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Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!
In reviewing the last couple of quarter's results of Goldman
Sachs operating results, I have come to the conclusion that Goldman is
a Federally insured, publicly traded hedge fund!
Reggie Middleton on Goldman Sachs Preliminary 3Q09 results
Goldman Sachs generated net revenues of $12.4 bn in 3Q09 as compared to
$6.0 bn in 3Q08 and $13.8 bn in 2Q09. The revenues grew primarily on
back of strong performance in its trading and principal investment
segment while traditional investment banking arm and asset management
segment continued with its lacklustre performance.
The Company's core investment banking revenues declined to $899 mn
in 3Q09 from $1,294 mn in 3Q08 and $1,072 mn in 2Q09 with both
financial advisory and underwriting business delivering poor
performances. Revenues from the financial advisory business declined
47% y-o-y and 12% q-o-q to $325 mn in 3Q09 owing to slow down in
industry-wide M&A activities, while underwriting revenues declined
15% y-o-y and 46% q-o-q to $574 mn primarily due to lower debt
underwriting volumes.
Revenues from Trading and Principal Investments were $10,027 mn in
3Q09, down 7% compared with $10,784 mn in 2Q09 but were up
significantly over the corresponding quarter last year. Trading and
Principal Investment revenues were principally buoyed by strong trading
performance in its Fixed Income Currency and Commodity (FICC) segment
which surged to $5,991 mn compared with $1,595 mn in 3Q08 on back of
wide bid-ask spreads. Although bid-ask spreads compressed marginally in
3Q09 (which caused 12% q-o-q decline in FICC trading revenue) they
remain wide by historical standards. As industry wide competition
intensifies and bid-ask spread get restored to historical levels,
revenues from FICC segment could witness some pressure going forward.
As a note to all of those groupie types that believes Goldman walks on
water, the monopolistic dearth of competition will only last for so
long with a clear lack of barriers to entry. This bodes ill for a
company whose only valid value driver is predicated upon a lack of
competitors leaving wide operating margins.
Besides FICC, revenues from equities and principal investment also
contributed to higher trading revenues with their respective share of
$2,775 mn and $1,261 mn, respectively in 3Q09 compared with $1,562 mn
and $(453) mn in 3Q08, respectively. As
of September 30, 2008 revenues from Trading and Principal Investments
contributed to 71.1% of Goldman Sachs net revenues compared with 15.2%
for JP Morgan, 8.1% for Citi, 34.3% for Morgan Stanley and 16.3% for
BAC. Further, the GS' average daily VaR, a measure of the market risk
on its investment portfolio, was still higher at $208 mn at the end of
3Q09 as compared to $181 mn in 3Q08 - and this was with the no
competition Federal ZIRP (zero interest rate policy) subsidy. Thus,
as the free ride of historically cavernous bid/ask spreads continue to
normalize, one should expect significantly more volatility of earnings
in GS as compared to its competition.
The Asset Management segment reported a y-o-y 29.3% decline in
revenues to $1.5 bn as total assets under management dropped to $848 bn
versus $863 bn 3Q08 while yield on AUM declined to 0.11% in 3Q09 from
0.13% in 3Q08 due to decline in composition of high yielding assets (it appears as if there are some GS clients who are not eating the green shoots).
GS' net interest income increased 48.9% y-o-y to $1.7 bn during 3Q09 as
interest expense dropped 83% compared to 66% drop in interest income ~
most likely the result of extensive cost management and cutting, but
not truly discernable until the SEC reporting documents are released.
In line with increase in net revenues, compensation expenses increased
84.5% to $5,351 m in 3Q09 compared with $2,901 mn in 3Q08. Resultantly,
the ratio of compensation expenses-to-net revenues improved to 43.3% in
3Q09 from 48.0% in 3Q08. Non-compensation expenses increased 2% y-o-y
to $2,227 mn from $2,182 mn in 3Q08 with ratio of non-compensation
expenses to revenues improving substantially to 18.0% from 36.1% a year
ago.
In aggregate, GS' net income available to common shareholders'
increased to $3,028 bn, or $5.25 per share in 3Q09 versus $810 mn, or
$1.81 per share in 3Q08 and $2.7 bn, or $4.93 per share in 2Q09. The
bank's tangible book value per share increased to $92.7 in 3Q09 from
$83.1 in 3Q08 while book value per share improved to $101.2 in 3Q09
versus $94.8 in 3Q08.
