Motley Fool Hidden Gems Investing - Goldman Sachs Drags Down the Dow

Episode Date: January 17, 2023

Goldman Sachs Drags Down the Dow The investment bank suffered its worst earnings miss in a decade.   (0:21) Jason Moser discusses: - 4th-quarter profits for Goldman Sachs falling 66% - How investments in Marcus and the Apple Card partnership haven't paid off yet - Disney's blunt response to activist investor Nelson Peltz   (11:00) Alison Southwick and Robert Brokamp talk with Stephanie Marini, certified financial planner, about what investors need to know how The Secure 2.0 Act affects savings and retirement.   Looking to get a jump start on your 2023 financial goals? Our flagship service, Stock Advisor, is open to new members for just $99 a year! Access this special offer by visiting www.fool.com/intro.   Stocks discussed: GS, DIS   Host: Chris Hill Guest: Jason Moser, Alison Southwick, Robert Brokamp, Stephanie Marini Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. A wise man once said, never bring a knife to a gunfight.

Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Jason Moser. Thanks for being here. Hey, thanks for having me. We are going to get to the latest in the Disney fight in just a minute, but we talked on Friday about the big banks. Most of them reported, but this morning, we got the fourth quarter results from Goldman Sachs, and the headline is that this is the worst earnings miss for Goldman Sachs in a decade.

Fourth quarter profits down 66%. No one expected their results to be great, but Jason, I feel like this is actually worse than people had feared. Is it? Probably. I don't think this really should come as a surprise. If we talked about on Friday with Wells Fargo, Bank of America, JP Morgan, all reporting challenges on the investment banking front and also taking a bit of a conservative approach, preparing for potential downturn, boosting loss reserves to account for that. Certainly, there is a tone of caution on the Goldman Sachs call as well. I think a lot of this, you look at Goldman, it's far more levered to the investment banking side of things and it's very understandable. That's

just a very difficult environment right now. If we go to the numbers, not good. That really explains why the stock is being sold off so dramatically today. Revenue, down 12% sequentially for the quarter, down 16% from a year ago. If you look at earnings per share, down 60% sequentially, down 70% from a year ago. That was after nine straight quarters of double-digit returns. This was a big pivot, but I don't know that it's something that lasts forever. a lot that stood out in the quarter, I think. The investment bankers brought in just under $1.9 billion in fees for the fourth quarter, that was down 48% from a year ago. You look at net revenue and the asset and wealth management at $3.56 billion for the quarter, that was

down 27% from the same quarter a year ago, 12% from the previous quarter. As we talked about with many of the other banks on Friday, the provision for credit losses, again, played into Goldman's narrative as well. $972 million for the fourth quarter of 2022 versus $344 million from a year ago, and $515 million sequentially. It's just a very difficult environment for investment banking these days, and we're seeing that play out with Goldman's results. When do you think we get any kind of a signal with an investment bank like Goldman Sachs that things are turning around on the investment banking side, because to the point you made, a lot of this is not surprising. Maybe the magnitude, maybe the actual numbers

were surprised, but Goldman Sachs, this is the bank that was out there in front signposting back in December that they were going to be laying people off, and they actually announced that earlier this month. Is this a situation where they're in their own category because they're so much more dependent on investment banking, or do you think this is a bellwether for the entire group? No. Ultimately, this boils down to two words, dealmaking. We're just in an environment where dealmaking has more or less come to a grinding halt. That is due to current market conditions, plenty of uncertainty in regard to the economy. Recession talk continues. This is just a very difficult time for investors

writ large, and Goldman certainly falls into that category. I think that comes and goes, that goes in cycles. We'll see that improve as we see market conditions improve. I think another thing to keep an eye on with Goldman beyond that, they've made investments recently to diversify the business, become a little bit more modern, looking at things like Marcus, example, the investments in markets clearly haven't paid off. They are rolling that operation down considerably. They're going to stop offering new loans on that platform. Another thing, an interesting dynamic I find with the business, there's this platform solution side of the business, which really focuses on consumer credit. That stood out as a positive for this quarter,

