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Reggie Middleton vs Goldman Sachs, Round 2 - the most overvalued bank on Wall Street???
Before I get started, I want all to realize that this is not Goldman
bashing piece. I think it is a [relatively] well run company, but its
PR machine appears to be from Kindergarten land, and the aura of
invincibility that it enjoys(ed?) is highly undeserved, as a consequence
its historical "aura-based" premium is absolutely unjustified. Case in
point...
On December 8th of last year, I penned "Reggie
Middleton vs Goldman Sachs, Round 1" wherein I challenged all to
take a critical look at exactly how much money was lost by Goldman
Sachs' clients. Well, here comes round 2, which is directed at Goldman
(over)valuation.
Three months ago I explicitly warned my
readers and subscribers about how outrageously priced Goldman Sachs
was: Get
Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on
Now! Monday, 19 October 2009.. Goldman was closed at
$186.10 that day.
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 expensive,
federally insured, publicly traded hedge fund with a strong lobby arm
and an even stronger brand management department.
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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...
I
consequently wrote "It
appears as if the patina on Goldman's Stock is fading..." wherein I
stated on the 15th of December (Goldman traded at $162.70):
"The amount of public resentment,
potential for political backlash (yes, even Goldman can get stabbed in
the back when a sacrificial lamb is needed), surfacing compensation
issues (remember, on the Street, compensation is everything - there
really is no company loyalty) and unwarranted premium added to this
company's share price over the last few quarters appear to be
culminating into another potential collapse in the company's share
price. This is not investment advice, simply an anecdotal
opinion.I believe the Goldman premium will be
reduced, along with its transient above market earnings
potential/advantage (when the edge that it has is assimilated into the
market). It probably cannot maintain its trading record for more than a
few quarters (98% profitable days of trading out of a month is
statistically impossible, but that is a story for another day), and its
other value drivers still don' t look very promising. Last but not
least, there is the matter of all of that trash still on the balance
sheet. If the market's euphoric bear rally breaks, which it looks like
it may (finally), then Goldman will break along with it. It has a long
way to fall if it does."
Well, here we
are on Jan 30th, 2010. Goldman's last closing price was $148.72, down
20% and primed to test their 52 week lows. Let's take a closer look at
Goldman's last quarter then remind subscribers why they pay for my
services. After all, just like in 2008, not one was talking about
shorting the indestructible, government protected, almighty, infallible,
uber-bailed out Goldman at their highs besides me (twice).
Reggie on Goldman's Q4 2009
My blog subscribers can
download the full quarterly review and opinio here: This reveiew has an
updated valuation componet for Goldman, takng into consideration what
we feel the stock is worth now, and also what could potentially happen
if the market continues to slide further and signficantly. See
GS 4Q09
Final Review and Updated Valuation 2010-02-01 03:04:55 528.52 Kb
Non-subscribers (which, you all
should be subscribers, but I'll forgive you for now), take note of
this excerpt and screen shot from the subscription report.
With
trading revenues dictating the overall profitability of investment
banks like Goldman Sachs, important concerns are being raised about the
business models of investment banks which are highly dependent on the
trading income (highly volatile under current conditions) to sustain
their profitability. Trading revenues (nearly 64% of the total net
revenues in FY09) form a substantial portion of Goldman’s revenue stream
and movements in this income stream determines the Company’s total
revenues overall profitability. In 2009, trading revenues amount to
nearly 63.9% of the total net revenues while the impact on earnings is
magnified with the total trading revenues amounting to 145.6% of the
total pre-tax income.
Comparing with the peers, the trading
revenues accounts for highest percentage of total revenues in case of
GS. The Company’s trading revenues are largely driven by the activity
levels as well as spreads, both of which are market determined and
decided by general macro-economic conditions. With nothing more
uncertain than the macro-economic conditions and markets in US, this
income stream is becoming increasingly volatile under the current
circumstances. The future sustainability of this income is further
dented by Obama’s recent policy announcements to curb proprietary
trading (trading with no client related transaction involved and
primarily done to earn profits by assuming greater trading risk). The
administration is working out increased restriction on the risk-taking
involved in earning prop trading revenues. The government is also
planning to put restrictions on hedge funds and private equity
transactions which will directly impact the revenues from Principal
Investments of Goldman Sachs. Thus, apart from the risk of regulatory
move that can seriously clamp down the trading revenues, the risk of
deterioration in the general market condition, increase in volatility or
a serious dislocation like the one witnessed in 2008 seriously
undermine the future profitability of GS.
Click to enlarge
full screen.
This multiple summary and graphs
above also explains how Obama effectively cut the compensation GS, and
to the lesser extent, othe banks employees. They are getting stock at
the peak of a banking bubble - particularly after the most recent run
up. I know I have heard pundits and analysts across the media saying
that employees are getting discounted stock, but it is stock discounted
off of a bubble at a time when banks are about to become worth a lot
less - that is unless they find a way to do something else that is very
productive contributory to growth (other than theirs) to replace extant
yet dwindling revenue streams. Just take a look at the facts and figures
above. They don't lie!
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.
You know what most people don't realize is that it looks quite
scary now as well.
If one were to strip out the revenues from prop trading, it would
leave bards some balance sheet issue. Again, I query, should virtual
hedge funds that pay out half of revenue as compensation trade at such
high premiums to the rest of the market? I don't think so, and I have
put my money behind the idea that the market will not think so in the
near future either.
More of Reggie on Goldman Sachs
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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!
Goldman Sachs Report
June 21, 2008 2008-10-20 16:48:01 361.18
Kb
Reggie
Middleton on Goldman Sachs' fourth quarter, 2008 results
Goldman Sachs - Buffet's strategic
investment and public offering 2008-09-26 02:29:15 895.36
Kb
GS ABS Inventory 2008-02-25 06:48:56 1.22
Mb
Goldman Sachs Valuation Model updated
for PPIP - Retail 2009-04-04 19:50:51 388.04
Kb
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take a look at MQG - the worlds most expensive investment bank
I would not be surprised if GS is shorting there own stock at this point !!! Next stop.. is taking it private. Say put the metal to the floor $100.00 more 93 octane... $75.00 Racing fuel... $50.00 aviation fuel. Burn Baby burn!!!
Anyone who doesn't see that Goldman is the epi-center of a GIANT world-wide ponzi scheme is completely BLIND!!
Just a matter of time before their lies unwind. It is so blatant!!
next edition: Reggie Middleton vs. the Dwarf Star = no on cares about your ego, Reggie. Get over it!
They need to do Mark to Market Accounting and be honest.
They don't know how to be honest...
Nice work. GS ego needs a big deflating anyway.
So you thought GS was a short at $186.
And you thought GS was a short at $70 (Dec 2008).
I'd say, you suck! Give it up.
If you thought it was a short at $70 and they earned $22 this year (and paid another $30/shr in comp)... what exactly do you do for a living?
Seems to me like they can produce earnings and cash to whatever degree they want... bc they can always lower comp.
I'd hesistate to be short.
OBAMA is in a MOVIE about hedgies. He is featured in a movie-- about greedy hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell (5 cents/share), I liked it because it exposes the dark side of Wall Street. DVD is everywhere but cheaper at www.stockshockmovie.com
Fundamentally, all those fuckers should be shorted. The question is, Will their servants come to their rescue?