Now I Can Get Interested in Goldman Sachs

By Dr. Duru written for One-Twenty

February 4, 2009

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Reuters reported today that "...Goldman Sachs Group Inc Chief Financial Officer David Viniar said the bank is keen to avoid restrictions it agreed to after receiving funds from the U.S. government late last year and it is looking to pay the money back as soon as possible." This $10 billion loan is feeling even heavier after President Obama put the squeeze to executive compensation for many companies benefitting from TARP funds. Now, I am not one to begrudge executives of taking as much compensation as the free market, the board of directors, and the shareholders will allow them to take. However, if I am helping to fund the operations with my tax dollars, I want to get as big a bargain as I can get - especially with most of corporate America going on a frenzy of layoffs and pay freezes. Kudos to President Obama. Even better is the concept that taking government money is onerous and not a free-for-all. When the government attaches strings to this kind of bail-out largesse, then only the truly desperate and needy step up to the feeding trough. This also makes it just a little easier to separate the potentially good companies from the likely bad ones. Heck, maybe it even provides some incentive to avoid excessive risks in the first place. Goldman is probably not the last financial company to realize that it does not need the handouts so badly after all.

This apparent commitment to return the $10 billion as soon as this year now has me interested in Goldman Sachs (GS) from the long side. Last year, AIG claimed it wanted to return its government hand-out as soon as possible, but it was clear they had almost zero chance in doing that anytime in the near future. Indeed, the stock hit an all-time closing low of $1.03 today. AIG has essentially become a ward of the state. I am more willing to believe that Goldman will come through, but I remain in "show me" mode.

The last two times I wrote about GS, I focused on the Jan 2010 calls, $105 and $110 strikes. Since November 26, the Jan 110 calls have moved from around $11 to about $14.50. The stock was trading at $76.50 at the time. So, the calls have moved 32% while the stock has moved 15%. Not bad, but not great considering the large risks baked into a stock that has gyrated so much in such a short amount of time. During the past three months, the calls dropped as low as $5.50.

Given I still expect the stock market to retest and break its November lows sooner than later, I am not interested in chasing GS here. But it is now firmly on the "buy on oversold dips" list. The chart below shows that GS has been experiencing higher trading volume, especially on up days. That is bullish. It is now a few dollars shy of its 2009 high. A break above that level could trigger an even bigger swell into the stock. GS is also surviving much better than the bulk of its financial cousins. The XLF set a new 52-week (and all-time) low last month. This move took GS down with it, but GS fell far short of its 52-week low (and triggered a buy at the time which I only held for two days - oh well). With Bank of America (BAC) choking on its Countrywide and Merrill Lynch acquisitions and teetering at its multi-decade lows of $4.70, the XLF dangles precariously close to fresh 52-week lows. (There is a GOOD reason why Goldman's CFO declared "Don't pick up The Wall Street Journal looking for a Goldman Sachs acquisition because I think you will be largely disappointed" - as reported by Reuters). GS remains vulnerable to the on-going mess in these financials, so extreme caution remains the only way to play.

Goldman Sachs
*All charts created using TeleChart:

Be careful out there!

Full disclosure: long S&P 500 in an index mutual fund. For other disclaimers click here.

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DR. DURU®, 2009