10 o’clock briefing

Markets are under pressure again. Dollar is holding up though and might have found a bottom.

In the meantime, banks continue to be under pressure from fraudclosuregate:

While the market awaits the Fed report on currency manipulation. This report will probably say nothing of substance, hope to put some shallow pressure on China, and leave it at that. But treasuries are selling off anyway with yield rising:

Elsewhere, oil is holding up remarkably well, GOOG is holding up the Nasdaq with a 10% gain after last nights earnings report, and consumer sentiment declined more than expected.

Let’s see if this is just profit taking or the beginning of the realignment we anticipate.

Google

I follow developments in the tech industry quite closely but rarely discuss specific stories – this one is different.

…Google announced Google Apps for Government, a new version of Google’s suite of cloud-based enterprise applications that have been hardened to meet the government’s more stringent security restrictions.Dave Girouard, Google’s President of Enterprise, kicked off the presentation with a few stats: every year, the federal government spends $76 billion on IT expenses. Another $50 billion is spent on IT by state and local governments. Google is looking to help.

Google says that this is the first multi-tenant cloud application suite that has received FISMA certification at a FISMA-Moderate level, which gives it the ability to store and serve sensitive (but not classified) information. Google’s Matthew Glotzbach says this encompasses 80-90% of all government information.

For the link, click here.

First, the fact that the government is ever growing, to the point that Google finds it necessary (and profitable) to develop government-specific IT programs is pretty astonishing (concerning, amazing, cool, scary, etc.). Second, the fact that even the government recognizes the challenges of closed systems is encouraging (again, it’s also quite scary). Lastly, the fact that Google is developing something to such standards is encouraging for the rest of the world as it will ultimately trickle down into our apps. (No position in GOOG – I just think it’s pretty impressive.)

Goldman’s plight might be the spark, but it ain’t all that

If you live in a cave and haven’t heard, the SEC came out in the middle of the day on Friday to charge Goldman with fraud over a securitization deal it helped underwrite for Paulson. Lots of nuance and many details to follow, but the gist seems to be that Paulson materially influenced the collateralized assets that he was trying to short and GS may have mislead ACA, the outside management firm hired to lend the deal some credibility. Now, the SEC isn’t charging Paulson (yet?) nor ACA (yet?), but rather is focusing on a single deal and a single senior VP at GS. In the worst case scenario for GS (best case for the SEC), GS misled and committed the fraud and will pay a fine. In the best case scenario for GS (worst case for the SEC), GS was marginally ignorant, and the SEC will once again look like it doesn’t understand the firms and securities it’s supposed to oversee.

Did the SEC really need to come out with this news in the middle of the day? By focusing on one transaction and not a pattern, will financial reform ever be effective? Is this politically driven by higher-ups?

Goldman will end up figuring this all out (and probably finding a way to profit from it), but this story shouldn’t be the focus going forward. The real focus is GLD and Paulson’s positions. Gold lost 2% on Friday. Why? Some are speculating that Paulson will need to raise cash in anticipation of redemptions, or other reasons. If that is the case, the market might be front-running Paulson by selling off any positions in which he is a large investors, GLD being one of them. Check out this news story. If that is indeed the case, then the following weeks could see a lot of volatility in Paulson’s names:

Top 10 Holdings as of 12/31/09

SPDR Gold Trust

GLD

NYSE

31,500,000

$3,380,265,000

17.08%

FINANCIAL

Bank of America Corporation

BAC

NYSE

151,034,229

$2,274,575,000

11.49%

FINANCIAL

AngloGold Ashanti Limited

AU

NYSE

42,849,864

$1,721,708,000

8.7%

BASIC MATERIALS

Citigroup Inc.

C

NYSE

506,700,000

$1,677,177,000

8.47%

FINANCIAL

Boston Scientific Corporation

BSX

NYSE

99,135,000

$892,215,000

4.51%

HEALTHCARE

Comcast Corporation

CMCSA

NASDAQGS

44,000,000

$741,840,000

3.75%

SERVICES

Sun Microsystems, Inc.

JAVA

NASDAQGS

74,000,000

$693,380,000

3.5%

TECHNOLOGY

Capital One Financial Corporation

COF

NYSE

17,000,000

$652,800,000

3.3%

FINANCIAL

Suntrust Banks Inc.

STI

NYSE

30,380,700

$616,424,000

3.11%

FINANCIAL

Kinross Gold Corporation

KGC

NYSE

31,500,000

$583,322,000

2.95%

BASIC MATERIALS

Source: DaveManuel.com

Lots of gold exposure and lots of financial exposure. One thing that’s particularly telling was how quickly and how far GS fell on the news, while the market stayed relatively firm. Both sides are telling, depending on whether you’re a bull or bear. The bears will point out that a minor piece of news sent GS down 13%, meaning there are no buyers out there. The bulls will point out that the market was relatively stable and held up well, showing resilience in the face of bad news. I’m biased in that the valuations of the market lead me to look for weaknesses. GS is just one example yesterday and it overshadowed GOOG, which was down 7.5% despite positive earnings.

It will take time to understand the full ramifications of the case, but at first go, it looks like the SEC might be focusing on the trees over the forest (disclosure issues are minor compared to the prop trading conflicts of interest – which this case doesn’t have!!). That being said, eventually the market will continue to use the news as an excuse to realign valuations, so it’s only a matter of time.