Yoshikami: Now What Goldman Sachs?
$550 million looked like pocket change until Goldman Sachs earnings were announced today.
Today's numbers, which missed analyst expectations, actually makes one think that Goldman is paying the price for last week's SEC action. Of course, their win was avoiding criminal action and other SEC regulatory activities as a result of the disastrous subprime mortgage placements.
Goldman's numbers today were less disappointing than it might first appear.
Results were hurt by the one time charges (hopefully) of $550 million dollars for the SEC fine and an United Kingdom $600 million dollar special tax assessment. Still trading revenues and profits were down compared to the incredible previous quarter and results like this have not been seen since the depths of the financial crisis.
But despite today's soft earnings announcement, Goldman appears ready to move forward after a cloudy period in the firm's history. And leadership seems eager to try to restore the firms reputation as not only a profitable firm but one that is respected by Main Street as well.
So what now for Goldman Sachs?
And what should one be thinking about when assessing this company as an investment possibility?
First, let's not discount the fact that there is a very shrewd group of investors working at Goldman.
You might not agree with their behavior at times, but they are certainly working to make money for their clients. This company has operated successfully in varying financial environments and that can't be discounted.
Challenges remain for the firm as it seeks to get back on track. Goldman will be subject to the new era of financial regulation that is upon us now and that will impact profits and behavior. Oversight will force Goldman to rein in their more creative tendencies. This means that one needs to assess what Goldman's business model will be look like going forward and how earnings will be impacted by the required lower leverage ratios. The same can be said for J.P. Morgan as the investment banking model morphs under current regulatory pressure. Stock prices are a function of current and future earnings; it's really that simple. While Goldman is making money now, the real question is how much will they make in the future.
"Goldman will be subject to the new era of financial regulation that is upon us now and that will impact profits and behavior. Oversight will force Goldman to rein in their more creative tendencies."
That's the real puzzle.
Even if regulation reduces profitability, certain businesses with strong talent pools will very likely grab market share which will help profitability.
Companies that fail to react to the current environment will be left behind.
Those that are pro-active will capture earnings from the marketplace.
Goldman Sachs is, if anything, pro-active. And more difficult conditions will likely provide opportunity for this nimble operator. Additionally, less competition and a strong talent pool are strong positives for Goldman. This financial inflection point is shaping up to be a prime opportunity for Goldman Sachs.
I expect Goldman Sachs to be one of those companies that will adapt and thrive despite current economic conditions. The overhang from the stock has been the potential SEC action which has now been settled. That should provide clarity for the future for this shrewd company. And for investors, after months of uncertainty, Goldman now becomes a possible investment opportunity without regulatory overhang.
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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.