Wednesday, March 16, 2005

Metabusiness Is King: But For How Long?

Two very different press releases in the past couple of days. Yesterday, the financial services firm of Lehman Brothers posted very strong results for its first quarter (ending February), way ahead of expectations. It gave the market a bit of a boost early in the day. Today, General Motors, icon of the American manufacturing economy, announced that it would fall below expectations in the first quarter, posting a loss instead of early forecasts of breakeven and reversing its operating cash flow forecast from plus $2 billion to minus $2 billion. GM has been in the news a bit lately because of the possibility that some of its debt will fall below investment grade and into the so-called Junk category -- a development that might well be accelerated by this little piece of news. That, among other things, put Mr Market into a bit of a funk today.

It really puts the US economy into perspective. Lehman made $875mm in the quarter to February on revenues of $3.8 bn, an annualized return on equity of 24.5%. Bond trading generated $2bn in revenues. Investment banking had a record quarter (Lehman advised on four of the top 10 M&A transactions in the quarter; Asia and Europe broke records on the back of strong mortgage and other asset backed securities transactions). Three other publicly traded brokers, or as you might call them, "metabusinesses", Goldman, Morgan and Bear Stearns are all due to report later in the week.

Will someone please explain? I admit I've always had some trouble understanding how Wall St can continue to flourish while Main St seems to spend most of its time under floodwater. I mean, granted there are some relative bright spots in the "real" economy -- we're pretty strong in, for instance, "aerospace" (a bit of a euphemism?), semiconductors, software, and movies to name just three real industries. But Wall Street essentially depends on all these other "real" areas doing well. I mean, they don't actually make anything, do they? They just shift money about. At bottom, they depend for their profits on the profitability of "real" companies. You would think that this situation would be untenable in the long-term. Yet it's been this way for as long as I can remember.

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