Goldman Sachs (NYSE:GS) announced blockbuster earnings – the beat goes on – and the market yawned this morning. The Street has come to expect blockbuster earnings from Goldman. People in the industry also have come to expect wayward behavior not necessarily illegal – so current revelations and the SEC lawsuit also means the beat goes on. The supposedly impartial anchor-geniuses on CNBC were defending GS as early as yesterday morning. Jim Cramer has bought platform shoes to add to the height of his soapbox, and everyone is screaming “cheap,” “bounce,” and “unfair.” Not to mention that everyone assumes GS’ attorneys will beat the government attorneys. I am not so sure about that assumption.
But maybe the beat will not go on. Here are a few serious negatives to consider when looking at GS, which many see now as “cheap” and ready for a bounce up.
1. Reports came out today revealing that Goldman had been in intense negotiations with the SEC for five months – a surprise to everyone who has bought GS stock over that period of time. Would you buy stock in a company negotiating a deal with the SEC that, if the deal forced GS to admit wrongdoing, would open the company to a flood of lawsuits? Or, if it did not settle it would end up in court and, if a loser in court, would open it up to that proverbial flood of lawsuits? Not me – not many – so here come more lawsuits over shareholder fraud. It is bound to happen, and it should. For, while a problem with the SEC may not be material to the long term financial future of the company, it sure is material to the value of the company – as measured by its stock price – on any given day.
2. The Europeans are furious – their taypayers got hit for about a billion bucks in bailout money due to the CDOs at the center of the current imbroglio. And they listen far less to lobbyists than our chaps on Congress. Gordon Brown was particularly forceful – goes with the upcoming election, I guess – but other leaders are following suit and you can expect investigations to begin popping up everywhere. At stake are more than legal fees – some countries may take aim at barring Goldman from working on sovereign debt issuance. Another problem for Greece... you guessed it, GS is neck deep in helping the Greeks fleece more investors. As they did in the past, helping the Greeks mask the true level of their debt from EC authorities – and investors.
3. GS earnings may not hold up in the second half of the year due to a market driven slowdown in the growth of their trading business and the potential for shyness to creep into customers use of GS for investment banking and related activities.
Bottom line: GS is not an easy stock to short; it is a tremendous profit machine and still the darling of many on the Street. And once this thing is resolved, it will go back to running rings around regulators – legally – and printing profits. But this problem may take years to leave headlines and customer meetings and if you have to choose between going long or going short, and staying neutral was not an option, the short side holds more potential over the next few months than the upside.