Someone shoot the bank stocks. It's just too painful to watch them. This morning Goldman Sachs (GS) reported a pretty astounding quarter. Remember, despite the pandemic, Goldman reported the second highest quarterly revenue. It has record quarterly investment banking revenues and the best Fixed Income, Currencies and Commodities in nine years, best equity net revenues in 11 years. That's insane.
I know it's all about money with me, not about friends, but I sure felt proud to be an alumnus after this quarter because the market's been dissing this company more than any other financial. Even as it is the acknowledged leader, hardest to get a job on the Street, it sells at the lowest price to earnings model. Not anymore, I figured, this wasn't just an upside surprise it was a called shot which is why the stock was up eight points before the market opened. But as the morning went on the stock just started dripping down, no support at all.
When I worked at Goldman Sachs my boss always described the company in what I first though was a demeaning way. "Jimmy, we're a dry cleaner, and don't forget it," I was told. That's because a dry cleaner doesn't own anything. It takes, it cleans, it gets paid and it gives back. No inventory. Therefore no losses. The worst that happens? The company has to sell the inventory and claw the money back.
But today on page three of the package, the deck so to speak, what did I see? A nasty line, a line that said "provision for credit losses," and a number, $1,590 billion, that stunned me. That's no dry cleaner. "The 2020 provision for credit losses was significantly higher year over year, primarily due to revisions to forecasts of expected deterioration in the broader economic environment." Now I can deal with slower growth, but loan losses, oh my.
Now, in truth I think the bank is being incredibly conservative. I believe this is an amazing buy. I own it and have owned for my charitable trust for ages. But what matters is that if you believe that we are headed into an abyss filled with defaults, you cannot own this financial when you can own one that will not experiences losses, ones like Mastercard (MA) or Visa (V) or PayPal (PYPL) , or some fancy pants fin tech company, which counts toward owning a financial, or even a Square (SQ) which has some loan loss exposure but is a fast growing fintech.
This madness is simply an extension of what happened yesterday when JP Morgan (JPM) reported a fantastic number but took a big loan provision. Same with Citi (C) and Wells (WFC) . It just didn't matter how well they did.
You want insult to injury? Citi has this terrific business, Treasury and Trade Solutions, which helps clients to sustain operations, manage their supply chain and optimize working capital, and provide liquidity management services. This business, alone, is so large and so lucrative that I think that it is worth the entire $100 billion company if it were spun off. The bank's better off dead than alive.
Now, given that Goldman Sachs might never report a quarter this good - yes it was that special - given that it might not be able to be topped, I have no idea what will get people to buy this other than a vaccine that helps them reverse the losses, although I doubt that will happen.
They can boost the dividend although that would be frowned upon by the regulators, or they can buy back stock. Except the regulators have said no to that, too.
These days the new dry cleaners are technology companies that make the payment plumbing work best, and have no inventory whatsoever.
You know what's ironic? Goldman has a partner in Apple (AAPL) ; they managed Apple's credit app. It's a great business, but the value? Right now it accrues only to Apple.
Are banks like the oils, not to be touched because they are wasting dirty assets? No, not fair. The fact that Goldman can make this much money in this environment is extraordinary. It's too cheap. Right now value goes begging. It won't always be that way. But it's not a lame horse. It's a thoroughbred, but one that doesn't have any hope of crossing the finish line ahead of most of the Dow Jones average or the S&P 500.