Opinion on  Goldman Sachs Group Inc The (GS)     Sector: Financial  >  Industry: Investment Services
Goldman Earnings to Fall Futher

Financial Stocks to Remain Under Pressure

While the perhaps heroic, certainly desperate actions of Ben Bernanke and the Federal Reserve bank have brought some relief to the Wall Street investment banks, commercial banks, and mortgage companies look for the relief to be very short lived.

In my opinion, the problems with the world's financial system, with the United States in the lead position, are just far greater than the solutions. In the end we will be lucky to avoid a financial meltdown.

The desperate nature of the Fed's recent actions should give us an idea as how close to the financial abyss we truly are. Exchanging government treasuries for toxic waste mostly worthless subprime mortgage and CDO paper and the like seems to be a bad exchange to me.

Cutting rates at a time when inflation is picking up and the dollar is in a strong downtrend risks a unhealthy dose of inflation, perhaps even hyperinflation, as consequences of that interest rate cutting action.
 
Bernanke's high level of activity (interference?) in the way a capitalist economy is supposed to work may well prove to be a disaster as events unfold. At some point the risk is high that he will make a tragic mistake. Perhaps he already has as the Bear Stearns bailout has enraged Bear Stearns investors and already the Fed is backpedaling as the $2.00 a share price paid by JP Morgan, demanded by the Fed,   is already subject to negotiation.

It is the trillions of dollars of hard to value, probably largely worthless, derivatives that threatens the world banking system. The likelihood of further serious problems, perhaps the failure of a few big banks, brought about as the derivatives market falls apart, is high.

I would sell the recent run up in the financial sector stocks.

Goldman will experience further pressure on earnings this year. Look for a 35% to 40% decline for the next quarter. 

I first sold GS on 3/24/08 at $179.00 a share. I am holding onto this short position.

The turmoil in world credit markets was caused in large part by the operations of GS and other investment banks in the conversion of mortgages taken out by people without the means to repay into AAA rated investments that were then distributed to careless investors across the world.  What financial magic by the Masters of the Universe!

Now by their own greed the investment bank model has been completely destroyed. GS has been forced by events to convert into a commercial bank. The high profit investment bank model is broken. In fact it no longer exists as Lehman Brothers (one of my other financial industry shorts) , Bear Stearns, and the former five major Wall Street investments  banks have resorted to bankruptcy or forced to accept government bailouts.

The profitable operating model that drove profits at GS no longer exists. Look for a continuation of falling profits and balance sheet stress at GS as the financial meltdown continues. There will be a big change in the evaluation of Gs as this reality sets in. with investors.

Do not be fooled by occasional rallies. GS and the stock market probably have as long way to go on the downside. The current meltdown is a take no prisoners event that will stun the world with its severity.