Goldman Leads Banks Higher After Yellen Testimony

NEW YORK (TheStreet) -- Goldman Sachs (GS) was the sector winner on a strong day for bank stocks, with shares rising 2.1% to close at $164.39.

The Dow Jones Industrial Average rose 1.2%, the S&P 500 was up 1.1% and the NASDAQ Composite ended with a 1.0% gain, after Federal Reserve Chair Janet Yellen said during testimony before the House Financial Services Committee that she expected "a great deal of continuity" in the Federal open Market Committee's "approach to monetary policy."

Yellen took over from former Federal Reserve Chairman Ben Bernanke on Feb. 1. During her testimony on Tuesday, Yellen also said the FOMC was likely to continue curtailing the Federal Reserve's monthly bond purchases "in further measured steps" during subsequent policy meetings. The central bank is currently purchasing a net $65 billion in long-term U.S. Treasury bonds and agency mortgage-backed securities each month. The pace of "QE3" bond purchases was lowered to the current level late in January, after being lowered to $75 billion in December. Before the December FOMC meeting, the Fed had purchased a net $85 billion a month in long-term securities since September 2012.

The FOMC is looking to move past the "less-traditional tools" it has used to help prop-up the U.S. economy in the wake of the financial crisis that crested during 2008, and get back to relying on the federal funds rate as its main policy tool. The short-term federal funds rate has been locked in a target range of zero to 0.25% since late 2008. The FOMC has repeatedly said that this "highly accommodative" policy was likely to remain in effect until the U.S. unemployment rate fell below 6.5%. We're getting close to that target, since the unemployment rate improved to 6.6% in January from 6.7% in December.

But crossing the 6.5 threshold "will not automatically prompt an increase in the federal funds rate, but will instead indicate only that it had become appropriate for the Committee to consider whether the broader economic outlook would justify such an increase," Yellen said.

"In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal," she added.

The KBW Bank Index (I:BKX) rose 0.9% to 68.48, with all index components seeing gains, except for Capital One (COF), which was down slightly to close at $71.26.

A Lawsuit That Is Unlikely to Succeed

The biggest splash in the banking industry on Tuesday was made by Better Markets, which sued the Department of Justice over the epic $13 billion residential mortgage-backed securities settlement with JPMorgan Chase (JPM) that was announced in November.

Better Markets - a nonprofit market watchdog - is seeking in federal court in Washington to have the settlement thrown out, and in a press released called the agreement "a mere contract and was not reviewed or approved by any court. And, it gave JP Morgan Chase complete civil immunity for years of alleged pervasive, egregious and knowing fraudulent and illegal conduct, which contributed to the worst financial crash since 1929 and the worst economy since the 1930's."

While federal judges over the past several years have intervened to prevent or change settlements between regulators and banks - including Bank of America (BAC) and Citigroup (C) -- it appears no judge has any authority over the settlement between the Justice Department, JPMorgan and other government authorities, because the bank was not actually sued prior to the settlement.


Shares of Goldman Sachs are down 8% this year, following a 41% return during 2013. The shares trade for 1.1 times tangible book value and for 9.7 times the consensus 2015 earnings estimate of $17.03 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $15.75.

Reuters on Tuesday reported that according to internal memos, Goldman had added five additional executives to its management team, including Paul Russo, Michael Daffey, Justin Gmelich, Craig Broderick and Sarah Smith.  Goldman confirmed the Reuters report.

Deutsche Bank analyst Matt O'Connor in a client note on Jan. 27, when Goldman's shares closed at $164.69, called the company one of his "top picks" among large-cap U.S. banks.

"From here, GS seems to be pricing in a lot of bad news/uncertainty-trading at a slight (1%) discount to our year end 2014 forward book [value] estimate. GS remains well levered to continued strong [equity capital markets] and especially a potential pick up in M&A-both of which seem possible if markets settle down."

Assuming that happens, Goldman could earn over $20 dollars a share during 2015, according to O'Connor, who currently estimates Goldman will earn $17 a share in 2015. He estimates Goldman will earn $16.03 a share during 2014.

This chart shows the performance of Goldman's stock against the Dow Jones Industrial Average and the S&P 500 since the end of 2011:

GS Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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