Friday, July 1, 2011

What Does the Price Action in Goldman's Stock Mean for You, Me and Phantasmagoric Finance? (GS)

GS is up $3.08 at $136.17.
From Deal Journal's Mean Street column:

Mean Street: On Wall Street — It’s Grim and Getting Grimmer
Are stock prices any good at predicting the future?

Ironically, if you work on Wall Street, you better hope not. At $23 bucks a share, Morgan Stanley is trading near its 52-week low. Goldman’s shares are off 21% since the start of the year. That 2011 will be a crummy year on Wall Street is already the accepted wisdom.

But the prices of Goldman and Morgan Stanley shares, trading at or below book value, are hinting at something worse. Business doesn’t just stink now. It’s going to stink for a long, long time to come.
In a strange way, this is good news for today’s Wall Street CEO – be it a Lloyd Blankfein, James Gorman or Credit Suisse’s Brady Dougan. At least, it gives him a pretty clear strategic choice.
He can either keep the status quo and deliver an embarrassing single- or low-double digit ROE until his shareholders get fed up and fire him.

Or he can fire lots of other people, slash compensation, and pray for a stock market boom that will let him keep his speaking slot at Davos.

On Wall Street where self-preservation is priority #1, #2 and #3, it’s not hard to guess where most CEOs will come out. Certainly, that’s why we’re seeing a couple of thousand Wall Streeters get the shove in an unusually early pre-Independence Day purge. Goldman, for one, will be letting go of 230 unlucky souls here in New York.

In the scheme of things, this isn’t a big round of layoffs. More than three-quarters of a million people work in the U.S. securities industry – what we commonly refer to as “Wall Street.”

But it’s pretty likely that lots more will lose their jobs come the employee review ritual of early autumn. That’s the standard routine: sack ‘em before you have to fork over the Christmas bonus.
It’s easy of course to blame a fragile economy and the Dodd-Frank regulatory mess for Wall Street’s unhappy state of affairs.

But it’s naïve to think that everything would be hunky dory if U.S. home prices suddenly shot up or Jamie Dimon was given Elizabeth Warren’s or Tim Geithner’s job.

This is no temporary setback. With Wall Street’s fixed income, CDS and prop trading businesses on the decline, there’s just too much lost revenue out the door, never to come back....MORE