Merrill Lynch analyst Guy Moszkowski had some harsh words this morning for Goldman Sachs Group (NYSE: GS). Rather than a fourth-quarter profit of $2.98 per share, the analyst now expects Goldman to lose 49 cents per share during the quarter. If his prediction comes to pass, it will mark the bank holding company's first-ever quarterly loss as a public company.
While Moszkowski razored his price target on GS from $159 to $100, he maintained his Neutral opinion on the stock. The new target represents a premium of 8.1% to the stock's closing price last Friday. The analyst cites the "stressed" equities market as the primary driver behind his dramatically reduced outlook on Goldman.
In a note to clients, Moszkowski explained that Morgan Stanley's (NYSE: MS) business mix should allow it to weather the choppy market conditions better than Goldman. He trimmed his fourth-quarter earnings forecast on Morgan as well -- dropping his estimate from 72 to 36 cents per share -- but considers the stock a Buy.
The analyst stated, "We still think GS remains in many ways at the forefront of the capital markets industry, but if it can't consistently produce a premium return on equity, it's not going to be able to continue to have the premium valuation multiple that it has enjoyed." As of last Friday's close, Goldman's forward price-to-earnings ratio of 7.63 dwarfed Morgan's ratio of 4.03.
In today's session, MS is up about 5%, compared to Goldman's gain of about 1.2%.
This morning, I speculated that Morgan Stanley (NYSE: MS) might reunite with its former parent -- JPMorgan Chase (NYSE: JPM). It looks like I was wrong about that. But the basic idea of finding a merger partner for Morgan Stanley is still alive. The New York Times reports that Wachovia (NYSE: WB) has been in talks with Morgan Stanley about a possible combination.
Morgan Stanley's stock fell another 24% today and Washington Mutual (NYSE: WM), about which I posted this morning, hired Goldman Sachs (NYSE: GS) to find a buyer. So it could be that less than a decade after Congress repealed the Glass-Steagall act -- which prohibited investment and commercial banks from combining -- we will solve our current catastrophic financial problems by reconstituting the very thing that contributed so heavily to the Great Depression.
This looks to me like a desperate move that is only possible because commercial banks were required -- due to their regulations -- to hold more capital than investment banks. The investment banks were vulnerable because they bought such a huge volume of complex securities that nobody now wants to buy. And the decline in the value of these securities is wiping out the slim sliver of capital that they held.
And now what could become history's biggest transfer of tax dollars to bail out bad lending begins. Last month Congress passed a bill that gave the Treasury Department $800 billion to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). And while it is unclear how much money will be used to bail them out, the general outlines of the soon-to-be-announced terms are becoming clearer than they were last night.
The New York Times and The Washington Post report on five key features as follows:
Government bankruptcy. Fannie and Freddie will be taken under a conservatorship -- which is similar to a bankruptcy wherein a trustee operates the company so it can be fixed and ultimately sold back to public investors. The bailout would reduce the value of their common and preferred shares "to little or nothing," according to the Times.
Taxpayers bailout defaulted mortgages. Some share of the $800 billion in taxpayer funds will be used to pay "any losses on mortgages [Fannie and Freddie] own or guarantee," according to the Times.
Payouts on a quarterly basis depending on reported results. Treasury is trying to dribble the bailout over time. "Instead of giving each company a big capital infusion up front, the government could make quarterly injections as the companies' losses warrant. This would be an attempt to minimize the initial cost of the rescue," according to the Washington Post.
BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.
The hedge fund in question this time is Ospraie Fund, which invested in commodities like oil and gold. It "has lost 38% of its value since the start of the year." Gold is down 22% to $800 from its $1,030.80 an ounce high in March. Oil has tumbled 25% to $109 since peaking in July, according to BBC News. But 1440 Wall Street suggests that the biggest commodity culprit in Ospraie's demise was copper's tumble. The lesson here is that if a sufficient number of big money speculators get together and decide to, say, short the dollar and go long commodities, there will seem to them to have safety in numbers.
But when the government started investigating the cause of spiking oil prices, the trade got very unprofitable very fast. As I posted, the Commodities Futures Trading Commission (CFTC) recently found that 81% of oil trading volume was driven by speculation. Then we witnessed the failure of SemGroup and the indictment of Optiver Holding for manipulating energy prices -- those funds who were too slow to reverse their positions and got creamed.
Now eight large brokerage firms have settled with Auction Rate Securities (ARS) investors. This afternoon Bloomberg News reports Goldman Sachs (NYSE: GS) and Deutsche Bank settled with state regulators. Merrill Lynch & Co., Inc. (NYSE: MER) announced another prong of its settlement earlier in the day.
What are the terms of the settlement for the latest two? Bloomberg writes that "Goldman will buy back $1.5 billion of the securities and pay a $22.5 million fine. Deutsche Bank will redeem $1 billion of debt and was fined $15 million." In addition to the rogues gallery of big ARS issuers who have yet to settle, investigators are targeting medium-sized brokers -- Charles Schwab (NYSE: SCHW), Fidelity Investments and E*Trade Financial Corp. (NYSE: ETFC).
