Dropping Goldman Sachs From My List

Thursday may have marked an intermediate low for the US stock market; yearly lows were violated, stops were hit and the market violently reversed to finish higher on the day. Interesting a new moon was yesterday and this week was the anniversary of the very important lows in 1907 and 1929.

The two primary considerations that traders must focus on are: (i) choices of companies to monitor, and (ii) entry and exit timing of the share prices of these companies.

My choices of companies are listed in the Cara 100, and timing is based on the study of reversals in price trends and cycles. Cara 100 companies are the highest quality rated companies based on my assessment of past and present management practices, financial strength, operating performance, and return on shareholder equity factors. Market timing is based on a variety of technical and quantitative studies of the price and volume data series, not only for the shares of each company, but for other data in the capital market (equities, debt, forex, commodities) known to have active relationships with these shares.

Corporations are like people; they go through periods of thick and thin, which doesn’t necessarily change their fundamental character, ie, quality. So as long as a company is not “broken”, which is simply a way of expressing a fundamental change for the worse that would require my removing it from the high quality Cara 100 list, I’ll stick with it.

Sometimes that’s very difficult to assess. Lehman Brothers, for example, was a Cara 100 company for years. It went bankrupt. Years ago, 3M was on the list, but this is a complex company that needs a top-flight CEO, and when James McNerney departed to take on that position at Boeing, I switched out 3M and inserted Boeing in the Cara 100.

Deciding whether a Cara 100 company should go or stay is a dynamic process, but, the availability of time to focus my study on companies and their share prices is limited, so this rather subjective decision is not often made.

The process never stops however. Presently the stresses of global financial systems, volatility in business and economic cycles and in the forex market, and political intervention factors, have put a huge strain on the ability of corporations to function effectively and efficiently. Many companies, like people, are in fact breaking down.

In this regard, I have a tale of two companies, related mostly because they are severely impacted by the credit crunch. All other discussions aside, I have to make the ultimate decision to keep either in the Cara 100 based on the one factor: is the company broken? These companies are Goldman Sachs (GS) in the financial sector and Brunswick Corp (BC) in the consumer discretionary sector.

Here is the data I look at first:

Brunswick Corp [GICS 25, Cara 100]
(BC: Yahoo Finance file)
(BC: Google Finance file)
(BC: StockChart chart)
(BC: BillCara2 chart)
(BC: ADVFN Financial Data)
(BC: ADVFN Financial Data)
Goldman Sachs Group Inc [GICS 40, Cara 100]
(GS: Yahoo Finance file)
(GS: Google Finance file)
(GS: StockChart chart)
(GS: BillCara2 chart)
(GS: ADVFN Financial Data)
(GS: ADVFN Financial Data)

Jumping ahead to a likely conclusion - since I have not yet made the final decision - I am inclined to drop Goldman and keep Brunswick.

Why might you ask since Brunswick is potentially close to bankruptcy? Goldman on the other hand is believed to be the finest investment bank cum corp bank in the world, the one with the strongest resources and connections.

The products that Brunswick make will stay in demand, and the factories can be re-opened, the manufacturing and distribution processes largely unchanged, and the workforce hungry to return to relatively high-paying jobs. These workers are not likely to move their families to China or Taiwan to work in manufacturing companies there in the same line of business. They represent the heart and soul of America.

Killing US manufacturing will ultimately destroy America. “Trickle Down” benefits from the Money Center Banks of Wall Street and their friends has proven to be a disaster because the movers and shakers there move their money offshore without hesitation. Call these people un-American if you wish, but they call themselves capitalists and they have no social conscience. A buck is a buck, whether it happens to be made in Yuan or Euro or Lira or whatever. I believe the Obama Administration and the new Congress is going to change that. They intend to protect the people in the smaller cities and local communities and come down hard on Wall Street. They intend to protect Detroit and the US manufacturing base where possible. The pendulum is about to swing. Brunswick Corp will be a beneficiary, and companies like Goldman will stay under pressure.

Moreover, some of the pressure on Goldman is going to come from Congressional and regulatory processes. The American people have to discover why their system broke down and who culprits were who benefitted, perhaps illegally. The next few years will not be a good time in the careers of the leading investment bankers who engineered products like credit default swaps and syndicated mortgage-backed loans and who promoted the “Liar Loan” practices. Goldman Sachs was involved in that mess as much as anybody and their people are going to be the obvious targets.

But Goldman Sachs has also made a decision to change its business model. The new Goldman will be a corporate bank, which means that its people resources and their best clients will not have access to huge 35 to 1 leverage, but will have to get by with less than 10 to 1. I can see the elevator going down on Fridays and not returning the same people on Mondays. They will follow the money, ie, their ability to earn the big money, into small boutique investment banks. They know the business model and made huge incomes from it. These are Type-A driven hustlers who will not put up with the floaters who run corporate banks by committee.

So, Goldman will be getting hit from all sides, including hedge fund clients and their clients who will be looking for revenge in the form of class-action lawsuits to recover damages they perceive resulted from misrepresentation and bad management practices.

I add all this up and come to the conclusion that Goldman Sachs will be removed from the Cara 100 (when I get the time) - something I never thought possible - and Brunswick Corp will likely stay. Of course, I am hopeful that the next three months at Brunswick is not tied up in bankruptcy and that the new political regime in the US can bring relief to this company, which, like Harley-Davidson represents an important part of US manufacturing.

This blog is here to help people think through issues, not to make decisions for our community. It’s up to us to discuss the material and consider as many factors as possible before making decisions. I try to help, but the rest is up to you.

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