It's time to sell Goldman Sachs (GS).
The company beat earnings estimates by nine miles this morning, posting a profit of $3.70 per share on revenues of $8.61 billion. Analysts had been looking for $2.88 on about $8 billion. Trading, investment banking and client services were all strong and everything seems to be clicking in Goldman's world.
"The real reason they crushed it was in the pits behind me," says Jeff "Killir" Kilburg, founder and CEO of KKM Financial, from the Chicago Mercantile Exchange. "They dominated the bond pit."
That makes it a perfect time to trim. When things can't get any better they get worse. Goldman's debt underwriting revenues were nearly $700 million in Q2. Investment banking revenues overall increased 29% year-over-year but were flat compared to Q1. That's what it looks like when momentum slows.
The equity underwriting market is relatively moribund and debt underwriting has almost certainly peaked for the foreseeable future. Much like the IPO craze of the late '90s led to any company that possibly could go public doing so, any corporation that wants to issue debt has done so already.
Rates may not go higher but they're not going back to where they were. Flooding the market with high-yield garbage was a passing fancy. By the end of Q3 there will be more demand for VHS copies of Sharknado than for junk bonds.
A steeper yield curve doesn't help Goldman the way it does JP Morgan (JPM) or Wells Fargo (WFC). Goldman is a hedge fund that does underwriting. Right now there isn't a ton of demand for public hedge funds and underwriting has been strip-mined to the point that it's going to be years before it normalizes.
Goldman dominated the bond market it two ways: trading and underwriting. Trading doesn't get a multiple on the stock price (not stable enough) and underwriting is done. It's not going to get better for GS in debt.
Banks as a whole aren't done yet, but are due for a rest. With Goldman stock having gained more than 60% over the last year and 25% year-to-date, it's time to sell the house of Vampire Squid and move into regional banks, or the jumbo banking supermarkets or Financial Select SPDR ETF (XLF).
As usual this isn't advice but a strongly worded opinion. It's possible I'm wrong but I doubt it.
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- Banking & Budgeting
- Goldman Sachs
- Chicago Mercantile Exchange