This leaves major ARS issuers lagging behind their peers. Here are three holdouts (with their 2007 municipal ARS issuance in parentheses):
Upset about paying $3.80 a gallon for gasoline? Hank Paulson, former Goldman Sachs Group (NYSE: GS) CEO, argued that it was all supply and demand so quit your bellyaching. I thought speculation was playing a big part -- traders who bought oil and sold the dollar to drive up the price. Indeed, a few months agao I found a source who thinks 60% of the volume was from speculators.
Seems even that was too low an estimate. The Washington Post reported Wednesday that the Commodities Futures Trading Commission (CFTC) has analyzed the books of oil traders and calculated that 81% of oil trading volume was conducted by speculators.
Guess who broke open the opportunity for oil speculators to trade oil in a loosely regulated fashion? Goldman. The Post reports that In 1991, its J. Aron unit argued that "it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms."
Bloomberg News reports that two more big banks -- JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) have made offers of $7 billion to 30,000 holders of Auction Rate Securities (ARS) -- those long-term securities whose yields reset in weekly auctions until the auctions failed this February. JPMorgan and Morgan Stanley also agreed to $60 million worth of fines. This brings to five the number of large firms that have settled so far. The Wall Street Journal reports that of the big firms that have yet to settle, Goldman Sachs (NYSE: GS) is proving to be among the most unhelpful to its clients.
Meanwhile, the Wall Street Journal's James Stewart, who first got me writing about the ARS catastrophe, has finally broken his silence. And he seems to think that the ARS mess is much worse than he originally thought back in February. Stewart was shocked that brokers were unloading this toxic waste on customers so they could get it off of their books and out of the accounts of their executives. Stewart's reaction struck me as surprisingly naive -- particularly considering his long track record of reporting on Wall Street misdeeds.
Nevertheless, the problems with the frozen ARS continue to stress out investors who fell victim to Wall Street's chicanery. Among the top 10 municipal ARS issuers, the following have yet to offer any restitution to ARS holders (the value of their 2007 ARS issuance is in parentheses):
Wall Street has a habit of riding its booms a bit too long. And that leads to collapse, layoffs, and hand wringing about the future. But it looks like Wall Street is already moving forward. And that means exporting its future by taking its finance franchise to cash rich countries and out of the canyons of Wall Street.
Wall Street's boom and bust cycles tend to eclipse a decade. In the 1980s, junk-bond fueled takeovers created massive amounts of wealth -- and also led to the collapse of junk-bond issuer Drexel Burnham. Wall Street licked its wounds for a few years and by the mid-1990s it had reinvented itself as the headquarters for Internet initial public offerings. That bubble burst in 2000. Then the Fed cut rates to 1% and Wall Street reemerged as a packager of mortgages -- along with servicing hedge funds and private equity moguls.
That all ended last August and the collapse of that bubble led to the demise of Bear Stearns and Countrywide and the loss of about $8 trillion worth of wealth. The New York Times reports that the latest collapse has cost 80,000 finance jobs as well. But Wall Street is already mapping out its future by following the money. And the Times pinpoints where Wall Street thinks that money resides -- based on the growth in the number of Wall Street people moving to various global money centers.
BusinessWeek reports that Wall Street has its eye on a new pot of cash -- your pension. And it's a mighty big pot -- $2.3 trillion. But Wall Street is not looking at the entire pension industry, just a $500 billion portion known as "frozen plans" that are closed to new employees and whose benefits are capped. McKinsey forecasts that frozen plans will triple to a hefty $1.5 trillion by 2013.
As usual, Wall Street's plan to buy these frozen pensions will line its own pockets and it will help companies as well. For example, if Wall Street charged a 2% management fee, that alone would generate $30 billion in revenues by 2013 if it bought all the frozen plans, but that fee income is probably the tip of the iceberg.
Companies are eager to dump their frozen pension plans. Why? These limping plans weigh down corporate balance sheet and new accounting rules will require companies to mark the value of their pension assets to market each quarter. In a down market, that could wipe out a company's operating profits.
Does America really need an economy that depends on creating new bubbles to get us out of the mess caused by the bursting of old ones? Is it possible to replace this with an economic system that generates growth without bubbles? I think the answers to these questions are No and Yes.
The most recent example of this bubble economy is the way the dot-com frenzy's aftermath was replaced by a debt bubble, which was focused heavily on a now-imploding mortgage-backed securities (MBS) industry. The dot-com bubble expanded thanks to the public's insatiable appetite for dot-com IPOs, regardless of whether the issuer was or could become profitable. The MBS bubble grew thanks to rock-bottom interest rates, rising housing prices and institutional investor demand for higher "risk-free" yields, all of which ignored the cost of a market reversal.
But the MBS part of the current bubble may not be the last to burst. There are also the leveraged loans that fueled a boom in private equity -- a market which has lost 70% of its business in the last year. Thankfully, massive defaults in such loans have yet to occur. The New York Times reports that capital-starved banks are starting to limit commercial and industrial loans that fuel normal business expansion. It reports that such loans have dropped 3% since 2007, from $3.36 trillion to $3.27 trillion.
Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees.
Many of them were the stocks we might have looked to in the past for stability, so you can be sure I put forward my five candidates with a little trepidation, but forward I go anyway. First a little review is in order.
Citigroup Inc. (NYSE: C) dropped from around $53 per share last year to around $30 in January and we can buy it today for around $17. Even at that price Goldman Sachs (NYSE: GS) has downgraded it to a sell and thinks there is more bad news to come. Citigroup was the largest bank in the world. Not any more.
General Motors (NYSE: GM) was the largest car maker in the world. That was before the stock tumbled from $43 to its current $11 range. A crushing blow to long time investors hoping that someone in the company could stop the ship from sinking.
The Wall Street Journal reported that after years of rapid grows, many hedge funds are shutting their doors or merging with others, as expansion has dramatically slowed. As a result, the industry is being dominated mostly by big firms, such as Och-Ziff Capital Management Group LLC (NYSE: OZM), D.E. Shaw & Co., and Paulson and Co.
Shares of Ctrip.com International Ltd (NASDAQ: CTRP), China's major Internet travel booker with about 58% of the country's online travel business, have dropped about 30% in the last six weeks alone creating a possible buying opportunity, according to the Wall Street Journal's "Heard in Asia". Travel in China is expected to grow solidly in the long-term and Ctrip.com said it expects revenue to grow 30% for the three months ending June 30 from a year earlier.
In a move that could potentially usher in a new phase in the credit crunch, the Financial Times reported that The Goldman Sachs Group Inc (NYSE: GS) is said to be close to finalizing a plan to restructure a $7B investment vehicle formerly run by Cheyne Capital, a London-based hedge fund.
Bloomberg News reports that 10 of the biggest names in investment banking are blocking investors from getting their hands on their share of the $330 billion Auction Rate Securities (ARS) that they were told was as safe as a money market fund.
I first posted about this back in February and now it has 4,325 comments from people trying to get at their money. Bloomberg quotes one victim of frozen ARS syndrome: Franklin Biddar, a 65-year old real estate investor who can't get his $100,000. "I can't do anything," said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. "Bank of America (NYSE: BAC) got me into these securities that are supposed to be as safe as a money market, and now they won't get me out."
Here's a list of the banks involved in this money blocking operation and the volume of municipal ARSs they issued between 2001 and 2007:
Since I have been a shareholder of Berkshire Hathaway (NYSE: BRK.A), I have enjoyed reading with great interest the musings of company chairman Warren Buffett as he gives almost a play-by-play review of the year in his letter to shareholders. He writes in a tone I would compare to Will Rogers, the writer, actor, comedian, cowboy and former mayor of Beverly Hills.
"My pal Warren" highlights both the triumphs and disasters of the year and his own perspective of the State of the Union and the economy like only he can. I strongly recommend investors take the time to read his letter(s).
One of the most often referred to items in Buffett's letters is regarding the quality of the management at each of the companies that Berkshire owns, or has major stock holdings in. There are many shrewd investors who will make a convincing argument that the quality of management is the highest priority.
He glowingly speaks of the wisdom, integrity and hard work of his management partners. He openly states that one reason that most of Berkshire acquisitions tend to work so well is the mutual appreciation of these character traits they all share. Unlike many companies that look to make money by shaking up the management structure, Buffett bases his investment strategy on keeping the strong management that built the enterprise in place.
Troubled savings and loan giant Washington Mutual Incorporated (NYSE: WM) will receive a $5B investment from private equity firm TPG and other investors, the Wall Street Journal reported. For now, this eliminates the possibility that it will be acquired by another financial institution such as J.P. Morgan Chase & Co (NYSE: JPM).
People close to the situation said that Delta Air Lines Inc (NYSE: DAL) and Northwest Airlines Corporation (NYSE: NWA) have revived merger talks. It is speculated, the Financial Times reported, that weak demand and high fuel costs are urging the airliners back to the table to work out a merger arrangement.
OTHER PAPERS:
Evergreen Solar Inc (NASDAQ: ESLR) is expected to announce today that it will double the size of its manufacturing facility in Massachusetts and add about 350 new jobs as part of its ongoing expansion, according to the Boston Globe.
WEB SITES:
Bloomberg reported that The Goldman Sachs Group Inc (NYSE: GS) has been the only major investment bank that has refused to reduce its leverage. In fact, Goldman's adjusted leverage ratio of assets rose to 18.6 at the end of February, from 17.5 at the end of November.
This morning, I 
Now eight large brokerage firms have settled with Auction Rate Securities (ARS) investors. This afternoon 
Upset about paying $3.80 a gallon for gasoline? Hank Paulson, former 
Wall Street has a habit of riding its booms a bit too long. And that leads to collapse, layoffs, and hand wringing about the future. But it looks like Wall Street is already moving forward. And that means exporting its future by taking its finance franchise to cash rich countries and out of the canyons of Wall Street.
Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees. .gif){kind=logo}
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Comfort Zone Investing: Getting beyond today
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