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Readers Comments on Goldman's Valuation
A knowledgeable reader, who is currently a sell side analyst, questioned
me about using book value to value Goldman and investment banks in
general. He proposed using a formula that entails revenues as well due
to the fact that the main concern during the crisis was breakup value
while revenue visibility is clearer now that the crisis is over.
Without going into the merits of his valuation suggestion (I am allowing
him to make a more compete argument), this suggestion does
bring up several pertinent points. For one, while the crisis may be
over, the root causes of the crisis have went nowhere, and the
counterparty risk concentration is actually much worse than before. In
addition, not only is it political suicide to attempt to bailout another
bank, I think it is poor economic policy as well. Combining these two
assertions, it is not clear that we will not see anymore bank failures.
The probability of such has dropped considerably though.
In terms of revenue visibility, I simply don't see it as a positive.
Though we have more revenue visibility, that visibility points to lower
revenues since:
- we have just come out of a credit, financial asset and real asset
bubble; - we have just re-entered another financial asset bubble and an
attempted (and very foolish) reflation of the real asset bubble due to
Fed liquidity measures and virtually zero interest rate policies which
also happened to; - cause an unsustainable spike in banking revenues
.
As you can see from the graph above, Goldman's net revenues are nearly
twice what they were during the bubble, and are even higher than they
were at the PEAK of the bubble. This is, of course, after a drop to the
negative zone when the bubble actually popped. This unstustainable pop
was due primarily to the government dropping the cost of business for
Goldman to near zero. Notice the inverse relationship of interest
expense and net revenues. In addition, notice how quickly revenues have
dropped (the spike and fall are due to trading), despite the act that
rates have not risen yet. Goldman was able to ride higher revenues on
the back of higher rates due to a credit, financial and real asset
bubble. Without said bubbles, and with a potential rise in interest
rates, Goldman's revenues have nowhere to go but down from here.
So, the argument of book value versus net revenue is highly academic. I
see significant headwinds for Goldman's stock unless actual multiples
increase. Goldman is already trading at a significant premium to its
peers, despite the fact that the regulatory spirits are circling its
most prolific and profitable net revenue source - trading. Does it
deserve this premium moving forward?
See Reggie
Middleton
vs Goldman Sachs, Round 2 for the post that sparked this
disucssion. I will now start working on the Central European and China
info to ready it for distribution to the blog.
- advertisements -
Reggie, you say: "Without said bubbles, and with a potential rise in interest rates, Goldman's revenues have nowhere to go but down from here."
How do you know that? And how do you know the crisis is over? Maybe we are in the eye of a hurricane. There are lots of moving pieces, and forget the comparisons to the great depression, we have not ever been here before. In my opinion.
I never said the crisis was over. As a matter of fact, I said that we cannot say no further banks will fail, which is the exact opposite. As for how I GSs revenues will go down without further bubbles or continued low interest rates, well GS business is highly beta geared, and in the history of their public reporting I have not seen their revenues spike in a period of rising interest rates without asset bubbles. As of now, it is not how the business model is geared, at least to my knowledge.
have gone.
Awesome! Reggie, YOU are the greatest! Reggie vs. Goldman, the two big powerhouses collide. Who will come out the winner? Reggie! Reggie! Reggie! Of course.
Wow, your blog is sooooo wonderful. I cannot go one day without reading all the good stuff there. It's blinding. (Well worth the price of admission $$). Please post more links to your web pages they are great.
Reggie gives us all hope for banking change. The hope and change man.
You can't value highly a company that issues new stock like toilet paper.
I hate the F@@king capcha.
Just get youself an APP that does the work for you, keep it on your dektop. Might even learn some math along the way.
Don't forget to add in the value of the essentially unconstrained perpetual call that GS (et al for that matter) have on the full faith & credit of the US. That more than offsets a large part of the risks. Does it really matter what the revenues do when an institution is too important to fail?
Can you say-- MASSIVE and IN-YOUR FACE PONZI scheme??????
When will it just be called out for what it IS?