Is Goldman Sachs Managing Its Earning Expectations?

An interesting story from the Columbia School of Journalism regarding the Goldman Sachs story featured at The Wall Street Journal the other day suggest some oddness in the WSJ story on Goldman Sachs newly expected losses.

Did Goldman Sachs leak its own results? Are they accurate? Or was this a setup to dampen expectations on the results?

Or merely to provide 'guidance' to the Street? Note the stories at the bottom that shows analysts turning increasingly bearish on Goldman in October, and that Katzke of Credit Suisse actually cut estimates precipitously the day before the WSJ story, from a decent gain to a sharp loss. What precipitated her reversal?

Let's see how Goldman's numbers and follow-on stories come out, and judge accordingly. For now it looks like a simple case of follow the leader, the leader being Katzke from Credit Suisse who did a remarkable turnaround on her earnings projections from a gain of $2.47 to a loss of $4.00.

The Audit
Columbia Journalism Review
December 02, 2008 10:06 PM
Weird Goldman Sourcing at the Journal
By Ryan Chittum

A [Wall Street] Journal scoop this morning—or at least its sourcing—may have confused some readers.

The paper reported that Goldman Sachs’s loss this quarter would be much worse than expected, news it attributed to “industry insiders.”

That’s funny attribution, but okay. But scan the rest of the story and you’ll find that it appears nobody from Goldman was ever given an opportunity to comment. (Odd because the follow on stories indicate Goldman declined comments to other news outlets - Jesse)

Now, it’s highly unlikely that these experienced reporters got a story on A1 in the WSJ without calling the company for comment.

What the lack of a Goldman attribution signals to us is that Goldman Sachs itself leaked this to the Journal as a way to feed hungry beat reporters and get bad news into its stock price before it reports earnings.

The Journal has a nearly iron-clad internal rule that says a story can’t say a source declined to comment if that source is quoted elsewhere in the story. That can make for awkward negotiations if a reporter is trying to protect the identity of a source who doesn’t want to be named. (Apparently the WSJ broke that rule because Goldman declined to comment, so who leaked the insider information? - Jesse)

I don’t know why Goldman was so finicky that it wouldn’t let the Journal use its standard “people familiar with the matter” phrasing, but I’ve dealt with similarly skittish/irrational sources.

But for what it’s worth as an insiderism, that’s your likely explanation.

The Wall Street Journal
Goldman Faces Loss of $2 Billion for Quarter
DECEMBER 2, 2008

Goldman Sachs Group Inc., known for avoiding many of the blowups that have battered its Wall Street rivals, now is likely to report a net loss of as much as $2 billion for its quarter ended Nov. 28, according to industry insiders.

The loss, equal to about $5 a share, would be more than five times as steep as the current analyst consensus for the Wall Street firm, as it faces write-downs on everything from private equity to commercial real estate.

Though analysts and investors already were bracing for Goldman's first quarterly loss since it went public in 1999, the ...


Reuters
Goldman shares fall as analysts see bigger loss
Tue Dec 2, 2008 12:26pm EST
By Joseph A. Giannone

NEW YORK, Dec 2 (Reuters) - Goldman Sachs Group Inc shares fell Tuesday on speculation the bank's fourth-quarter loss could be much larger than expected -- more than $2.5 billion -- fueled by the plunging value of many Goldman investments.

The shares fell as much as 6 percent, rose briefly in volatile trading, then settled at $64.78, off 1.5 percent. They are down 70 percent this year.

For the past month, Goldman has been widely expected to post its first quarterly loss since going public in 1999. But poor market conditions got even worse last month as the U.S. Treasury abandoned its proposal to buy hard-to-trade mortgage securities and other debt from hard-hit banks.

Atlantic Equities analyst Richard Staite on Tuesday widened his loss forecast for Goldman to $4.65 a share, or $2.3 billion, for the fiscal fourth quarter ended Nov. 28. Staite forecast that falling equity and debt values will trigger more than $9 billion of writedowns.

Within hours, veteran UBS brokerage analyst Glenn Schorr forecast an even bigger loss -- $5.50 a share, or $2.7 billion -- driven by writedowns approaching $5 billion. S&P Equity Research cut its forecast to a loss of $3.25 a share.

That's a big change from a month ago, when the average Wall Street forecast was a profit of $2.34 a share; six months ago, the average estimate was a profit of more than $5.40 a share.

Currently, analysts' average forecast is a loss of $1.46 a share excluding one-time items, according to Reuters Estimates. Individual forecasts range from a profit of 23 cents at Wachovia Securities to a loss of $5.50 at UBS.

The average loss forecast will only deepen as Wall Street analysts try to estimate the impact of market weakness on a range of assets held in Goldman's investment portfolio and by its traders.

Goldman has long been the industry's most aggressive player in deploying its capital into everything from power plants and Japanese golf courses to ethanol makers and distressed debt.

