Goldman's Earnings Miss Is Macro-Driven

Oct.21.11 | About: Goldman Sachs (GS)

Goldman Sachs (NYSE:GS) emerged from the global financial crisis stronger and more consolidated than ever. The global financial crisis is still showing its impact on the world economy, and even heavily capitalized giant bank Goldman is not exempt from the effects of the financial meltdown. Goldman on Tuesday, October 18, reported its third quarter earnings: a net loss of $428 million, which is only the second time it has posted a loss since going public in 1999.

Goldman Sachs, being the most admired and respected bank on Wall Street, had a tough quarter as the world financial markets were hit by news on European debt crisis and US economic slowdown. The financial environment has greatly changed since the event of the global financial crisis as new and tougher regulations have been enacted and introduced. The famous Volcker Rule, introduced in the Dodd-Frank Act of 2010, seek to separate certain investment activities such as proprietary trading and flow (client) trading and restrict banks’ involvement in risky activities including proprietary trading, hedge funds and private equity. Regulation changes and lower investors’ confidence have increased uncertainties within the financial markets. The recent protest on Wall Street, which has spread to other financial centers of the world, has also brought about an uncertain future of the capital markets.

Goldman Sachs’ third quarter loss was motivated by steep decline in revenues of its various investment portfolios. Goldman posted a 36% decline in revenue from trading fixed income, currency and commodities. Another major source of loss was its investment in Industrial and Commercial Bank of China, which generated a loss of $1.05 billion, and other losses related to equity and debt investments.

Goldman Sachs, one of the five Wall Street bulge-bracket investment banks, holds industrial leaderships within the global financial industry and can be gauged as benchmark in assessing performance of other banks and the industry as a whole. The US' biggest investment banks- JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), Citigroup Inc. (NYSE:C), Goldman and Morgan Stanley (NYSE:MS) together posted $13.5 billion in trading revenue, down by 35% from a year earlier, while investment banking revenue plunged 41% from the second quarter to $4.47 billion.

Meanwhile, Goldman Sachs' competitors posted much better results. JPMorgan reported quarterly earnings of $4.3 billion net income, equal to $1.02 per diluted share. Bank of America reported-quarter earnings of $6.2 billion net income, equal to $0.56 per diluted share. Citigroup reported quarterly net income of $3.8 billion, equal to $1.23 per diluted share. Morgan Stanley reported quarterly net income of $2.2 billion, equal to $1.14 per diluted share. Goldman Sachs beat Bank of America, Citigroup, and JPMorgan on the basis of equities trading revenue excluding debt valuation adjustments.

In such a turbulent environment, the performance of major banks tends to be environment-driven rather company-driven. Corporate performance is hampered by market sentiment and the macroeconomic environment. Investors should stay focused on upcoming developments that could impact on the future earnings of investment banks. The markets are mostly down, and would continue to be so in the coming weeks. As always, I recommend capital preservation strategy through safe-haven assets such as commodity investments while taking advantage of short-term market swings through short positions in well-diversified and low-correlation ETFs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.