Thursday, June 11, 2009

Goldman Sachs Looks Shortable at $146

Short Goldman Sachs@$146, stop-loss around $155

-Goldman Sachs stock is up 200% from the lows six months ago. The stock hasn't taken a breather or shown any real consolidation since it was trading below $100/share. Goldman has torn higher, in spite of consistently lower trading volumes above $100/share. This suggests lack of strong buying interest and potential exhaustion in the move. In the words of Kyle from the Terminator movie: Listen, and understand! That Terminator is out there! It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead. (in spite of this, they do kill the Terminator in the end)

That being said, I believe Goldman Sachs stock is slightly more fallible. The stock was not trading much higher than its current price even in 2006-2007 before the extent of market losses could be quantified. In addition, they will likely show significant losses since the value of their public debt securities has risen in Q2 2009 (due to fair value accounting, major banks are able to report mark-to-market "gains" when the price of their debt securities declines below par). While Goldman may be raking in large gains from the recent surge in debt/equity issuance, even an optimist might view 10x earnings as a rich multiple to pay for an investment banker in the current environment. Essentially Goldman Sachs is arguably overvalued.

Shorting a small amount of shares here (may sell more short on a spike), along with implementing a put spread (buy $135 October Put/ Sell $105 put). A break below $140 might cause a severe decline to the $100 area (perhaps over 2 month period into August/September), although its fair to assume the Treasury would interfere if movements became any more severe than a 30-40% decline in Government Sachs' share price.