Goldman's Offering and the Recent Rally: Coincidence?

Includes: DIA, GS, KBE, QQQ, SPY, XLF
by: Ben El-Baz

This past Tuesday, Goldman Sachs Group Inc. (NYSE:GS) announced its sales of $5 billion in new stock in an effort to repay U.S. government bailout loans. Goldman is upset with the restrictions these loans place on Goldman’s business operations, and the company is very focused on repaying the government and getting out of these restrictions as soon as possible. Their solution: raise money from the capital markets.

On March 4th, Goldman’s shares hit a low of $73.95. On April 13th, Goldman’s shares, in the midst and on the back of this current rally, had risen to $130, a massive gain of 75% in just five weeks!

Accordingly, they were able Tuesday to price their $5 billion share sale at $123/share. In just over a month’s time, Goldman, due to run-up in their shares, was able to reduce dilution to shareholders by 40%. They only had to offer 60% as much stock at this price as they would have had to in early March to raise $5 billion (5 bln / 123 = 40 MM; 5 bln / 74 = 66.66 MM; 40/66.66 = 40% less shares needed to be sold).

Anyone who thinks this is just plain good luck for the financial giants at Goldman should probably avoid investing in the stock market. The big players have immeasurable influence, and this needs to be understood by small investors trying to gauge what’s going on.

Keep An Eye On the Big Guys

In most modern markets, the big players exert a huge influence on market prices. In the global economy, for example, rising gasoline demand from the massive U.S. can send oil prices skyrocketing. On a smaller scale, popular leaders in communities can turn masses away or towards businesses. In free markets, big players have a huge advantage: sometimes they can affect prices to the extent that prices are aligned in the player's best interests.

Huge players in the stock markets have incredible influence on prices. They have money. They employ the best of the best. People trust their opinions. If they need to sell, others will ride their backs and sell. If they turn into buyers, the motion shifts to mass buying. Huge players do not necessarily set prices, but instead their behavior works to influence the direction of market prices.

Prices that clear in any market are often based on information arbitrage, control, and herd behavior. The big guys usually have access to all these things. With respect to the stock market, private investors need to monitor the current rally closely, looking for any signs that large institutions are trying to manipulate sentiment to effect a more favorable capital raising environment.

Although there is no hard evidence that Goldman intentionally hyped up the market rally and the financial sector to get a better price on its offering, it would be very naïve to assume that they passively let the market determine the price of this massive dilution. Goldman is a global capital markets powerhouse; they know how to finesse the market, and they know how to raise money, no matter whom it affects.

Disclosure: no positions.