Why Falling Revenues Are Sinking the Dow
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.
Congress finally approved an agreement hammered out by the Senate to extend the debt ceiling and reopen the government. This was almost literally a last-minute deal: The time of the House vote was 10:18 p.m. EDT. It appears that a successful (if short-term) resolution to the standoff was wholly factored into yesterday's closing stock prices, as stocks opened lower this morning, with the S&P 500 and the price-weighted Dow Jones Industrial Average down 0.14% and 0.57%, respectively, as of 10:10 a.m. EDT.
The Dow's underperformance relative to the broader S&P 500 index is due to the fact that two of the Dow's top-weighted components, International Business Machines and Goldman Sachs , are suffering significant declines this morning.
Yesterday, in regard to the substantial declines in fixed-income revenues witnessed at Citigroup and Bank of America in the third quarter, I warned:
None of this bodes well for Goldman Sachs and Morgan Stanley , which report tomorrow and on Friday. Goldman, in particular, depends heavily on bond trading: Its Fixed Income, Currency and Commodities Client Execution unit contributed 30% of the bank's net revenues during the first six months of this year.
That risk materialized this morning as Goldman reported that net revenue in its fixed income, currency, and commodities unit fell a stunning 44% year on year to $1.25 billion. That contributed to a 20% drop in the bank's total revenue to $6.72 billion. Manifestly, this is what the market is focusing on this morning, as Goldman shares are down 2.8% despite the fact that the bank beat analysts' earnings-per-share estimate by 19%, posting $2.88 versus $2.43.
Morgan Stanley reports its third-quarter results tomorrow after the close. But investors are already paring back their expectations in light of Goldman's numbers: Morgan Stanley stock is off 0.9%so far today.
Declining revenue is also hurting the shares of International Business Machines this morning. The technology software and services concern announced a 4% year-on-year decline in sales in the third quarter to $23.7 billion -- $1 billion short of the number Wall Street was looking for. Worse, the latest drop in sales was the sixth in as many quarters. Investors may be tempted to ask whether IBM's business model is in irreversible decline, and that's rarely a useless question to ask. But it's also worth remembering that IBM is one of Berkshire Hathaway's top positions; Warren Buffett clearly sees some longevity in the business.
The technology trend you can capitalize on now
Technology investing can be tricky, but some trends can't be ignored. The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.
The article Why Falling Revenues Are Sinking the Dow originally appeared on Fool.com.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.