Epiphany Investing

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Goldman Sachs as a Confidence, Tail Risk Barometer (GS)

Posted on | October 29, 2008 Time: 6:18 am |

While most stocks are struggling to make a bottom in the past two weeks, Goldman Sachs is trying to preserve a low set earlier in the month. After dipping into the $80’s-level twice intraday in early October, the stock rallied nearly 50% to over $120. Less than two weeks later, Goldman shares are back down to the low$90’s:

Paulson Can’t Save it Alone

I see Goldman navigating the path to becoming a commercial bank well, while remaining the preeminent market maker and investment banking service provider. But right now they are serving as my favorite barometer for tail risk in the markets, by which I mean the risk of systemic losses or events. As fears of global shenanigans rise, Goldman remains under pressure. We all know them to be an active and global player, so we have to wonder whenever a new symptom of financial contagion appears…who is exposed to these (insert favorite horror story here)? Is Goldman, or their megahedge fund exposed?

Did Goldman Get Crushed by….Volkswagen?

Shares have been under pressure for several reasons, but the whipsaw action from today was focused on potential losses from the absolute Mother of All Short Squeezes, which occured in none other than Volkswagen stock. By the way, VW was briefly the largest company in the world by market cap after the small float was rumored to be under contract to buy. It’s a crazy little story that highlights perfectly just how unchartered these waters are. Until things like this stop happening on a daily or weekly basis, there will be ultimate long-term fear surrounding the health of the (former) investment banks and other global holders of “alternative assets” and leveraged positions.

Investment Thesis Solid, But in Motion

On any fundamental metrics, Goldman shares are an absolute steal, so long as you put some level of trust in the balance sheet. A down market kills a lot of the high-margin activity that made Goldman so much money, and growth rates from the past may never appear again. But as a bank, as an institution of utmost respect and on the hunt for cheap deposits to acquire, Goldman at less than book value is a steal. It’s even got the Buffett Endorsement…But as long as the tail risks are a tangible fear in the markets, Goldman’s fundamentals will be ignored.

Ryan Barnes

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