but that really was due to consumers taking on more credit card debt than anything. So, you take that however you'd like. But even more interesting, I think, though, when you look at Goldman Sachs platform solution side of the business, it's lost $3 billion over three years here. But interestingly, a big chunk of those losses have come, they're tied to the Apple card. Remember, Goldman is in partnership with Apple for its Apple card. And so far, I mean, granted, Apple Card is still a relatively new product. I think it was rolled out in 2019 or something, maybe somewhere in the neighborhood of six million plus users. It's not resulting in good business right now for Goldman. It's going to be interesting to see how that dynamic plays out over time,

if they really feel like that relationship is worth continuing, particularly as we enter this time where, I mean, we know personal savings rate is at a decade plus low. We know clearly that Americans are living more and more paycheck to paycheck and they're taking on more credit card debt, which means eventually they're going to have to pay that piper. You just kind of wonder if this is a relationship that is working out as well as they thought it might have in the beginning. But at the end of the day, I mean, the bank grew book value 6.7% for the year. They put shares today at around 1.1 times book value. It's not outrageous, I think, in today's climate. It's obviously a key player in the investment banking world,

and I don't think it's going anywhere, but I don't know that things are going to be getting better anytime real soon. In a filing with the SEC, the Walt Disney Company has responded to activist investor Nelson Peltz regarding his push for a seat on the board of directors. And look, there were a lot of words in Disney's response, but I feel like it essentially boiled down to the following. With all due respect, Nelson Peltz is not telling us anything we don't already know, and he is not proposing anything that we are not already considering. Thank you. Here are some lovely parting gifts. It's got to be hard being an activist. I think Ron said this last week. He said, being an activist is really hard. It is funny sometimes to see these activists

who think they've all got it figured out. They know the business better than the folks running the show. In some cases, maybe they do. Peltz has enough of a track record of success, as we talked about on the show. If it was some other firm, if it was you and me, and we've got our activist fund, and we had half a percent of Disney stock, they wouldn't give us the time of day. But Nelson Peltz, because of his track record, engenders some amount of respect, but not so much respect that Disney didn't respond the way they did. Agreed. I see both sides of this to an extent. Disney was very clear in their deck they released this morning. They said, and I quote, Peltz has no track record in large-cap

media or tech. No solutions to offer for the evolving media landscape. If MSG Sports is his training ground, it has not been a good one." They're telling it like it is. I don't disagree with them. I think you're right. He has plenty of experience in the investing realm as an activist. This is not necessarily in his wheelhouse, I think. Now, I will also give him credit because I think he's onto something here in regard to the Fox acquisition. says the Fox acquisition hurt the company, took the dividend away, it put their balance sheet into chaos. You can't contest that, those are facts. That said, I don't know that Pelts knows this business as well as someone like Bob Iger does. Disney is in the midst of a generational

transformation in how they produce and distribute content. I don't even think this is necessarily a business that Bob Iger is fully familiar with yet, because they're still figuring it out, and that is going to take some time. And it really goes to show, I think, the advantages in taking that risk of blazing a new trail, a la someone like Reed Hastings at Netflix, right? I mean, this is going to take some time for them to fully get this new media paradigm sorted out. That said, I think they'll pull it off, right? I mean, the advantage of the IP, I mean, Clearly, they have good tech and they're in so many living rooms already now. They've done a good job there. It really is a matter of just getting the financials in order. When I say

getting the financials in order, I mean they went from a coverage ratio in 2017. Your coverage ratio is looking at how effectively you are able to service the debt that you have, and higher is better. They went from a coverage ratio of 33 in 2017 to 4.5 today, and no dividend either. I definitely understand where Peltz is coming from. I don't know that he really stands a chance of enforcing any real change or action, but it's nice to see he's keeping management on their toes. Pop some more corn. I feel like this one is going around. Indeed. Jason Moser, thanks for being here. Thank you.

