Lockstep Investing

Q4 Outlook: Real Life Stress Tests Begin

Woops! I hope it was a small position. It sounds like you did not hedge it at all.

How to Profit from Goldman Sachs

Jhdec, Buffett made his investment before the government did.

How to Profit from Goldman Sachs

To BS...

I see you are starting to understand my position more.

Let me clarify some things to give you an even better perspective.

I think I should have been more accurate in describing credit events rather than BK because credit events will occur in times of distress and gov intervention (i.e. Freddie, Fannie) and cause just as much harm as the BK itself to the credit environment.

1) Preferred pricing

If you think putting in a price 30% lower than today's price is meaningless, once again, you have not been watching the behaviour of the income security markets recently. Every time there has been a major credit event this year corporate security spreads blow out wider. Do you actually think GM, Chrysler, or AIG getting government infusions will not end up with a credit event for the bond holders there? Do you appreciate what that will do to the confidence in the credit market as a whole? You, my most appreciated commenter, are nieve.

2) "I believe your premise is flawed. There's not likely to be another major bankruptcy among financials;"

Oh really? What about the institutions that did not get TARP? What about European banks? What about Asian banks (i.e. the Citigroup South Korean subsidiary that needed a $1B infusion just weeks ago)?
What about hedge funds that are counterparties on baskets of CDS that are facing massive redemptions?

More importantly, as I mentioned above, credit events such as the bailout of Freddie and Fannie, AIG, Citi are just as damaging to the income security market. So you do not need the bankruptcy to happen, just the threat of a major institution facing problems is enough to cause spreads to widen. Just watch Bank of America, Wells Fargo, and JP Morgan this year. There will be a short attack on all of them during the year.

3) What happens when you own the puts and the credit event occurs?

This is where we differ on the outlook for GS. I don't look at book value for GS, that is irrelevant. It is operation with leveraged positions with no access to working capital, only equity to sell. It is a broker with huge counterparty risk, political risk, and directional risk that no public information can quantify. $40 is not a hard milestone to reach with a major blow up.

I just want my puts to be hedged as the stock falls. Sure I will probably wind down my puts as it falls, that is only prudent. But I also want to benefit from the "white knight event". Both scenarios are from MHO very likely.

How to Profit from Goldman Sachs

Mr BS,


1) Regarding the Buffet's preferred investment: If Buffett thinks that GS will continue to be able to pay the preferred, then it is logical to get on the same level of the capital structure. The comparing the terms Buffett got with your own is irrelevant when you are looking at the security of your own investment. The key thing is making sure GS pays out even through short selling attacks and economic uncertainty.

2) As for the price proposed for buying the preferred, it seems we are at odds of how to observe the market condition. With every major credit event in 2008 there was increased uncertainty of leveraged institutions to stay solvent. There will be more in 2009, and with each one there will be another opportunity to buy income securities at an increased discount. So what if GS-A has bounced up because of Treas-Corp yield spreads in the last two months? One major BK event in the market will cause the spreads to explode again. This will be the time to buy. This is the logic in the preferred price I put forward.

3) The put price is a great place to get in from a technical perspective and in terms of value. The key for me is my belief that the markets have more credit blowups coming sooner rather than later. In which case, $9 YFTMK are cheap.

4) As for the order of the purchase, I don't think pair positions need to be purchase simultaneously. I don't have VaR measures constraining my positions, so I can be more lenient with approach.

Remember the premise, GS is on a time clock to completely overhaul to a much less profitable business model. There is only downside from a income perspective, but the market valuation is the part to be hedged using different parts of the capital structure. The preferreds happen to be the volatility most similar to the common shares of GS.

Goldman Sachs Beaten, Buffett Down $2 Billion

Great summary of what is swirling around Goldman Sachs.

Cramer's Lightning Round - Who Needs Citi? (10/28/08)

Haters, all of you.

Cramer has been dogging Citi for two years now.

Bank of America has a huge derivative book, but it is focused on industrial credit default swaps, not residential mortgage backed securities like Bear Sterns, UBS, Lehman and the rest.

Citi put the seven SIVs on the balance sheet and has been too bloated do any transaction since. It is a ward of the Federal Reserve and is just a silent version of AIG waiting for unwind.

Goldman Sachs: Buffett's the Milkman and He Always Delivers

What? Are you nuts? "This sets a floor price on the common stock" No it does not. It is just a call option if GS survives this mess intact or gets bought out by someone who wants to retire the debt. But if this sex change (read: business model change) does not work out as planned, GS stock will continue to decline and the warrant is worthless but the dividends keep paying to the end. Warren is still taking risk and GS still has significant downside risk.

Profit Plays for the End of the 'Fail-and Bail' Cycle

This article is horrible! "This is not confined to Lehman as I predicted last week". UGGHH!! Who didn't know that!

There is absolutely no insight in this post. None.

You do so much better in emerging markets analysis.