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Goldman’s Gains in Trading Raise a Familiar Dilemma: DealBook Briefing

Credit...Richard Drew/Associated Press

Good Tuesday. Here’s what we’re watching:

• A ‘Geneva Convention’ for cyberwar?

• Did Goldman’s trading business perform too well?

• The U.S.-China fight has pushed deeper into tech.

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Goldman Sachs’s strong first-quarter earnings raise a familiar dilemma for the bank.

The results got a significant fillip from trading, a business Goldman must do well in, but not so well that investors think the bank is too dependent on it. And a breakdown of first-quarter revenue shows the dominance of trading. Revenue from trading in stocks, bonds, currencies, commodities and derivatives totaled $4.39 billion during the first three months of the year. That works out at 44 percent of total revenue, well above the 37 percent share that trading had in 2017.

Stock and bond markets are unpredictable, even in relatively good times, so the helpful trading conditions this quarter may not last. What can Goldman’s senior executives do to persuade investors that the bank is a lot more than a trading shop? They can point to the fact that David M. Solomon is in line to succeed Lloyd C. Blankfein, Goldman’s current C.E.O. Mr. Solomon ascent took place in the bank’s powerful investment banking division, not its trading operations.

Goldman’s leaders can continue to talk about the steps the bank is taking to widen its client base and diversify into other businesses that might have more stable revenue, like its relatively new consumer lending operations. But such businesses are going to take time to make a meaningful contribution.

And it’s important to remember that other major businesses at Goldman are also volatile. Investing and lending, which mostly involves making longer-term investments in companies, and whose revenue can be unpredictable, made up 21 percent of total revenue in the first quarter, the second largest contribution.

Despite the bumper results in trading along with investing and lending, Goldman’s shares slid slightly on Tuesday, suggesting investors are waiting on longer-term trends than one quarter’s results.

But the volatility of revenue is not the only reason investors are often skeptical about Wall Street firms. The huge amounts that they pay out in compensation is also a concern. When revenue rises, so does pay. As a result, money that could have fallen to the bottom line at other types of companies instead gets paid out to traders and bankers. Compensation at Goldman Sachs made up 45 percent of non-interest revenue in the first quarter, up from 44 percent the first quarter of 2017.

— Peter Eavis

Taxes and market volatility lifted Goldman Sachs’ bottom line during the first quarter.

Here are the numbers:

— Goldman reported earnings of $2.83 billion, up 26 percent from a year ago.

Earnings per share came in at $6.95. Analysts polled by Thomson Reuters expected $5.58 a share.

— Revenue increased to $10.04 billion from $8.03 billion a year ago. Analysts had expected revenue of $8.74 billion.

— Overall trading revenue rose 31 percent from a year ago.

— Revenue from stock trading climbed 38 percent.

— Fixed-income trading revenue increased 23 percent.

— Fees from investment-banking revenue rose 5 percent to $1.79 billion, driven by an increase in underwriting revenue.

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Clergy leaders staging a protest this week at the store where the arrests occurred.Credit...Mark Makela/Reuters

Starbucks said it would close more than 8,000 of its stores in the United States on May 29 to conduct racial-bias training for nearly 175,000 employees.

The move comes amid an outcry prompted by the arrests of two African-American men at a Starbucks location in Philadelphia last week.

The two men were arrested after asking to use the restroom in the shop. An employee refused their request, because the men had not bought anything, according to officials. The men sat down and were asked to leave, and an employee eventually called the police. The prosecutor’s office in Philadelphia reviewed the case and declined to pursue charges against the men because of “a lack of evidence that a crime was committed,” according to a spokesman.

Tom Buerkle of Breakingviews writes that Starbucks is setting an example for corporate America: “Facing a backlash over the arrest of two black men at a Philadelphia shop, the chain will shut all of its company-owned U.S. outlets for an afternoon of racial-bias education. The swift response backs up Starbucks’ social goals and offers a lesson to others.”

Some may be optimistic that the $1.5 trillion tax cut will extend the business cycle.

The strategists at Morgan Stanley are not among them.

“While there’s a fair amount of debate about how much this fiscal expansion extended the economic cycle, for markets our analysis suggests we’re closer to the end of the day than the beginning. Hence, there’s less reason to behave like it’s ‘morning in America’ than ‘happy hour in America.’”

Key points

• Morgan Stanley argues that while the tax cuts will help lift growth in the near term, its benefits are already priced into the markets.

• The new tax law creates economic cliffs, as many key provisions in the law are not permanent and end in just a few years.

• The tax cuts may make it more difficult for the government to turn to fiscal stimulus to fight the next downturn.

In conclusion

“While this policy supports growth in the near term, it may worsen the next downturn while limiting the fiscal reaction to it. Even if those concerns are unfounded, we think much of fiscal stimulus’ ‘good news’ is already in the price of key markets.”

