Everything Old is New Again: Goldman Sachs Grabs the Halo this week – and shares it


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Expert Perspective by Grahall’s John Hammond

expert perspective telescopeJust a few months ago, it was the financial services industry that caused the stock market to tank. Now financial services is doing the heavy lifting in pulling the market back up by its bootstraps.

As reported Monday July 13, in an AP article in the Newark Star Ledger, Market soars on Goldman forecast, a “few kind words about Goldman Sachs sent financial shares shooting up and yanked the entire stock market out of a slumber. Rising bank stocks propelled indexes to their biggest one-day gain in six weeks yesterday after influential banking analyst Meredith Whitney raised her rating on Goldman Sachs Group. The bank reports earnings today. Whitney also said on CNBC that hard-hit Bank of America looks inexpensive given the assets on its books. “

Dan Denning (The Daily Reckoning July 15th, 2009) digs deeper into the Goldman Sachs financial performance figures and asks: “whether Goldman’s performance is aberrant.” He attributes the positive results to “good fixed income trading profits,” saying, “Goldman’s second quarter performance belongs to a bygone era of swashbuckling financial capitalism when interest rates were low and huge money flows made trading price movements in asset classes a full-time job.”

In other words, the times have been a changin’ since April. He continues: “Whitney is bullish on Goldman because Goldman is good at trading its own book. But what’s good for Goldman is probably not the same as what’s good for everyone else.” Fixed income trading profits are not today’s measurement criteria.

But both reports raise an interesting point in referencing Whitney and her “kind words” as at least part of the source for optimism in the financial services sector. An interesting article about behavioral economics by James Guszcza, entitled Rethinking Rationality – Economics and Human Nature (Contingencies Jul/Aug.09), points to several “cognitive and behavioral biases” that may help us account for this week’s spreading enthusiasm for financial services stocks.

The “framing” of the message, for example, which is “the way relevant information is presented,” influences people’s decisions and actions in response to the message. It’s likely that the raised rating by a respected and historically conservative banking analyst might have such a positive impact.

Likewise, the tendency of people “to rely too heavily on a (possibly arbitrary) reference point when … making a decision” is called “anchoring.” The raised rating itself may be such a reference point, easy to welcome under the hope-starved circumstances.

And the circumstances continued to favor the financial services sector during the week, with reports Thursday that JP Morgan Chase second-quarter results were better than expected. Second-quarter results for Citigroup and Bank of America also proved positive.

But for now, other financial services companies might be the beneficiary of a “halo effect” from the raised rating of Goldman Sachs – another behavioral tendency Guszcza cites, which in this case would be a tendency to attribute positive impressions about Goldman Sachs to other companies in the same industry, such as Bank of America (to which Whitney also nodded).

As The Ledger reported, “Banks have taken some of the biggest blows among U.S. companies since the recession began in late 2007 as investment and loan losses mounted.” It’s natural for the emotionally driven market to respond to the first bit of good news from its worst offenders, almost wanting to will the financial companies to succeed. For now, the financial sector is pulling its weight.

Email John Hammond at john.hammond@grahall.com

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