Wednesday, December 19, 2007

Goldman beats profit forecasts, but...

(FT Alphaville) Goldman Sachs hinted at a possible end to its dream run of record-breaking profits in defiance of the credit squeeze, warning on Tuesday that difficult market conditions in November had clouded its outlook. The bank’s fourth-quarter results on Tuesday beat market forecasts by a wide margin. But David Viniar, CFO, warned that a continuation of November’s conditions would weigh on future profits. That outlook, coupled with fear that slowing US growth will hit all investment banks next year, helped drive down Goldman’s shares more than 4% to $200 by midday in New York. Morgan Stanley, which reports Wednesday, and Bear Stearns, which reports Thursday, are expected to post losses for the quarter following big mortgage-related writedowns. Lehman Brothers last week reported a 12% decline in Q4 earnings. Lex notes that Goldman operates in broadly the same businesses as its peers but trades on 2.5-times book value, compared with about 1.5-times for its nearest rival. “That is simply too big a premium to be sustainable given the vagaries of its business,” it concludes. “The gap looks set to narrow in 2008.”

Goldman good / Goldman bad

(FT Alphaville) Goldman Sachs reported its Q4s on Tuesday. You can view the filing here. Most of the financial press eulogised that, once again, Goldman proved itself the best bank on Wall Street. Net income was up 2 per cent at $3.22bn.

But oddly, Goldman’s stock fell - 3.4 per cent.

With the US commentariat at least, you’re either with ‘em or against ‘em.

Both the FT and the WSJ seem to damn with faint praise: warning of a “possible end” to Goldman’s “remarkable run” and asking how long the bank will dance.

Compare those to the Bloomberg report: ” record earnings in the worst quarter for Wall Street in six years.” In the blogs, CrossingWallStreet “doesn’t know how they do it”.

Picking up the stick from the last Goldman brouhaha, Bensteingate, Felix Salmon had nothing but praise for the “unstoppable” GS. Salmon also lambasted a Reuters reporter for picking up on the Goldman stock, and attributing it to some very general comments from CFO David Viniar:

We’re cautious about the near-term outlook for our businesses as we see dislocation in some of the world’s capital markets has continued.

Salmon is pretty firm when he says that its “silly” to blame the dip on Viniar’s comments, which couldn’t have come as a surprise to Goldman’s shareholders. Equally though, it’s perhaps not quite fair to say that Goldman’s stock was essentially moving in a “random” direction.

So, putting the commentariat aside, why did the stock dip?

Because Goldman, it seems, suffered a very nasty November, smoothed over by the aggregated Q4 figures. Viniar hinted cautiously at something in a conference call to analysts on Tuesday:

The weakest thing environmentally in the fourth quarter was the credit markets in November. It’s too early to tell in December.

Alone, that’s just caution talking. But then CNBC reported mid-afternoon that for Goldman, the last two weeks of November were “probably the worse in the firm’s history”.

From record best to record worst - enough to spook any shareholder. It seems that Goldman execs only operate in superlatives. The Goldman press office confirmed that November was “very difficult”.

The worry then - hardly assuaged by Viniar’s oblique comments - is that Goldman’s earnings have ended this Q4 as they may continue.

On another note, there’s a wry observation from Deal Journal too: the bank’s financial wizardry apparently doesn’t extend to the one investment it should know best. Goldman used money from its groaning treasury to buy back $9bn of its own stock last year…

With Goldman’s shares closing at $208.63 yesterday, the firm lost about $350 million on the investment.

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