Dow 11,000, Emergent Japan and Reputational Risk    

• US stocks got a nasty surprise last Friday as the SEC slapped Goldman Sachs with civil-fraud charges. From our corner of the world, it looks political. Political for the SEC to restore their reputation as the cop of the Street, political for legislators trying to implement more control of dark pools of capital sloshing around financial markets, political for Main Street to vent their anger over having to pay for the great recession while those who perpetrated not only get bailed out, but are back to receiving multi-million dollar bonuses while 15 million are unemployed, and political schadenfreude for those firms that crashed and burned during the financial crisis while Goldman apparently dodged the bullet. 
• Goldman's stock price took a 13% hit on Friday, and investors are asking themselves if this will derail the "meltup" rally since February that was being led by the financials. In other circumstances, Goldman would end up writing a check for whatever they are fined by the SEC without admitting to any wrongdoing, while the White House (and SEC) claims victory. Given the current political climate in the US, it may not be that easy this time. 
• However, we see parallels between Goldman and Toyota in that two of the most respected companies in their respective industries have some serious reputational risk. In the case of Toyota, the recall debacle triggered a 23% selloff that the stock has yet to recover from, but has not done any particularly deep or lasting damage to the Toyota brand even though it could end up costing the firm upwards of $5 billion. 
• Having just survived one of the most serious financial crises and economic recessions since the 1930s, the Goldman case is unlikely to be anything other than a temporary hiccup to the global equity market recovery. While the news caused some knee-jerk buying of the yen and general profit taking in risk trades, it is unlikely to be a game-changer in terms of the market trends that were in place before Friday of last week. In other words, we see foreign investors continuing to restore their exposure to Japan as they avoid Euro sovereign risk and look to Japan as a cyclical play. While there may be some knee-jerk profit taking in Japanese banks and broker/dealers, the major financials in Japan were already lagging the rally in Japan and virtually ignoring the rally in US financials.

< Go Back to List