The trough. The trough in earnings. That's what people saw today in Goldman Sachs (GS), which ignited a powerful banking rally with its better-than-expected quarter this morning: $1.84, vs. the $1.23 people were looking for.
Sure, the revenue was light. Sure, the compensation, while reduced, was still way up compared with the revenue. But what happened here is simple. Today you saw Goldman Sachs at its most horrible, most naked, least exciting, and you know what? It still made a lot of money. It did so by just being good at what it does. Not being great, but being better than everyone else.
It did so without taking much risk. That allowed people to figure out what a non-hyped, non-supercharged, non-hedge fund like Goldman is worth, and the answer is a heck of a lot more than yesterday, 6.3% better.
We don't talk about book value much on "Mad Money," because it hasn't been a true indicator of anything lately. Banks trade through book value all of the time, because people don't trust the book. But today we saw that people want to buy Goldman Sachs at a big discount to its tangible book value, which is basically what the company is worth if it liquidated, and the liquidation level is $119.
Suddenly, people trusted book value, and they realized that Goldman is just too cheap compared with what it is historically worth, now that it isn't taking on so much risk that it could destroy that book value.
Now, here's what's so hard to understand. The big jumpers this year have been companies that have beaten on the sales line and the earnings line, but Goldman only beat on the earnings line. Why is that worth so much to people?
Simple: Because Goldman showed you that this company can still make money in one of the worst environments it has ever seen, it can still make money on really low revenue. It can still make money when no one is doing many IPOs or takeovers or any trading much at all. So who knows how much it can make if anything good ever happens? And something good will ultimately happen.
So, people are saying, "OK, at the trough, Goldman looks like it can squeeze a lot of lemonade out of lemons, you just wait until deals start being done, and IPOs start flowing and investors step in from the sidelines."
And the rest of the financials? Hey, if it is a trough for Goldman, maybe it is a trough for everyone. That ignited this powerful rally that lifted every player in the business, including those that really did disappoint, such as Citigroup (C) and PNC (PNC).
Given how the most surprising place for a rally is the financials, isn't it fitting, in this topsy-turvy year, that that's exactly what we got? I don't know about the other financials. I am still sticking by U.S. Bancorp (USB), which reported a fine quarter this morning, and Wells Fargo (WFC), which delivered a terrific number yesterday. But if you asked me for another financial, after today, I'd say Goldman has bottomed too and at last is ready to go higher.