Goldman (GS): Staying Short

To me, this has been, and continues to be, the most straightforward secular short thesis in the Hedgeye Portfolio. Wall Street’s operating structure is in the process of changing, and those captive to its current structure will have perpetual headaches to deal with, including competing with Research Edge.

There was nothing that Goldman's CFO, David Viniar, said on the GS conference call today that convinces me that they are not operating under the same compromised, constrained, and conflicted structure that the industry is struggling with. Conversely, Viniar reminded us all that they are very much hostage to the investment banking cycle, and as captive as they have ever been to the volatility implied in their Principal and Prop P&L's. It would have been interesting to get one of their prop traders on the conference call – but these guys aren’t into the transparency thing.

Goldman Sachs is a compensation structure that is proving to make a lot of money in bull markets, and losing an undeterminable amount in down markets. They have not been public across cycles of economic crisis, so the jury is still out on how much money they can lose peak to trough. Today, they printed a down -40% number in their investment banking division and a nasty -67% one in their Trading & Principal division. While Viniar admitted on the call that they may take down risk in a "tactical" way, he refused to imply that they will change their strategies. They don’t consider risk in the same way that I proactively manage it, so this is confusing to me altogether.

There are levered long bull market strategies, and then there are those that can protect and preserve capital in times like this. Great investors evolve. Goldman's prop businesses sound like they don't think they need to. That's plain scary, and I am excited to wakeup competing them every day. They have nothing but market share to give us.

The stock has rallied from $118/share on the open. You should sell it here. On Sunday, my downside target was $147.43. As the facts change, I do, and after listening to their conference call today, I'm going to move that immediate target price to $117.72.

KM

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