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Credit...Mike Blake/Reuters

It was another blockbuster quarter for Netflix.

The streaming video company added 7.41 million subscribers during the first quarter. Its profit jumped 62 percent, and sales grew 40 percent.

Netflix also said it plans to spend $10 billion on content and marketing this year.

Shares are up 8.6 percent Tuesday and 75 percent this year. That easily beats the S.&P. 500, which has gained just 0.2 percent this year. It also tops the performance of its fellow FANG stocks. Facebook is off 4.5 percent this year, Google-parent Alphabet is up about 3 percent, and Amazon has risen 28 percent.

Stephen Ju, an analyst over at Credit Suisse, writes in a note titled “Getting Closer and Closer to Achieving Escape Velocity”:

“Netflix continues to reap the benefits of its programming win streak, as it wields its large content acquisition budget as a weapon to put greater distance between itself and its competitors (especially as Disney prepares to exit the platform). And we find it hard to argue with the accelerated pace of subscriber additions as the conceptual proof of its capital allocation decision, and we also expect the Street to continue to underwrite the investments.”

Twitter is having an even better day.

Its shares are up 12 percent after a Morgan Stanley analyst upgraded the stock to equal-weight and raised its price target to $29. It is the eighth upgrade since it reported third-quarter earnings in October, according to Bloomberg.

The stock is up 87 percent over that period.

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Brad Smith, the president of Microsoft.Credit...Jason Redmond/Agence France-Presse — Getty Images

In pledging not to help any government — including the U.S. — with cyberattacks against “innocent civilians and enterprises,” Microsoft, Facebook and 29 other tech companies are trying to distance themselves from the messy business of national cyberwarfare.

That may reassure some tech workers. (Earlier this month, Google employees protested their company’s work on a Pentagon project, saying the tech giant “should not be in the business of war.”)

The NYT’s David Sanger says the impetus came largely from Microsoft’s president, Brad Smith, “who has been arguing for several years that the world needs a ‘digital Geneva Convention’ that sets norms of behavior for cyberspace just as the Geneva Conventions set rules for the conduct of war in the physical world.”

Also striking: Who hasn’t yet signed, including Google, Apple and Amazon.

The context: The U.S. and Britain just yesterday warned about sweeping Russian cyberattacks on governments, businesses and private individuals.

Elsewhere in tech: Tesla halted production of its Model 3 to work out kinks. Netflix reported its strongest subscriber growth since going public. Investors are considering dropping Facebook from their FAANG bets, while a federal judge gave a photo-scanning lawsuit against the company class-action status. Amazon Business is reportedly holding off on selling drugs to hospitals. Coinbase is buying the paid inbox service Earn.com. And TaskRabbit has gone offline to investigate a possible hack.

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Credit...Lluis Gene/Agence France-Presse — Getty Images

Trump administration officials said that moving to block China’s ZTE from using U.S. components wasn’t a trade-related decision. But it’s hard not to see as the latest salvo in Washington’s fight with Beijing, particularly over technology. (Another Chinese tech giant, Huawei, is scaling back its U.S. presence.)

China’s trade deficit with the U.S. is widening. But China offered an olive branch today by loosening regulations for foreign makers of electric vehicles.

On currency concerns: The Treasury Department chose not to label China as a currency manipulator. President Trump disagreed: “Russia and China are playing the Currency Devaluation game.” The truth is more complicated.

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Sean HannityCredit...Saul Loeb/Agence France-Presse -- Getty Images

Now that Mr. Hannity has been revealed as a legal client of Mr. Cohen’s, the media world has wondered what Fox News star wanted from the lawyer used by President Trump and the disgraced Republican donor Elliott Broidy.

Mr. Hannity has denied paying Mr. Cohen legal fees and asserted that none of their talks involved a matter involving him and a third-party — i.e., a settlement. (The talks, he said, were brief and about real estate.)

More eye-catching is the Fox News host’s contention that he might have slipped Mr. Cohen a few bucks for attorney-client privilege, which appears to be right out of “Breaking Bad.” (And legally erroneous.)

• President Trump has nominated Richard Clarida, an economist specializing in monetary policy, as the Fed’s vice chairman. (NYT)

• Republicans want to run on tax cuts, but most Americans — including President Trump — seem uninterested. (NYT)

• The White House has ruled out further sanctions against Russia for its role in Syria, contradicting the ambassador to the U.N., Nikki Haley. (WaPo)

• James Comey’s book tour, with its attacks on President Trump, may damage his nonpartisan credentials, and has irritated Hillary Clinton supporters.

