GS: Your thoughts please

I think finance sector is still quite risky and volatile, although I believe the crisis is almost about to end.

As a long term investment I just think there is no conspiracy here; Goldman is truly in a league of its own.

I think GS is a great buy in these conditions.. no doubt they have been beaten up with the rest of them and as Tan mentioned they are the least damaged with bad loans.
It makes perfect sense to me that when the sector starts coming back GS and JPM will be the quickest gainers..

We know Goldman Sachs has a few secrets to share. The giant Wall Street investment bank has had a negative cash flow since 2001. And the cash losses have been enormous – roughly $200 billion. Goldman reported a $68 billion cash loss in 2007. Meanwhile, the firm keeps reporting record earnings, mostly from its trading positions...

But no one outside the company really knows how it does it. How do you earn profits but consistently lose cash? And if you're really making so much money with all of your smart trading, then why do you need to borrow so much money each year? (In 2007, Goldman added $80 billion in debt.) The constant cash losses and additions to debt have taken the firm's leverage from the mid-teens to the high 20s. And the move has sent Goldman's interest costs through the roof. It's now paying over $40 billion a year in interest.

Yes, ramigabai, with numbers like this, Goldman is truly is in a league of its own......

interesting, Dirt Harry, so actually it seems that GS trying to patch their big balance gaps(holes) with the profits on Sales&Trading business?

Hi Harry,
What's your take on JPM for this sector?
I don't know much about financial companies but an drawn to the smell of opportunity.
The way i see it JPM bought Bear Sterns for next to nothing. I'm also under the impression that JP weren't invested in junk-prime mortgage securities.. so didn't take too much of a beating financially..
What do you think?

tanh1o - Probably something along those lines, and whatever other creative accounting they can do to make them appear to be more insulated than others.

JPM.....Offhand, I don't know but I do think they had less exposure than others. That said, if we look at Merrill Lynch (MER), it's dumping its CDOs (collateralized debt obligations)... After telling clients – and itself – that they were worth $1, it’s selling them for 22 cents.

And the Singapore government........ It thought is scored a coup when it bought Merrill stock for $48 a share. Now, Merrill is forced to raise capital again. But this time it’s selling $8.5 billion worth of shares at only $22.50.

While I don't know exactly what's going on with JPM because I've haven't gotten into it, there's a general theme here: Financial companies lying/misstating proper valuations of their holdings. Therefore, I think you need to be very very careful before getting into the sector at this time. I'm avoiding it altogether. What if suddenly JPM's exposure was higher than expected, and worth less than stated. That's the problem here: They can't be trusted.

My advice: stay away for now. There are lots of option ARM mortgages that are only JUST NOW beginning to unwind (Phase 2 of the mortgage crisis is beginning). If the financials run up and you feel like you've missed out, my suggestion is to buy SKF and make it up on the contraction side when they fall back down. Speaking of which, SKF might be getting into "buy" territory. If these guys are constantly lying and they can't be trusted, then the best assessment in the world isn't going to help because you're basing judgments on bogus numbers.

One more thing.....if a lot of financials tanks.....JPM, rightly or wrongly, will most likely slide down with the rest of them.

Thanks for the insight Harry,
After reading your bio - it's interesting to see the differences in approach. My rational is:

JPM is worth now what it was 10 years ago.

the economy has doubled in 10 years.

JPM bought Bear Stearns for nothing.

5 years from now, will JPM still be standing? I'm betting it will and some time along that run JPM has got to be worth 3 times it's current valuation.

I respect your technical approach though, and think you make a lot of sense on this huge scam being reviled.. but the US government has proven it will provide a safety net worth billions. I think it's risky, but a good time to start picking up some JPM.

Cheers.

i am bearish on all financials for the next 6 months at least. we are smack dab in the middle of a housing glut and arguable recession, and the banks have shot up like it's all over. there is no fundamental reason for this runup, no matter how stable the bank may be (e.g. BAC, WFC, JPM). heading back down...

a few reasons I would stay away from GS:

1.. they are leveraged something like 20 to 1 and there is wiritng on the wall that all these banks will be more tightly regulated which will likely mean that GS will need to de-lever

2. I'm not a technical guy but there is evidence that financials are in a secular bear market..if thats the case GS will underperform for years

3. They are the only ones not to be hurt but at the end of the way they are not gods and they will be hit by this storm if its as serious as I think...so GS is a short if you u think the problems will get worst

4. They classified more assets as level 3 which is kind of suspect (level 3 you dont need to mark to market)

5. There are better things out there...buying GS now is like buying CSCO in 2002...ie get over it, the credit bubble has burst, the same way the tech bubble burst and when bubbles burst they take a VERY long time to clear...years not months

guliamo - Safety net or not, when the bad news comes out that there are billions more that need to be written down, those prices will tumble. I believe your analysis of JPM *could* be faulty because the financial companies have been CONSISTENTLY LYING about their exposure. Why you should now trust JPM in the middle of the crisis is beyond me. Read the other comments by shlomi and contrarian - they are right......dead on.

