The initial first quarter corporate earnings reports and this week’s economic releases continued to point toward growth with well-contained inflation. Yet, the report that the SEC had filed civil charges against Goldman Sachs spooked the equity markets ending many weeks of gains. Government bond markets rallied, especially in the U.S. Oil traded a couple of bucks lower to close the week under $84/barrel. Financial conditions remained firm with credit spreads narrowing further.


The announcement that the SEC had filed a civil suit (the only suit option within its authority) against Goldman Sachs spooked the market this week. The reaction was enough to end the long string of positive weekly equity returns. Goldman is now charged with the failure to disclose their conflicting interests while selling a collateralized Ddbt obligation (CDO) to clients. If the charges are proved true, criminal charges could follow and other institutions could come into the SEC cross-hairs. The Goldman mystique and earnings power was unmatched. The firm had weathered the recession storm well on both an absolute and a relative basis. For years, Goldman managers have been rewarded with enormous personal wealth and have retired early to serve in senior government positions. Goldman has been the most admired firm on the Street. If anyone was safe, it was Goldman.

In free, open, and transparent markets, how could one firm could do so well competing against other talent-laden firms on the Street? The SEC believes that it has found an answer. If the SEC’s charges are correct there are consequences. In the capital markets, reputation and trust are core attributes to do business. If reputation is tarnished, trust evaporates, and business fails. Toyota has also been struggling with its tarnished reputation for quality and safety. I own four cars built by Toyota, three with well over 90,000 miles behind them; they all serve me well. Despite the great deals Toyota has offered on its new cars, I am not ready to buy a new Toyota right now. Trust matters. These charges could have a significant impact on Goldman’s business and management.

Economic Releases

In the US, March industrial production increased a tick while capacity utilization increased two ticks to 73.2%, still 7..4 percentage points below its 1972-2009 average and 3.7 percentage points above its level a year ago. These improvements were achieved despite the potential impediments of the winter storms, showing both the resilience of the recovery as well as the shortfall from full capacity. retail sales rose +1.6% in March; less autos. Retail Sales rose +0.6%. On the negative side, initial jobless claims rose 24,000 to 484,000 and the University of Michigan Consumer Confidence Index fell 4 points to 69.5 in April.

While many signs of recovery are evident, the Nathional Bureau of Economic Research (NBER) announced on April 12 that it was not yet able to set the end date for the U.S. recession, which began in December 2007. This reticence was not unusual for the NBER, which has never been quick to hang out the “Mission Accomplished” banner.

Inflation remained well contained in March. YOY CPI for the US inched up to 2.3%. The Eurozone rate increased to 1.4% and the French rate increased to 1.6%. The UK is expected to report 3.1% next week. US CPI for the month of March was +0.1% while the core rate (ex food & energy) was flat. The Euro-zone experienced a +0.9% increase in its CPI in March: Germany’s was +0.6%; France’s was +0.5%.

Housing has been at the core of the US recession from its start. The chart below shows Housing Starts (red) and Permits (blue) were 626,000 and 685,000 respectively. The chart also shows that the shape of the housing recovery was certainly not a “V” shape, but could be an extended “U;” as of March it remained an “L.” While Starts and Permits have crept up over the past year they were less than a third of where they were at the peak. Housing and employment have lagged in the recovery and have contributed to the polls where many consumers have indicated we are still in recession. The data showed that the housing construction stabilized over the past year, but it did so at levels less than a third of where it was at its peak five years ago.

Apr 16 Bonds



Equities Markets
Equity markets were lower with the exception of the Technology sector which lifted the Nasdaq. In the initial stage of first quarter earnings reports over 80% of the S&P 500 companies have reported positive surprises.

Apr 16  Bonds



Bond Markets

Bonds rallied, particularly in the US after the Goldman announcement and equity sell-off.

Apr 16 Bonds



The US dollar was unchanged against the Euro, but rose against the Pound, and Looney this week.

Apr 16  Bonds

Economic Sectors

Small Cap Growth and the Information-Technology Sector had the best performance while Large Cap Value and the REIT Sector fared the worst on the week. On a year-to-date basis, the Consumer Durable and Small Cap Value stocks did the best while Telephones and Large Cap Growth stocks did the worst.

Apr 16 Bonds



Source: Bloomberg LP