On July 22, 2009 GS repurchased 12.2 mn shares from US Treasury
which was issued under US Treasury's TARP Capital Purchase Program for
$1.1 bn which resulted in a reduction of shareholders' equity. Although
GS' continues on its endeavour to de-lever its balance sheet the bank
still has a long way to go before it could boast of a healthy one. As
of 3Q09 the bank's tangible equity capital ratio stood at 6.1%,
implying a leverage of 16.4x while its toxic level 3 assets stood at
$50.0 bn, or 94% of its tangible equity.
Although GS' had beaten street expectations (which everyone at
BoomBustblog.com should recognized as the game that it is), the
company's share price has significantly run ahead off its fundamentals.
Since December 2008, the company's tangible book value per share has
increased by a modest 3.2% while its share price has increased by a
whopping 92.1% with its Price-to-Tangible Book value per share ratio
currently standing at 1.77x compared with 1.45x in 2Q09 and 0.45x in
4Q08. Based on closing price as of October 18, 2009, GS'
price-to-tangible book value per share is at 1.99x while average
price-to-tangible book value per of its peers stood is 1.55x, implying a premium of 28% for the Goldman Sachs brand name.
As I said, an expensic, federally insured, publicly traded hedge fund
with a strong lobby arm and an even stronger brand management
department.
Readers should take into consideration that this is the exact same
argument that I posed a year and a half ago when I first shorted
Goldman Sachs at $185! Where is it trading today? $186.43. This is
after it had to be rescued by the government for fear of collapse!
Let's revisit history with an excerpt from Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
Saturday, 05 July 2008, it's deja vu all over again...
I rode Goldman down to the $100 to $75 band, but it eventually bottomed somewhere around $50. Now it's right back where it started from, pre-bailout. Does it deserve to be there??? Inquiring minds want to know...
The Legacy Goldman Sachs direction neutral strategy empirical analysis is still available to Pro subscribers. Click 
Goldman Sachs Option Strategy Pro Analysis 2009-08-05 09:52:44 1.02 Mb to access or proceed to the downloads section. I will be providing a refresh of this analysis the third week in October.
Below is a complete listing of the fundamental research that we are
using to compile the direction neutral strategy analysis for the
tickers listed above. Some of it is free for non-subscribers. I would
recommend that pro subscribers reread the documents to brush up on my
take on the companies listed herein.
GS
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Free research and opinion
- Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, "Do you guys know who you're messin' with?"
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees
Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!
Who is the Newest Riskiest Bank on the Street?
More remium Stuff!
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Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
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Mr. Middleton, in no way am I trying to be racist nor make light of the horrendous crime that was slavery in America, but do you not see (tongue-in-cheek) how far America has come? In the past, the Black man or woman was slave to the white master. Now, in the interest of greater fairness, almost all of us are slaves to the new white master, who is Lloyd Blankfein and his Royal Family. We, the underserving many, brought these self-chosen few from the brink of disaster---a calamity entirely of their own making---and returned them to the exalted level to which they feel they deserve to be eternally accustomed. And we continue to serve them through ZIRP and a no-questions-asked, easy-come-easier-go Fed window, all the while knowing full well that if....nay, when---they fuck up again, as the Greek gods were oft known to do as well, we will toil and sweat and suffer the indignities that is our deserved lot in life to prop them up yet again.
I know my place. I'm not Rosa Parks. I'm no Medgar Evers. Just call me Uncle Tim's boy.
Well, doh.
I thought that when Paulson ran the US Treasury he ran that like a giant hedge fund too.
Nice job.
Trading higher now than when it was shorted just 18 months ago!
Leverage still at "16.4X", down from, what, 30x?
$50b of level 3 at 16.4X!
Meanwhile,
"Fixed Income Currency and Commodity (FICC) segment surged to $5,991 mn"..."net interest income increased 48.9% y-o-y to $1.7 bn"
The only cure we have to fear, is fear itself!
I went to buy lunch today (couple of vodkas) and the bastard wouldn't take gold
GS is earning a return on tangible equity of 23%, in the middle of a freaking depression, indicating that David Viniar's goal of "low 20s ROE through the cycle" is quite realistic
GS has a cost of equity of 12%
An investment bank's normalized P/B is given by ROE/Ke|n, so in the case of GS we have P/B ~ 23%/12% = 1.9x
GS TBPV =$93, so normalized value is ~$93*1.9 = $177
So, Goldman is not cheap, but nor is it egregiously overvalued at $185
You're using fundamentals to calculate a Share price?
Guess you still do your math with an abacus, refer to an umbrella as a bumbershoot, and wear your PBK pin on your vest.
Im no even pissed anymore, just loaded with gold and an real estate brochure for houses in the Gobi desert. Thank you for all your work Reggie, it is a fucking privilege to read it.