Here's a much better idea in my opinion: Avoid this troubled sector and go someplace else. There's plenty of money to be made in the market without risking your money with a bunch of lying companies that could be hiding more massive losses. This is a value trap. It appears good, until the real truth comes out. The U.S. acting as a safety net doesn't bail out JPM (yet) and will not stop a sharp price movement down if bad news is finally released.

Playing with financials right now is playing with fire.....and with all the volatility out there....why take extra chances? Buy some solid gainers without the problems, and sleep at night knowing they're not going to come out the next day and say "Oops...sorry, we just realized we have another$8 BILLION to write down."

And as far as techincals, I use them AFTER I do fundamental analysis. Check out a MACD indicator on JPM using a 12,26 setting, and you tell me if you notice a pattern over the past year!

As far as JPM being around in 5 years...sure. Do you think XOM will be around in 5 years? They just made $22B and I bet those are REAL profits. They also just hit a 52 week low and are trading at the same price when oil was just $65. Why not buy XOM over JPM? I believe the downside risks with JPM are just too great.

You can get my picks as I announce them for free, here:
http://www.freevaluestockpicks.com

dirtyharry -- curious as to whether you have an opinion on ETFC. They have been pretty transparent about their balance sheet. No subprime, no ARMs (AFAIK), just a rather big stack of HELOCs.

Their retail business is second to none in satisfaction and their turnaround plan is being executed on by new (and seemingly decent) management team. Net new accounts are up and new defaults are slowing. But the share price has been slaughtered more than any of them.

To me it's a risky play, sure, but the facts are much more on the table than with the larger, more complex financial institutions like GS and JPM.

hello all-

GS has been more careful than some of its competitors, but that's not saying much. Like harry, I am perplexed by their cash flow. And I have no idea how to value the (non-cash) assets on their books.

I'm inclined to think that we're not out of the woods yet. Citi got a black eye in a recent credit card securitization offering. Defaults by "prime" borrowers (unsurprisingly, those who took ARMs and interest-only mortgages) are increasing. In once-hot regional markets entire new subdivisions are now sitting empty. Builders will have to get those off their books, at a loss, to stay alive. In many places, house prices have a long way to fall.

Clearly, financials are priced as they are because of the huge amount of real uncertainty associated with them. However, plenty of other companies with more consistent earnings and reliable balance sheets are cheap, on general macroeconomic pessimism. It's in the second category that I see buying opportunities with a high potential return AND low risk of the permanent loss of capital.

Hi Harry,
The reason I'm not buying XOM is that although it is at it's 52 week low, that's only 20% under it's 52 week high..
I'm willing to assume the financial sector pain, if I might see some serious gain..
So far i am out of the sector keeping an eye on things. Thanks for your advice.

For a massive staple company like XOM, I find being "only 20% under its 52 week high" to be a rather large figure - but I guess that's just in the eye of the beholder. I'm in agreement with BenGraham that there are plenty of other companies that have consistent earnings and reliable balance sheets that are also cheap, and also have the potential to give some serious gains - hopefully without the risks of the financial sector.

I'm watching the sector too, but for now my main play is to swing trade SKF to the long side only. That is, I buy it after the financial sector has a brisk run up and I think the prices will fall back down.

Of all the Investment Banks I like GS the best. My concern with investment banks is that much of the past growth was in mortgage related business. And this business wasn't traditional mortgages of the Fannie Freddie type. Even so, the market likes GS which is clearly evident on a year-to-date chart. July's low is a "higher low" related as it relates to March. And while many stocks to include the major indices like DJIA and SP500 made "lower lows" (relative to March), GS was demanded by investors. When banking as a sector, begins to do just this, we will be out of the woods.

As much as GS technically looks to crack, I expect it run for its 200 MA in the coming days. Then possibly a retest of the July low. But all in all, if ones outlook is long term, I think GS is a good bet.

Phase 1 Score: 5/5
Volume Ratio 5/30 Day 61.6
P/E Ratio 8.4
P/E Relative Ratio 15.6
Proj EPS 1M Chg CFY -0.1
EPS Growth 5 Yr 43.8
Company Growth Ratio 2.0
Acc. Dist Current 74.4
Cash Flow Growth 5 Yr -199.1
Debt/Equity Ratio 7.7
Insider Trading -2.0
EPS Rank 50.4
Price Rank 62
Group Rank 7
Phase 2
F/E Score 3.00
Estimates 2.75
Financials 3.25
Price Pattern 1.50
Volatility 3.25
Stock Highlights
Industry $BROKER
Last Trade Size N/A
52 Week High 249.31
52 Week Low 139.74
EPS (ttm) 20.96
ERG 39.72
Shares Out 393.80
Est. Earnings Date Sep 15, 08
Dividend Yield 0.80
Previous Close 172.33

That was the analysis of InvestTools, Even though I'm critical on that, Cash Flow Growth and D/E make me worry...

Just traded down under the 50 day MA and you can't trust any estimates or fundamentals. I wouldn't be a buyer here. Maybe after a selloff.