In late December, while most of us were busy either celebrating or recovering from the holidays, Congress passed the Secure 2.0 Act, and it was signed into law. Robert Brokamp and Alison Southwick take a closer look at the bill and how it could change your retirement and your college savings. In the final days of December, the Congress people in Washington were hard at work passing a $1.7 trillion spending bill. And buried within the 1,400 pages of that bill are 400 pages covering what has come to be known as the SECURE 2.0 Act. In typical Washington fashion, SECURE is a tortured acronym for Setting Every Community Up for Retirement Enhancement.

and the first version was passed in 2019. The recent sequel has all kinds of new rules for retirement accounts, required minimum distributions, and 529 plans. And here to help us discuss the most important provisions is certified financial planner and fool, Stephanie Marini. Hi, Stephanie, thanks for joining us. Hi, thanks for having me. So today we're going to cover the six most important provisions of the Secure 2.0 Act. And as we go through these, you're going to want to pay attention to the dates that they start because some start this year, but most won't take effect for another year or two. All right. With that said, let's start out with 529 accounts will be transferable to a Roth IRA. Yep. So I'm going to take this one. I have two

young kids. So it was really interesting for me to see. But this provision allows for 529 accounts to be transferred into Roth IRAs or converted into Roth IRA accounts. And so it helps answer the question for parents or grandparents, you know, what happens if there's extra in the 529 account? Or what if my child doesn't go to college or get scholarships? So before anyone gets, you know, runs out to open an account or start converting, there are a lot of requirements to make this work. This provision won't start until 2024, so it is one of those later year start dates. The beneficiary of the 529 plan must also be the owner of the Roth IRA. Another one is the 529 plan needs to have been established for at least 15 years.

The contributions in the account need to have been in there at least five years before they are eligible to rollover. And in order to make that eligible rollover, Roth IRA annual contribution limits and the child having earned income still apply. So that child does need to be working and have earned income and can only contribute to the annual maximum for that year, or the rollover can only be up to the annual maximum for that year. There is also a lifetime rollover maximum of $35,000. So there are a lot of stipulations, but I think this is really important because even with those provisions, it's a way for parents to transfer tax-free wealth to their children. Yeah, whenever something like this comes out, these big laws, you'll find out that some of

the language is not exact. And then over the next 12 months or so, the IRS and the Treasury Department will clarify a few things. And one thing that needs to be clarified is that normally with a 529, you can transfer the money to a qualifying relative. So can you, if you have leftover 529 money, can you transfer that money to a qualifying relative, which could be you, and then you take the money and put it in your Roth IRA? Right now, the thinking is that's possible, but it's not certain. So we're hoping for more clarification sometime over the next six to 12 months. All right. The next one we're going to talk about is changes to required minimum distributions. Yeah. So the original SECURE Act bumped up the starting age for required

minimum distributions, or RMDs as they're called, from retirement accounts from 70.5 to 72. This 2.0 version pushes that age back to 73 starting this year, 2023, and then to 75 starting in 2033. So another way to put this is that effective immediately, the RMD age is 73 for those born between 1951 and 1959, and age 75 for those born in 1960 or later. The bottom line is that folks can let their money grow a little longer on a tax advantage basis, assuming they don't need it. In other RMD news, before Secure 2.0, the only retirement account that was exempt from RMDs was the Roth IRA. You had to worry about RMDs from traditional IRAs, traditional employer-sponsored accounts like the 401k and Roth employer-sponsored accounts. However,

thanks to Secure 2.0, you don't have to worry about RMDs from Roth employer accounts starting next year, not this year, but next year. So why should you care about taking your RMD? Well, the penalty for not taking an RMD was pretty steep. It was 50% of the amount you were supposed to take, and that was among the highest penalties in the tax code. But starting this year, The penalty will be reduced to 10% or 25%, depending on how quickly the error is corrected. So if you forgot to take your RMD, fix the problem as soon as possible, and you may pay a lower penalty. All right. The third aspect of Secure 2.0 we want to talk about is updates to the annual catch-up contributions. Yeah, I think one of the overarching themes of this bill is that it encourages savings and more ways to save.

