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Goldman Sachs Latest: Vindicates BoomBustBlog Research, Disappoints Sell Side Cheerleaders, Shows GS Is Just A Bank After All - an overvalued one at that
Goldman Sachs posted a 53 percent decline in quarterly profit, due in
large part to the reversion to mean of their outsized trading profits
over the last several quarters – as duly warned in the BoomBustBlog
research reports. As per CNBC:
Fourth-quarter net income after
payment of preferred stock dividends totaled $2.23 billion, or $3.79 per
share, compared with $4.79 billion, or $8.20, a year earlier. Net
revenue fell 10 percent to $8.64 billion.
Analysts on average expected profit of $3.76 per share on revenue of $9 billion, according to Thomson Reuters I/B/E/S.
Net revenue dropped sharply, as we anticipated as well.
Net revenue in fixed income, currency
and commodities slid 39 percent from the third quarter to $1.64
billion, reflecting what Goldman called “generally low client activity
levels.”
The Goldman, et. al. story is not over yet. There is still a material
amount of legacy assets (losses) to be recognized at market value. The
market is not returning to the point of inception of this stuff, and the
true extent of the losses have yet to be taken. I have been uber
bearish from this perspective, yet market prices appeared to disagree.
The problem was simply a matter of gross, coordinated misrepresentation
(a fancy way of saying “lying, on a large scale – and with the cooperation of regulators“).
I was absolutely correct, and now that the truth has come out, will
there be any rule of law? Let’s reminisce through referencing several
posts from 2008 wherein I made clear that Goldman Sachs was much riskier
than practically ANYBODY on the street and in the media recognized…
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
- Reggie Middleton’s Goldman Sach’s Stress Test: Breaking Ranks with the Crowd Once Again!
- Who is the Newest Riskiest Bank on the Street?
After all, it’s not like they paid 10 points to Old Man Buffet for
the hell of it. All of a sudden, sunlight started shining everywhere!
Where did the sun rise from? Goldman’s apparently captured friends in
high places of regulation. Let’s revisit the FASB tale: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules .
Remember, the change of these rules to the status of straight silliness
what kicked off one of the greatest bear market rallies in the history
of US publicly traded stocks. Now, nearly everything financial (as it
relates to M2M) is overvalued.
It looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! Friday, January 14th, 2011.
Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“
and I did it without being privvy to Goldman’s financial innards. It
was more or less common damn sense. Goldman and its employees do not
walk on water, they do not shit gold, and they cannot perform miracles.
If one takes an objective approach to their equity analysis, and simple
plug the numbers into a spreadsheet (objectively) you would have come up
with the exact same conclusions that I gave my subscribers all of these years. Let’s reminisce, shall we?
So, what is GS if you strip it of its government
protected, name branded hedge fund status. Well, my subscribers already
know. Let’ take a peak into one of their subscription documents (Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb
– 131 pages). I believe many with short term memory actually forgot
what got this bank into trouble in the first place, and exactly how it
created the perception that it got out of trouble. The (Off) Balance
Sheet!!!
Contrary to popular belief, it does not
appear that Goldman is a superior risk manager as compared to the rest
of the Street. They may the same mistakes and had to accept the same
bailouts. They are apparently well connected though, because they have
one of the riskiest balance sheet compositions around yet managed to get
themselves insured and protected by the FDIC like a real bank. This
bank’s portfolio looked quite scary at the height of the bubble.
The perception of perfection, and the resultant overvaluation still persists, reference No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times… and the post that irked so many - Can
You Believe There Are Still Analysts Arguing How Undervalued Goldman
Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look
To
begin with , Goldman Sachs produces more accounting revenue and
accounting profits than its peers. This is because Goldman benefits from
virtual monopoly pricing and advantages in several markets. Despite
this advantage, when one factors in economic RISK and the cost of
capital, Goldman doesn’t fare nearly as well as the sell side makes it
seem. Of course, the sell side rarely attempts to quantify risk, which
is cool until reality rears its (sometimes ugly) head. Before we get to
risk adjust returns, let’s look at the simple accounting numbers and
attempt to throw some logic on them…
Above,
you see that GS has enjoyed a significant premium over its peers in
terms of book valuation. This premium has actually increased over the
past year. Let me be the one to remind you that no US company has every
survived a criminal judgment, none. Arther Anderson was driven into
bankruptcy from charges stemming from the Enron collapse, and that is
despite the fact that the Supreme Court overturned the guilty verdict!
Assuming, for the benefit of the doubt, GS can somehow set precedence,
or more realistically, criminal charges are not filed, we still have to
contend with:
- the SEC lawsuit
- the increased regulation, in particular the Volcker rule and derivatives oversight
- follow on litigation, which is virtually guaranteed, and virtually
guaranteed to be extremely expensive, time consuming, and distracting
from the core businesses. - a general decline in business since we are coming off of a
credit and risky asset boom and going into a sovereign debt crisis that
will make FICC much less predictable (seeThe Next Step in the Bank Implosion Cycle??? for a more on how this could end with the Pan-European Sovereign Debt Crisis drama unfolding).
