Barrons Bears

As readers know, I recently went long Goldman Sachs versus my Bank of America short. My thesis was that I would much rather own the hated Goldman Sachs which has actual earnings versus everyone's favorite stock, Bank of America, which has lots of "normalized earnings" a few years out. This weekend a money manager recommended shorting Goldman in Barron's.
We're essentially short the political economy, and the most politically connected firm is Goldman Sachs [GS]. It has two sides: a highly secretive and profitable trading operation, and a more pedestrian public business. Our suspicion is that their secret sauce is access to friends in high places, and that the model breaks when it either flies too close to the sun or a public backlash opens them up to scrutiny. Trading and principal investments account for 67% of net revenue this year, the highest level ever. Goldman, aggressively plying the risk trade, is vulnerable to the next leg down.
I almost fell off my chair when I read the recommendation. Shorting a stock because of a "suspicion"? I understand not buying a stock because of a "suspicion" but going out and shorting a stock based on "suspicion" has to be one of the silliest things I have heard recently and another reason to believe Goldman is set to outperform other banks in the near term.


Anonymous said...

You know that GS trades at 35 times earnings. Let's hope that is forward earnings. If it's a current earnings, you have an even weaker case as a long in my opinion.

And that's only because as we've witnessed GS generated 2/3's of their net revenue from proprietary trading and their internal hedgefunds, and I believe the market in no way expects 2010 to have a 67% jump in the market from low to high. It will be a difficult case for investors to feel confident that GS will generate the kind of trading gains as it did this year for next year.

Tsachy Mishal said...

GS is going to earn nearly $20 a share in the year ending this week. They trade at less than 8 times.

PJ said...

The suspicion is a near certainty. They make money every day but one in a quarter -- that's not risk taking, that's a rigged bet. They are the market manipulation arm of the Obama Treasury & Federal Reserve.

When the Treasury & Fed stop manipulatingy risk markets, their earnings get cut in half. Are they a reasonable bet at 16 x 2011 earnings, with a very risky real estate portfolio that could blow up? You can make a case for the short position.

I do agree that an insolvent bank with a $132 bn market cap is a more attractive short than a solvent trading firm / hedge fund with an $84 bn market cap. The first can go to zero, the last at most will go to half. But I doubt those guys will get hurt badliy shorting GS. It's at peak earnings.