So in this provision, it encourages savings through updates to annual catch-up contributions. So these are the contributions that are for our more experienced workers, 50 and up. Keep an eye on the years here because they do change. But starting in 2024, catch-up contribution limits to IRAs are now going to be adjusted for inflation. So instead of having that set $1,000 that can be added to the standard contribution limit, we should start seeing it move higher. Then starting in 2025, additional contributions can be made in your employer retirement accounts of 150% of the standard catch-up contributions.

So this is for workers ages 60 to 63. And it will allow for within those years, a higher amount to be considered as a catch-up contribution. So taking 2023 numbers, that standard catch-up rate is $7,500, which would make the additional allowable catch-up contribution to be $11,250. This change doesn't just help fix the problem today with just the last year of high inflation, but it keeps these figures relevant for coming years moving forward. Another interesting change about catch-up contributions that will take effect next year is that higher income folks who are 50 and older, their catch-up contributions will have to go into a Roth account. The higher income means $145,000. If you earn $145,000 this

year, next year when you make your catch-up contributions, they have to go into a Roth account. And they think the reason for this was basically when money goes more into Roth accounts, it raises revenue for this year. It's Congress people basically wanting more money this year and not worrying about what happens down the future. And the thinking on this is that it's for employees, self-employed folks probably not have to worry about this. All right. The next one that we want to talk about is employers can match student loan repayments. Yeah, studies indicate that people who graduate from college with debt have lower retirement savings than those who graduate without debt. And so, not a big surprise there, right?

A provision in Secure 2.0 aims to close that gap by allowing employers to match student loan repayments by making deposits in their retirement plan accounts starting next year. So, the match formula and the vesting schedule will be the same as if the employee had contributed to the 401k instead of making a loan payment. There are several requirements, such as it has to be a qualified loan to pay for qualified higher education expenses for an eligible individual, so you can't just claim any old loan and say it was for school. Obviously, by the time this takes effect next year, some system will have to be created by which employees can prove to their employers that they're making payments on their qualified loans. It'll be interesting to see how

that plays out. But for those who can't afford to save for retirement due to student debt, this will at least get them started. All right, the next one we're going to talk about is reduced penalties and ways that they're going to try and encourage savings. The Secure 2.0 Act also helps address a now well-known statistic that most Americans cannot afford an unexpected $400 expense. So beginning in 2024, investors will be able to take an early emergency distribution of up to $1,000 to cover any unforeseen financial need and avoid the usual 10% penalty. This is just one of the ways that the Secure 2.0 Act is reducing some of these penalties to help encourage more savings.

So the distribution can be repaid within a three-year period, but no further distributions are allowed in that three-year period until the previous amounts are repaid. And the only thing I'll add to this too, it's only for non-highly compensated employees. And that definition somewhat changes year to year, but the higher income employees won't be able to do this. All right. And the last one we're going to talk about is that employer matching contributions can be deposited into Roth accounts.

Yeah. Before this latest version of the SECURE Act, all employer matches to retirement accounts had to be deposited in pre-tax traditional accounts. The money would then grow tax-deferred, but then withdrawals would be taxed as ordinary income. However, starting this year, employers will be permitted to allow their employees to choose to have the match deposited in a Roth account, which would make future withdrawals tax-free. While that sounds great, it's not necessarily a free lunch because that match would be considered taxable income to the employee. For example, if you received a $5,000 match from your employer

and you chose to have it put in the Roth account, your taxable income would be higher by $5,000, which of course would increase your tax bill. But if you're in a low or even middle range tax bracket, it could still be the right move if you expect your tax rate to be higher in the future. And the other thing I'll add is that while this is effective immediately, employers don't have to offer it. Plus, it's going to take a while for plan providers and employers to update their systems and their websites and things like that in order for this to be logistically possible. Well, thank you, Stephanie and Bro. Now I get to come in with the closing caveats. This wasn't an exhaustive list. There are many more provisions that we

didn't cover from the Secure 2.0 Act. Your mileage may vary. Additionally, many of the details, as you mentioned at the top of the show, will be tweaked and worked out over the coming months. If there's a provision that piqued your interest, make sure you track down the latest information before you take any action. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.