Taking
all of this into consideration, you tell me… Does Goldman really
deserve to be trading at such a premium considering the myriad risks it
is currently exposed to PLUS the murky business and regulatory
environment? They are also losing talent on the sales side, and at the
MD level to boot. Today’s market is starting to see things the Reggie
Middleton way.
Now,
let’s factor in some more reality. No matter what your broker says
about accounting earnings and revenues, they don’t come free. They all
have a cost of capital attached to them. Let’s reference an excerpt
from When the Patina Fades… The Rise and Fall of Goldman Sachs???
GS
return on equity has declined substantially due to deleverage and is
only marginally higher than its current cost of capital. With ROE down
to c12% from c20% during pre-crisis levels, there is no way a stock with
high beta as GS could justify adequate returns to cover the inherent
risk. For GS to trade back at 200 it has to increase its leverage back
to pre-crisis levels to assume ROE of 20%. And for that GS has to either
increase its leverage back to 25x. With curbs on banks leverage this
seems highly unlikely. Without any increase in leverage and ROE, the
stock would only marginally cover returns to shareholders given that ROE
is c12%. Even based on consensus estimates the stock should trade at
about where it is trading right now, leaving no upside potential. Using
BoomBustBlog estimates, the valuation drops considerably since we take
into consideration a decrease in trading revenue or an increase in the
cost of funding in combination with a limitation of leverage due to the
impending global regulation coming down the pike.
Remember, practically everybody poo-poohed my research and opinion in 2008 when I said Goldman was drastically overvalued – Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis.
Those 600% to 1000% gains on the put options proved otherwise. Speaking
of which, those July 150 puts… Can you smell what the forensic analysis
is cookin’???
More on Goldman Sachs
- The BoomBustBlog Review of Goldman Sach’s 2nd Quarter, 2010 Performance: I Told You So!
- On Goldman’s Latest Earnings Results…
- What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…
- A Realistic View of Goldman Sachs and Their Latest Quarterly Results
- The Brown Stinky Stuff is Splattering Off the Fan Blades and Landing on That Shiny New Building on the West Side Highway.
- No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…
- advertisements -
Reggie, any comments on apple earnings and iPhone/iPad sales?!?!?!
No additional comment. Pretty much as expected. They did a good job. Curious to see what the next 4 quarters look like as competition ramps up, as I have explained in previous posts.
Interesting to see that they wisely deploy their cash as venture capital to fund suppliers and lock up the markets. Something that was necessary for it is dangerous to rely on your biggest competitors to build the most important parts of your most important product (Samsung and LG).
"Reggie, the deeper question I have is when does the trust-busting start on these banks?"
Obama invited 'top' CEOs to meet with Mr. Hu at the White House. All of the CEOs are currently or have in the past worked for either the 'Squid' or GE. What we have is a Corpacracy. Where big government and big corporations become one.
Democrats hate big coporations and Republicans hate big government but they are all too stupid to realize they are the same thing.
If I'm not mistaken, Reggie modeled that fancy 'stache from 70s porn star Harry Reems ... Geraldo Rivera sports a similar but slightly gaudier model. (In fact, Geraldo has "the look" of a 70s porn star, he may have missed his calling, or simply been born a bit too late.) Think Ron Jeremy at the one end of the 'stache-flamboyancy spectrum and Harry/Geraldo at the other.
Anyway, just about time for the afternoon ramp job in financials to begin ... 10 ... 9 ... 8 ... 7 ...
You are simply one of the most Honest People in todays Market... Your work product is flawless and your delivery entertaining... I Sincerely Thank You for sharing with the World Reggie and as always... I still love that 1970's porn stache'.
God Bless You and Yours Reggie as always, JW
So, we should expect a fit of pique and they will short the market...
DavidC
Long time lurker, first time poster to ZH (3 days for an account??!).
Reggie, the deeper question I have is when does the trust-busting start on these banks?
It happens when someone really important really wants their money back, and the captured interests in government and regulatory bodies can no longer kick the can down the road.
When pigs fly? TBTFs have gotten bigger since the big blowout in 2008 thanks to the Treasury and the Fed. To infinity and beyond!
Golden Slacks IS a bank? Well where can I sign up for a checking account and debit card?
There are rumors that the Giant Squid has implemented the tightest and most comprehensive security measures of any 'corporation' (is that what Goldman Sachs is?; I thought it was a branch of government) in the U.S.
I wonder why...
Goldman... is an investment bank... with a 0% FED Window to draw from...