Is it Too Late To Short Goldman?
Goldman Sachs (GS) announced earnings Tuesday morning that beat deeply depressed expectations. While the odds were looking good that Goldman’s results would be less than stellar, it nearly doubled those pessimistic expectations. And its stock has been falling all year – now down 9.4% since the end of 2010.
Perhaps investors have been anticipating bad news – after all, with the government bailouts of Wall Street a matter of history, the business of the government using Wall Street’s services to raise the capital to bail out Wall Street has evaporated. And the various unpleasant surprises -- from Japan's earthquake to Middle Eastern unrest -- have put traders in a so-called "risk off" posture.
Meanwhile Goldman has not been able to do enough trading for its own account -- a business it is curtailing a bit to comply with Dodd-Frank -- to make up the loss of revenue. Furthermore, the volume of non-trading business --- mergers, raising equity and debt, and asset management – remains subdued. Warren Buffett’s exit from his Goldman investment looks like a pretty good sell signal. But are prospects for Goldman so weak that it makes sense to bet on a decline in its stock price?
Based on its first quarter results, the answer appears to be no. According to BusinessWire, Goldman earned $1.56 a share on revenues of $11.9 billion. These results were way down from where they were in the first quarter of 2010. In 2010’s first quarter, Goldman earned $5.59 a share on $12.8 billion in revenue. Goldman’s reported 2011 first quarter EPS were 72% below last year and its revenues were 7% lower.
So why was Goldman stock up 2% in pre-market trading? It beat expectations. Specifically, Goldman had been expected to do much worse -- reporting 86% lower EPS to 81 cents a share and 20% lower revenues to $10.3 billion in the first quarter of 2011 -- compared to the $5.59 a share on $12.8 billion in revenue it earned in the first quarter of 2010, according to Dow Jones Newswire. Its actual EPS were 93% better than expected and its reported revenues were 16% higher than expected. Goldman was also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to the Galleon Group.
Goldman's earnings are expected to be way down from where they were in the first quarter of 2010. Last year, Goldman earned and it's expected to report 86% lower EPS and 20% lower revenues in the first quarter of 2011, according to Dow Jones Newswire. Goldman is also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to a Galleon Group insider trading indictment.
If Goldman raises guidance in its conference call, its stock price will soar when the market opens. Moreover, even though Goldman's trading revenues -- specifically the ones from fixed income, currencies and commodities, were expected to be down from 2010's record results – they actually fell 28% which was better than the expected 50% plunge, investment banking and advisory revenues grew at a 5% rate. In theory, the record $2 trillion in cash that piled up on corporate balance sheets in 2010 could lead to a big boom in merger activity as companies use their cash and borrowing capacity to expand into emerging markets.
These “upside risks” make a short bet against Goldman pretty risky. Although it will be difficult for Goldman to achieve the record results it enjoyed before it decided to stop trading for its own account -- and betting against its clients. Its best hope now is to ramp up its advisory business. But succeeding there would depend on its ability to control what its clients do.
And that will be harder than what it used to do -- trading on what I call "insidery information" -- legal insider-like information about its clients -- to profit for its own account.
Perhaps investors have been anticipating bad news – after all, with the government bailouts of Wall Street a matter of history, the business of the government using Wall Street’s services to raise the capital to bail out Wall Street has evaporated. And the various unpleasant surprises -- from Japan's earthquake to Middle Eastern unrest -- have put traders in a so-called "risk off" posture.
Meanwhile Goldman has not been able to do enough trading for its own account -- a business it is curtailing a bit to comply with Dodd-Frank -- to make up the loss of revenue. Furthermore, the volume of non-trading business --- mergers, raising equity and debt, and asset management – remains subdued. Warren Buffett’s exit from his Goldman investment looks like a pretty good sell signal. But are prospects for Goldman so weak that it makes sense to bet on a decline in its stock price?
Based on its first quarter results, the answer appears to be no. According to BusinessWire, Goldman earned $1.56 a share on revenues of $11.9 billion. These results were way down from where they were in the first quarter of 2010. In 2010’s first quarter, Goldman earned $5.59 a share on $12.8 billion in revenue. Goldman’s reported 2011 first quarter EPS were 72% below last year and its revenues were 7% lower.
So why was Goldman stock up 2% in pre-market trading? It beat expectations. Specifically, Goldman had been expected to do much worse -- reporting 86% lower EPS to 81 cents a share and 20% lower revenues to $10.3 billion in the first quarter of 2011 -- compared to the $5.59 a share on $12.8 billion in revenue it earned in the first quarter of 2010, according to Dow Jones Newswire. Its actual EPS were 93% better than expected and its reported revenues were 16% higher than expected. Goldman was also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to the Galleon Group.
Goldman's earnings are expected to be way down from where they were in the first quarter of 2010. Last year, Goldman earned and it's expected to report 86% lower EPS and 20% lower revenues in the first quarter of 2011, according to Dow Jones Newswire. Goldman is also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to a Galleon Group insider trading indictment.
If Goldman raises guidance in its conference call, its stock price will soar when the market opens. Moreover, even though Goldman's trading revenues -- specifically the ones from fixed income, currencies and commodities, were expected to be down from 2010's record results – they actually fell 28% which was better than the expected 50% plunge, investment banking and advisory revenues grew at a 5% rate. In theory, the record $2 trillion in cash that piled up on corporate balance sheets in 2010 could lead to a big boom in merger activity as companies use their cash and borrowing capacity to expand into emerging markets.
These “upside risks” make a short bet against Goldman pretty risky. Although it will be difficult for Goldman to achieve the record results it enjoyed before it decided to stop trading for its own account -- and betting against its clients. Its best hope now is to ramp up its advisory business. But succeeding there would depend on its ability to control what its clients do.
And that will be harder than what it used to do -- trading on what I call "insidery information" -- legal insider-like information about its clients -- to profit for its own account.
posted by petercohan at 4:43 AM
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