As a group, analysts turned bearish on Goldman at the end of October, with industry watchers like UBS' Schorr and Merrill Lynch's Guy Moszkowski predicting small losses

AP
Ahead of the Bell: Goldman Sachs faces $2B loss
Tuesday December 2, 9:09 am ET

Report: Goldman Sachs could lose as much as $2 billion for its fiscal 4th quarter

NEW YORK (AP) -- Goldman Sachs Group Inc. could face losses totaling $2 billion when it reports its fiscal fourth-quarter results because of continued market turmoil and the expectation for large write-downs, according to a report in The Wall Street Journal on Tuesday.

The report, citing industry insiders and analysts, said the potential loss of about $5 per share would be largely due to write-downs on a wide array of assets that have increasingly lost value over the past three months.

A spokesman for Goldman declined to comment, noting that Goldman does not provide earnings guidance and does not comment on outside forecasts.

It would be Goldman's first quarterly loss since it went public in 1999....

AP
Goldman falls with market, analysts cut estimates
Monday December 1, 8:29 pm ET

Goldman Sachs falls as analysts cut 4Q 2008 and 2009 estimates

CHARLOTTE, N.C. (AP) -- Shares of Goldman Sachs Group Inc. dropped sharply on Monday as the broader market tumbled on concern about the economy and analysts cut their earnings estimates to reflect a dismal quarter.

Shares of Goldman fell $13.23, or 16.8 percent, to $65.76.

Goldman's decline came as the Dow Jones industrial average fell 680 points to about 8,149 and the Standard & Poor's 500 stock index lost nearly 9 percent. The decline was the result of investors' concerns about holiday shopping and new reports showing manufacturing activity fell to a 26-year low in November and construction spending fell by larger-than-expected amount in October.

In a note to investors Monday, Credit Suisse analyst Susan Roth Katzke said she now expects the New York-based firm will lose $4 per share in the fourth quarter. She had previously forecast a profit of $2.47 per share.

She also lowered her 2009 earnings estimate to $12 per share from $14.50 per share.

Analysts polled by Thomson Reuters, on average, forecast a quarterly loss of 62 cents per share and $10.38 per share for 2009.

Katzke lowered her target price on the stock to $140 from a range of $175-$200...

UN Economic Team Warns of a Dollar Crash

"Denial is the most predictable of all human responses. But, rest assured, this will be the sixth time we have destroyed it, and we have become exceedingly efficient at it."
The Architect of the Matrix

We have an hypothesis that what is learned from this series of financial crises, from 2000 to 2012, and the failure of the dollar reserve currency experiment, is going give rise to a new school of economics as the Great Depression lifted Keynesianism over classical economics, and the bear market and stagflation of the 1970's sparked the ascendancy of monetarism.

2009 is going to be a pivotal, volatile year, and most likely, interesting.

The Financial Times
UN team warns of hard landing for dollar
By Harvey Morris in New York
December 1 2008 08:48

The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.

In their annual report on the world economy published on Monday, the economists said the dollar’s sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.

The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels. An accelerated fall of the dollar could bring new turmoil to financial markets.

“Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession,” the report said.

Publication of the annual survey by the UN’s Department of Economic and Social Affairs, its trade organisation Unctad and UN regional bodies, was brought forward by a month in the light of the financial crisis. It was launched in Doha to coincide with the UN-sponsored development financing conference in the Qatari capital.

The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At the same time, however, the US’s external debt had risen to new heights that could provoke a dollar collapse.

The report recommends reform of the international reserve system away from almost exclusive reliance on the dollar and towards a globally backed multi-currency system.

Rob Vos, a Dutch economist who heads the UN’s policy and analysis division and who is responsible for the annual economic review, said the global economic pain could be eased if governments co-ordinated a spate of stimulus packages that were already under way.

“There has been a sea change in attitudes in favour of intervention and concerted action,” he told the Financial Times. He welcomed statements from US president-elect Barack Obama’s transition team in support of spending on infrastructure.

Worst Fifteen Dow Days in Percentage Decline

Its Official: National Bureau of Economic Research Says US Recession

Recession in U.S. Started in December 2007, NBER Says
By Timothy R. Homan and Steve Matthews

Dec. 1 (Bloomberg) -- The U.S. economy entered a recession in December 2007, the panel that dates American business cycles said today.

The declaration was made by the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.

We feel vindicated in our prediction of this in February of this year.

Here is the chart we used at the time to mark the top, and to forecast the coming decline.



Here is a chart with the monthly actuals added to it. The decline has progressed more quickly than anticipated.



If you start reading the blog entries in 2007, one can see how the case for recession was carefully built up based on the indicators, and the probability steadily increased from an estimate of 65% in early December.

Although fundamentals don't work in the short term, in the longer term the markets work, and the fundamentals count, probabilities pay off, and there is a reversion to the means. The trick in trading is not to be trapped by leverage, timeframes and capital risk.

Once again a special thanks to our friend Elvis_Knows for his excellent graphics.