Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
The number of building permits rose 6.2% in October to top 1 million on an annualized basis -- the highest such rate in more than five years, and substantially above the 930,000 median forecast from economists surveyed by Bloomberg. That news should be enough to keep stocks in the black this morning; the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) are up 0.05% and 0.09%, respectively, at 10:15 a.m. EST.
Dow component Goldman Sachs (NYSE:GS) has been trying to convince the financial media (and, by extension, investors) that a figure that popped up in its latest quarterly report is not representative of the firm's performance.
The figure in question appears in a table that breaks down "gains and losses from market-making and other principal transactions" by asset class, which shows a $1.3 billion loss under "Currencies." The breakdown by asset class is mandatory under FAS 161, an accounting standard issued in March 2008 to promulgate greater transparency in reporting by banks. Goldman Sachs, however, contends that it does a poor job of describing the bank's economic performance. Per the bank's statement last Thursday:
Goldman Sachs did not suffer a loss in our currencies business in the third quarter of 2013. Per our third quarter form 10-Q, the gains/(losses) in the table on page 14 are not representative of the manner in which the firm manages its business activities because many of the firm's market-making and client facilitation strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types.
In other words, when Goldman puts together trades on behalf of its clients, they often involve more than one asset class, so it doesn't make sense to look at one category in isolation. In this case, it is thought that some of the losses under "Currencies" are offset by gains under "Interest rates" (cross-currency rates are closely tied to interest rate expectations). Sure enough, as a table produced by FT Alphaville [login may be required] shows, Interest rates and currencies have produced gains simultaneously in just one of the past 15 quarters.
I'm willing to give Goldman the benefit of the doubt here, although there is no denying that its fixed income, currency and commodities client execution unit (FICC) had a lousy third quarter, suffering a stunning 44% revenue decline. Nevertheless, this issue highlights the opacity of investment banks' operations -- and Goldman is notoriously bad. Equally, its resistance to improved reporting amounts to telling investors, "Just trust us." The bank could do more; Credit Suisse, for example, produces a more business-friendly breakdown of its fixed-income revenue into commodities, emerging markets, securitized products, credit, and macro, which includes interest rates and currencies.
Goldman Sachs may be, in the words of Berkshire Hathaway Vice Chairman Charlie Munger, "the best of the breed," but investing in the shares requires a leap of faith -- for which investors ought to demand a margin of safety. Perhaps that is one of the reasons that shares of a best-of-breed profit machine trade at a mere 10% premium to their book value.