Watching Goldman Sachs
February 19, 2008
By Greg Sushinsky
There are many ways to watch the markets, many methods and
indicators traders and investors use to gauge where the markets
might be going, some technical and statistical measures, others
more intuitive, and some that are a combination of both. Some of
these are in depth, highly sophisticated and complex, while others
are not so much.
One indicator of the broader markets that gives professionals a
feel for the direction of things is monitoring investment banking and
brokerage stocks. The reasons for this are simple: when the
markets are robust, investors and traders flush with cash pour more
money into stocks, hence the brokerages, mutual funds and the like
reap the benefits of this activity. The bull markets are reflected in
the bull market which happens in brokerage stocks. This links Main
Street with Wall Street.
On the Wall Street level, professional investors and traders like
to look at the investment banks. Investment banking involves
professional institutional stock and bond trading in all its simplest
and most exotic forms, from purchasing shares of well known large
cap stocks to managing hedge funds and everything in between.
Also, debt underwriting, initial public offerings, and managing assets
of high-end clients is a large feature of Wall Street investment
banks. When they are robust, when the Wall Street money firms
experience good times, you can be sure the bulls are running in the
markets.
So with all the downturn in the credit market and the erosion last
year of such mega-banks as Citigroup, with this virally spread to
stocks and the markets overall, it’s important to note how the
investment banking firms were affected. All were touched, including
such well known names as Merrill Lynch (NYSE: MER), Lehman
Brothers (NYSE: LEH), and Bear Stearns (NYSE: BSC). All faced a
downturn in business and their prospects—perhaps Bear Stearns
worst of all--and their stock prices subsequently showed it. The
flagship of this fleet, however, Goldman Sachs Group, Inc. (NYSE:
GS) had remained relatively unscathed.
While the other firms were writing down billions of dollars in bad
subrpimre loans, (worldwide, banks and investment banks had
written down approximately $150 billion), Goldman showed a $3.17
B fourth quarter profit, this in the face of its competitors’ mounting
losses. Although its stock price had fallen along with the others, in
Goldman’s case from a twelve-month high of 250 down under 200,
its earnings prospects remained surprisingly good, unlike the other
investment banks and global banks. It was expected to surprisingly
keep earnings aloft for the first quarter, unlike its competitors.
After the fourth-quarter solid earnings report, however, Goldman
reported it may have to write down as much as $1.7 to $3 billion or
more in bad debt for its first quarter upcoming (reporting next
month), which will significantly dent projected earnings. The original
EPS estimates in the $5 plus range have now fallen under the $4
mark, and like all of these write downs, investors and traders hold
their breath, as news of write downs seems to come like a ball
bouncing down steps, observers watching and wondering when the
ball will stop. So traders and investors are in these times on high
alert.
What does it mean? Well, for one thing, even a great company
such as Goldman Sachs, which by Wall Street accounts features
some of the finest high-finance talent in the world, cannot fully
escape the secular downdraft that has blown its way through the
credit markets and the rippling effects it so inexorably has worked on
the capital markets as a whole.
With Goldman’s prospects for the near-term downsized, it also
shows that these events and their subsequent bearish
consequences will continue to take some time to work their way
through the markets. On the positive side, Goldman has still fared
far better than its competitors, so it is still well positioned to be on
the head end of the recovery in investment banking and the markets
when that turn occurs. Goldman will likely lead the investment banks
and power ahead signalling the better health of the markets into not
only recovery but their next bullish phase, whenever that comes.
Keep watching Goldman for signs.
February 19, 2008
By Greg Sushinsky
There are many ways to watch the markets, many methods and
indicators traders and investors use to gauge where the markets
might be going, some technical and statistical measures, others
more intuitive, and some that are a combination of both. Some of
these are in depth, highly sophisticated and complex, while others
are not so much.
One indicator of the broader markets that gives professionals a
feel for the direction of things is monitoring investment banking and
brokerage stocks. The reasons for this are simple: when the
markets are robust, investors and traders flush with cash pour more
money into stocks, hence the brokerages, mutual funds and the like
reap the benefits of this activity. The bull markets are reflected in
the bull market which happens in brokerage stocks. This links Main
Street with Wall Street.
On the Wall Street level, professional investors and traders like
to look at the investment banks. Investment banking involves
professional institutional stock and bond trading in all its simplest
and most exotic forms, from purchasing shares of well known large
cap stocks to managing hedge funds and everything in between.
Also, debt underwriting, initial public offerings, and managing assets
of high-end clients is a large feature of Wall Street investment
banks. When they are robust, when the Wall Street money firms
experience good times, you can be sure the bulls are running in the
markets.
So with all the downturn in the credit market and the erosion last
year of such mega-banks as Citigroup, with this virally spread to
stocks and the markets overall, it’s important to note how the
investment banking firms were affected. All were touched, including
such well known names as Merrill Lynch (NYSE: MER), Lehman
Brothers (NYSE: LEH), and Bear Stearns (NYSE: BSC). All faced a
downturn in business and their prospects—perhaps Bear Stearns
worst of all--and their stock prices subsequently showed it. The
flagship of this fleet, however, Goldman Sachs Group, Inc. (NYSE:
GS) had remained relatively unscathed.
While the other firms were writing down billions of dollars in bad
subrpimre loans, (worldwide, banks and investment banks had
written down approximately $150 billion), Goldman showed a $3.17
B fourth quarter profit, this in the face of its competitors’ mounting
losses. Although its stock price had fallen along with the others, in
Goldman’s case from a twelve-month high of 250 down under 200,
its earnings prospects remained surprisingly good, unlike the other
investment banks and global banks. It was expected to surprisingly
keep earnings aloft for the first quarter, unlike its competitors.
After the fourth-quarter solid earnings report, however, Goldman
reported it may have to write down as much as $1.7 to $3 billion or
more in bad debt for its first quarter upcoming (reporting next
month), which will significantly dent projected earnings. The original
EPS estimates in the $5 plus range have now fallen under the $4
mark, and like all of these write downs, investors and traders hold
their breath, as news of write downs seems to come like a ball
bouncing down steps, observers watching and wondering when the
ball will stop. So traders and investors are in these times on high
alert.
What does it mean? Well, for one thing, even a great company
such as Goldman Sachs, which by Wall Street accounts features
some of the finest high-finance talent in the world, cannot fully
escape the secular downdraft that has blown its way through the
credit markets and the rippling effects it so inexorably has worked on
the capital markets as a whole.
With Goldman’s prospects for the near-term downsized, it also
shows that these events and their subsequent bearish
consequences will continue to take some time to work their way
through the markets. On the positive side, Goldman has still fared
far better than its competitors, so it is still well positioned to be on
the head end of the recovery in investment banking and the markets
when that turn occurs. Goldman will likely lead the investment banks
and power ahead signalling the better health of the markets into not
only recovery but their next bullish phase, whenever that comes.
Keep watching Goldman for signs.
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| Financial Articles by Greg Sushinsky |
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