Tuesday, April 14, 2009
GS Earnings
It will be interesting to watch how GS and the rest of the financials trade today. GS had a blowout quarter on revenues and earnings because of trading in their fixed income, currency and commodities book. However the rest of the statement was just okay and people were looking for more there. In addition GS just switched to a calendar quarter so these results are for Jan-Mar, leaving December in no man's land because that was after their last quarter of November 2008. Results in December were worse than what people were looking for and so book value, the key metric to value financials, did not grow sequentially even with these good results. Net, net these results are not enough to keep people in place in GS in the short term. However I would go long the financials that can and will pay back the TARP and short those that will not be able to do that. The reason is those that pay back the gubment will be able to 1) pay fair market value for talent and will therefore see an inflow of talent, 2) not have to run their business with the government over their shoulder telling them what to do and therefore will be able to take appropriate risks and earn an appropriate return and 3) will be able to participate in the PPIP program to buy distressed securities while using the government as the prime broker to let you lever up. So go long GS and JPM and maybe even MS and short BAC, C and WFC. I still think slight upward bias to the market through earnings season but early to mid May when the government requires many banks to riase capital will be the start of a retrace of some of the recent gains.
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Nice. Good advice about the TARP paybacks. I never thought of that. I've read some interesting articles about GS in the past week. Apparently their trading volume is astronomical compared to the other dealer/brokers. The grassy knoll theory is that GS is using gov't/AIG money to prop up the financials so all the banks can issue secondary offerings. I can post some links if you want to read. Any thoughts to this? The key would be once the secondaries are sold then gravity will take over and share prices will fall mightily due to both the dilution and overdue correction.
ReplyDeleteI agree with that thinking. There have been 11 financials I have seen raise capital over the past couple of weeks. 7/11 have underperformed the overall financials index and so that tells you that raising capital is being punished rather than being a positive indicator that the worst is behind these companies. You would think it would be in these stocks, but it isn't.
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