Is Goldman Really Different?
Take a look at a YTD Goldman Sachs Chart. Especially zero in on the last 6 weeks (GS 2 Month Chart). Notice the zigging and zagging:
- After closing around $248 on Wednesday October 31st, Goldman’s shares sold off over the next 6 trading days, closing around $210 on Thursday November 8th.
- The shares then turned around and rallied over the next 3 days, opening around $240 on Wednesday November 14th.
- Then they sold off again, closing back around $210 on Wednesday November 21st before….
- Rallying back up to around $233 at the open on Friday November 30th.
- They came into the Fed meeting last Tuesday around $225 after which they sold off to their present level around $209 (Mon 12/17, Close).
Goldman’s shares are trading in a range between $200 and $240 over the last 6 or 7 weeks. And the moves within that range are sudden and large.
I think the question being asked by Goldman’s chart is: Is Goldman really different? Are they really going to escape the mortgage meltdown that has resulted in multil billion dollar writedowns at other investment banks?
When some news suggests they are different, the stock rallies as if the problems afflicting other investment banks won’t affect Goldman. When some news or analysis suggests they aren’t different, the stock sells off as if Goldman too will be dragged into this whole mortgage mess and credit crunch.
So far, the stock has held up pretty well as investors have given Goldman the benefit of the doubt. But the back and forth action suggests that there is still a good deal of suspicion and doubt.
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So tomorrow mornings earnings report becomes important. How will the numbers come in? Did their mortgage traders make a lot of money again this quarter shorting subprime mortgage backed securities? Or have those gains all been booked already?
What makes analyzing Goldman so difficult is that the company no longer gets most of its revenue from investment banking.
Instead, most of its earnings come from trading for its own account, which is essentially a black box they call “Trading” and divide into “Fixed Income, Currencies and Commodities (FICC)” and “Equities”.
51% of their revenue over the last 4 quarters comes from trading, making Goldman essentially a huge hedge fund and raising the question: Will they continue to get their trades right?
Answering that question is almost impossible which makes analyzing Goldman an extremely difficult task. (On top of that, their gains from their investments sometimes depend on the prices they assign their positions from their own models for illiquid securities for which there is not a trustworthy market price. But that’s a whole other complicated issue).
The way the stock has been trading lately reflects this substantial uncertainty about Goldman’s business. Tomorrow’s earnings report should go some ways in clarifying things a bit going foward.
UPDATE (Tue 12/18, 1:05pm PST): This post was featured on The Wall Street Journal’s stock market blog MarketBeat today here.