy after its request for a federal bailout was denied. Goldman reported a very strong performance in its core business: investment banking. It enjoyed the stock-market rally in the second quarter and continued to position itself as one of the few financial institutions smart enough to benefit from the horrible financial crisis. While some of its competitors - Merrill Lynch, Lehman Brothers and Bear Sterns - collapsed due to reckless exposure to complex derivatives related to the mortgage market, Goldman wisely bet against them and managed to finish even a terrible year like 2008 with a $2b. net profit. So excellent results from Goldman shouldn't really surprise investors. The real question is whether Goldman Sachs's results indicate a real change in the environment in which America's financial system operates. Let us not forget that Goldman Sachs isn't a commercial bank; it is not exposed to the time bomb of loans given to businesses, to residential and commercial real-estate borrowers, and its exposure to toxic derivatives is extremely low. Hence, trying to compare Goldman to other banks in the US is foolish. This is not to say that the rest of the reports from financial institutions won't be impressive. They probably will be. But if we learned anything from the current havoc in the markets, it is that we shouldn't believe a single word written in a bank's financial reports. Not only are they are purposely unreadable, the shady practices used by their accountants have received governmental approval. There is no way anyone could understand (including the most capable analysts) what their real exposure to toxic assets is and what is the real default rate on loans and mortgages. Future write-downs could be anywhere between hundreds of billions to trillions of dollars. Ironically, the gloomy future of CIT, a midget compared to Goldman Sachs and Citigroup, is more relevant for understanding the true reality of America. CIT will go bankrupt because its customers - million of small and midsized businesses - are defaulting on their loans in growing numbers. What is true for small businesses, which account for half the jobs in the US economy, is true for households as well. A report Wednesday showed that the number of foreclosures against delinquent homeowners soared 15 percent in the first half of 2009, or 1.5 million more homes. And this is despite continuous efforts by the government, which gave $50b. in subsidies to push banks toward modifying present loans to new ones with lower payments. If you think 1.5 million new foreclosures is frighteningly high, you will probably be terrified to know that this is only due to a voluntarily moratorium declared by the banks. The biggest lenders - Bank of America, Morgan Stanley and Wells Fargo - agreed to delay foreclosures earlier this year, because they can't get rid of the piles of houses already foreclosed in 2007-2008. The true number of delinquencies and foreclosures still in the banks' pipelines is much bigger. But even if the future of financial firms is not as bright as Goldman Sachs's report may indicate, what about the good news from Intel? Many Wall Street experts rushed to the televisions studios, saying the positive outlook provided by the Silicon Valley chip maker played a far more important role in the recent rally. Intel is indeed one of the world's leading hi-tech companies, and the world's No. 1 chip maker. As Israelis, we are all proud that its leading development centers are located here. But the second-quarter reports just show us the meaning of relativity in life. It is true that Intel beat the market's expectations, but the bottom line is that its revenues fell 15% compared with the second quarter of 2008, and net profit fell almost 30%. Intel also enjoys being a global company. It does not depend solely on the crippling US or EU markets and has a very good market position in the emerging Asian markets. But still, most of its revenues come from developed markets; as for emerging markets, the notion that they can replace the US economy as the world's growth engine took a serious blow last year. It is clear that without a significant improvement in Western markets, growth in China and India is in real danger. The global economy and stock markets are far from hitting the bottom. Yes, it is possible we shall witness a wave of encouraging reports in the coming weeks. Some of them, like Intel's, may be more realistic; some, mainly in the financial sector, will probably be total nonsense. But as long as labor markets continue to shed hundreds of thousands of jobs each month, as long as millions of foreclosed homes continue to burden housing markets, and as long as businesses and states lose their credit lines, a real recovery is still a far-off dream.