When good news isn't so good, and bad news isn't so bad

The two big items in today's financial news were the better-than-expected first quarter earnings reported by Goldman Sachs, and the worse-than-expected 1.1 percent decline in retail sales in March.

The market rewarded Goldman Sachs with a sell-off that sent its common stock down almost 12 percent. And some analysts are calling the retail sales decline an encouraging sign. So, what gives? Well, it turns out that Goldman's good earnings report isn't so good, and the decline in retail sales isn't so bad.

First, let's look at the Goldman Sachs. It's true that Goldman reported a $1.8 billion profit in the first quarter -- one of its highest ever. Why is this not good news? It's not good news because Goldman resorted to a little accounting gimmickry, and investors were not fooled. Goldman's 2008 fiscal year ended November 30, and Goldman switched to calendar year reporting this year. This switch allowed Goldman to effectively "skip" December in its earnings report. Not surprisingly, Goldman used December to write off $780 million in losses.

Goldman has also received $12.9 billion in counterparty payments from AIG. No one knows what the "AIG" effect was in December, and naturally Goldman isn't talking. Goldman probably benefited from the suspension of mark-to-market accounting rules as well. In the end, investors weren't buying it, and the stock plummeted. It's encouraging when investors act rationally.

That's not to say that Goldman's earning report is a bad sign for the economy. Goldman Sachs is one of a number of large banks that is heavily exposed and in danger of failing (the others are Wells Fargo, Bank of America, JPMorgan Chase, Citibank, HSBC USA, SunTrust, Compass, Fifth Third, and Huntington). But many other large and mid-sized banks are healthy, and that's good news.

This brings us to March's retail sales. It's true that retail sales fell when analysts had expected a small increase. This isn't as bad as it might seem. While retail sales fell, savings increased. This means that consumers are saving money and paying off debt. That's important because one of the bigger problems facing us is that consumers are over-extended with debt. Paying off debt is a good thing.

In the 90's boom, people used to talk about the "wealth effect" due to housing and the market. Well, now we have the reverse -- the poverty effect. To everyone's surprise, consumers are acting in a sane and logical manner; saving money and paying down debt. In the long run, this is a good thing. It means that we're getting healthier, we're heading in the right direction. But right now it means pain, and unfortunately this pain will probably be with us for a while.