• The E.P.A. broke rules when buying Scott Pruitt’s $43,000 secure phone booth, a congressional watchdog found, while the Interior Department’s inspector general criticized Ryan Zinke for a $12,375 chartered flight. (WSJ)

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Nick Brown and Natalie Massenet of Imaginary Ventures.Credit...Tom Jamieson for The New York Times

Natalie Massenet had planned to largely retire after leaving the online luxury retailer. Instead, she has teamed up with the venture capitalist Nick Brown to form Imaginary Ventures, which recently raised $75 million to invest in direct-to-consumer start-ups.

More from Michael:

Ms. Massenet and Mr. Brown are counting on Ms. Massenet’s Net-a-Porter experience and contacts to help Imaginary Ventures stand out. The firm has already invested in companies like Glossier and Everlane, an upstart clothing brand.

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Credit...Daniel Leal-Olivas/Agence France-Presse — Getty Images

• 21st Century Fox’s general counsel, Gerson Zweifach, argued in an FT op-ed that his company deserves a quick decision on its bid for the British broadcaster Sky. (FT)

• Volkswagen is considering buying the rest of Navistar, the truck maker where it has a 17 percent stake. (WSJ)

• SoftBank and Apollo Global Management are each said to be pursuing a takeover of the newspaper publisher Tronc. Gadfly says that SoftBank isn’t being nice to bondholders.

• Carl Icahn has effectively gotten out of casinos by selling Tropicana Entertainment for $1.85 billion. He has also put up candidates to replace SandRidge Energy’s board.

• Big activist investors, including Bill Ackman and Nelson Peltz, lost money in the first quarter; smaller rivals did better. (Reuters)

• Marriott Vacations Worldwide is said to be in talks to merge with another timeshare services provider, ILG. (Reuters)

• In telecoms, Bouygues is said to be in talks with potential partners like CVC Capital about bidding for Altice’s France unit. (Bloomberg)

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Reporters and editors at The New York Times on Monday.Credit...Hiroko Masuike/The New York Times

The NYT and The New Yorker shared the most prestigious Pulitzer Prize, that for public service, for their work on covering the harassment scandals in business, politics and the arts. What began with the NYT’s exposé of Bill O’Reilly’s settlements over sexual harassment allegations exploded with the two publications’ investigations into Harvey Weinstein.

Here’s the full list of prizewinners.

Elsewhere in workplace news: At an NYT event, female U.S. senators recounted the challenges they have faced. And the investment firm Legal & General said that it plans to vote against the chairs of British companies if less than a quarter of their boards are women. And Nike’s head of diversity has stepped down.

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Credit...Stephen Brashear/Getty Images

When the former Microsoft chief set up USAFacts, he described its main project to Andrew as a 10-K for the U.S. government. Today, Mr. Ballmer will present its findings at what USAFacts says is a sort of annual meeting for taxpayers.

Mr. Ballmer said of the latest report, “Public companies owe this level of transparency to shareholders; I think citizens, as America’s shareholders, deserve the same.”

Watch the livestreamed meeting today at 1 p.m. E.T.

As more financial firms move to pressure gun makers and sellers into self-regulation, the advocacy group (backed by Mike Bloomberg) plans to ask them to press for more policy positions and operational changes.

Among them: Requiring background checks for all gun sales; more funding for the Bureau of Alcohol, Tobacco and Firearms; having gun makers require sellers to adopt a code of conduct; and adopting smart-gun tech.

• Kirkland & Ellis has poached two more lawyers from Cravath, Swaine & Moore: the litigators Sandra Goldstein and Stefan Atkinson. (Kirkland)

Ben Frost, Morgan Stanley’s co-head of consumer and retail investment banking, is said to have left the firm and begun talks about joining Goldman Sachs. (Reuters)

• Lululemon named P.J. Guido as its new chief financial officer. It’s still looking for a C.E.O. (Bloomberg)

• The head of Cantor Fitzgerald’s broker-dealer unit, Shawn Matthews, is leaving to start a hedge fund. (Bloomberg)

• The banking heir Matthew Mellon, from the Mellon and Drexel families of Bank of New York Mellon and Drexel Burnham Lambert, died at 54. And David Edgerton, a founder of Burger King, died on April 3 in Miami at 90.

• Eastern Europe’s fast-growing economies have severe labor shortages, and growing numbers of robots. (NYT)

• Steve Wynn has settled a long-running lawsuit over a dissolved shareholders’ agreement with his ex-wife, Elaine Wynn. (WSJ)

• The S.E.C. is investigating Guggenheim Partners over the purchases of three California mansions and loans to a now-bankrupt retailer. (FT)

• Larry Fink is finally a billionaire. (Bloomberg)

• Robert Mercer gave up his police badge in Lake Arthur, N.M., but he’s now volunteering for Sheriff Chad Day of Yuma County, Colo. (Bloomberg)

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