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How the Fed and the government sandbagged Goldman Sachs

Lawrence Lewitinn
Talking Numbers
How the Fed and the government sandbagged Goldman Sachs

Goldman Sachs had a big miss on revenues in the last quarter and they're pointing fingers: straight at Washington, DC.

Goldman Sachs may have had a profitable recent quarter, but they're blaming some of their huge drop in revenues on a surprising reason: the US government.

From a company that is sometimes called "Government Sachs" for its often cozy relationship with the Fed and the Treasury Department, such an excuse can seem shocking.

Yet, Goldman was pointing its finger towards Washington as part of the reason why its revenues were $1.6 billion less this quarter when compared with last year. In a statement released with the company's earnings, Chairman and CEO Lloyd Blankfein said:

“The third quarter’s results reflected a period of slow client activity… Still, we saw various signs that our clients are prepared to act on significant transactions and we believe that the firm is well positioned to help our clients accomplish their objectives. As longer term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery.”

(Read: Goldman slashes pay as revenue drops)

In other words, Goldman says that once uncertainty with the federal budget ends, their revenues will get better. Blankfein certainly should hope its top line improves, especially since Goldman's revenues were down nearly 20% this quarter compared to last year.

But, here's an interesting fact: the government shutdown was initiated on October 1, the day after the quarter ended. The battle in Congress over the continuing resolution to fund the government began ten days prior to that. The entire quarter lasted 91 days from July to the end of September.

While Blakfein may think the budget battle on Capitol Hill added uncertainty to the company's top line, it's more likely the Federal Reserve Bank is more of a reason Goldman had a tough three months.

(Read: The creepy capital efficiency of Goldman's cafeteria)

The quarter also coincided with the massive selloff in bonds as much of the market expected the Federal Reserve Bank to taper its $85 billion monthly bond-buying program known as quantitative easing. The tapering was expected to occur in September but it never happened. Goldman's bond trading division took a huge loss. In its statement, Goldman said:

"Net revenues in Fixed Income, Currency and Commodities Client Execution were $1.25 billion, 44% lower than the third quarter of 2012, reflecting significantly lower net revenues in mortgages and interest rate products, as well as in currencies. In addition, net revenues in credit products were lower, while net revenues in commodities were higher compared with the third quarter of 2012. During the third quarter of 2013, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment, which was characterized by economic uncertainty, difficult market-making conditions in certain businesses and lower levels of activity."

Translation: Oops!

(Read: Goldman sees budget crisis fear as good news)

But, that's not the only difficulty for Goldman this quarter.

"My fundamental take is that they've got some issues on the trading side," says Andrew Busch, founder and editor of The Busch Update. "Some of it is self-inflicted,"

"They had an equities programming problem that cost them a bunch of money," says Busch. "But, clearly, the commodities issues from a regulatory standpoint – and the whole warehousing issues that JP Morgan and other banks have gotten in trouble with as well – that's going to hurt them. And, the interest rates scenario in the United States hurt them since the backup in rates to 3% happened rapidly. That obviously caught them wrong-footed."

But while Busch isn't a fan of Goldman's stock at these levels from a fundamentals point of view, that doesn't mean the technicals necessarily see things that way.

Steven Pytlar, Chief Equity Strategist at Prime Executions, says Goldman's stock has been trading within consolidating range coinciding with the bond selloff in May. "Consolidating is not a bad thing," says Pytlar. "It can be very positive longer term."

What are the key levels to watch? And do fundamental concerns outweigh potential technical opportunity in the stock?

Watch the video above to see Busch and Pytlar analyze Goldman Sachs and see what the fundamentals and technicals have to say on this stock.

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