Warren Buffett’s Goldman Sachs (GS) deal

GS july 11 2017 b

This chart is of Goldman Sachs. There are, in my opinion, two ways of interpreting this chart in EW terms. The real top was either in late 2007, which corresponds with numerous other financial institution’s tops, both in the US and elsewhere, followed by a lengthy B-wave that manages to double top for this stock but not most others. Or , alternatively, that top was just the end of a wave 3 and the great recession was wave 4 and the rest is a diagonal triangle wave 5. I do not give this much credibility.

The W. Buffett deal, entered into on the 23d of Sept. 2008 consisted of a purchase of 5 bln. worth of preferred shares AND the purchase of initially 2.5 bln. worth of warrants, that is 5-year options on stock with a strike of $115. This was immediately increased to 5 bln.  The whole purpose of the deal was to leverage on W. Buffett’s reputation as an astute investor and pull in other investors.

    By pure coincidence, on Oct. 14, 2008, about 20 days later, both Henry Paulson, then Treasury Secretary of the US but previously top dog at GS, and President Bush, announced their versions of the TARP programme. Remember that one? The Troubled Asset Relief Programme. This bailout programme called for or sanctioned the purchase of equity options or warrants and the purchase of preferred shares (debt) mirroring the W. Buffett deal. In essence the GS deal put W. Buffett in a position where he could finesse the government to his advantage. The story is, of course, that this was very risky but the reality is that every second Central Banker etc. is an alumni of GS and that success was virtually baked into the cake.

    The HCG deal is similar in all aspects except the timing. Whereas the GS deal was done too early, the HCG deal was done too late. Otherwise both rely on the almost assured cooperation of the respective authorities. These are always caught in the tension between “punishing” and “saving”, that is the regulatory side against the pragmatic side as in deposit insurance and not upsetting the apple cart.

    Note that the immediate gains came in the very first year after the deal and then took a long time to repeat. I suspect that something similar may happen in the HCG case. In any event a doubling of your money is definitely not out of the question, even without a 10% dividend guarantee.

    One significant difference is that the HCG chart is much clearer as the breakdown from the peak is a simple A-B-C correction, clear as a bell. The only question that might remain is whether or not the $5 low was indeed the low. See previous blogs. Also at this level it yields a little over 7% and trades at a p/e < 4.

HCG july 11 2017 b

GS and MS, Goldman and Morgan Stanley…… When in Rome…

gs & ms dec 24 2016

Both these “banks” function as “hedge funds”, that is they can go long and short and create all kinds of securities on their own. Obviously the simple fact that they can play the entire spectrum of possibilities gives them an enormous advantage over others that are confined to a much narrower range of the spectrum. This,  and seeing most of the flows, accounts in large part for their enormous profitability. That every second central banker or any other key player call either of the two their alma mater does not do any harm either.

Clearly regulations affect these pretend banks, in fact MS was created in the wake of Glass-Steagall , enacted in 1933 as a response to the great depression, specifically to circumvent the rules. GS on the other hand operated to a degree outside the scope of Glass-Steagall but was reluctantly drawn in by the bailout. Of course Glass-Steagall was repealed in 1999 which has some people conclude ironically that this law was both the result of the great depression as well as the cause of the great recession. Dodd-Frank (2010) is the new Glass-Steagall and Trump has promised to do away with it (and maybe the Fed. as well). His administration-to-be seems to subscribe to the Ayn Rand philosophy of complete and total unfettered selfishness and a government that interferes as little as possible, sort of where we were after 1999 and before 2010 at a time when these stocks peaked. Oddly enough Greenspan was once part of her (Ayn Rand’s) inner circle.

We have no idea if this Trump rally is over or if it has a long way to go, therefore we would suggest that the best approach is to “when in Rome, do as the Romans do” that is be your own hedge fund and short GS and go long MS. Both companies are about the same size, GS has a slightly larger cap. and MS more employees. The spread between the two has never been larger. A ratio of about 6 shares of MS (at $40) against 1 share of GS (at $240) would, more or less, do the trick.  You can achieve something similar with options.

Better yet, listen to this;


Merry X-mas and a Happy New Year.

GS, Goldman Sachs

gs dec 3 2016

Pretty well exactly two years ago (see beige annotations) we expected the stock to go into a dive. At the time it was about $200 and seemed to have completed a counter-trend a-b-c, itself the B in a larger A-B-C. Despite a , give or take, 30 % drop initially this prediction did not pan out ( see blog of Dec. 10 2014, the last time we commented on GS).

     This bank, which in reality never was a bank but simple became one along the same lines that Henry IV  with his alleged “Paris vaut bien une messe”, chose pragmatism over religion, has always been reviled and hated as some sort of unscrupulous money making machine. Its power is undeniable. Many of the world’s central bankers hail from GS. Together with Harvard, Yale and Morgan Stanley they constitute the rolodex of America’s Who is Who. It is not surprising therefore that the stock went up $50 or more in the initial euphoria of Trump’s election win and even more once it became clear that some of the key people in his cabinet are alumni of this bank.

     Morgan Stanley is the other powerhouse. Like GS it was formally formed as a consequence of Glass-Steagall (1933). It has done just as well recently, ironically as Trump promises to do away with Dodd-Frank, but has a completely different longer term chart and is nowhere near a top. See below, together with GE;

MS dec 3 2016ge dec 3 2016

As you can see, both these stocks started their drops years before GS,  AND both have uniquely clear -  at least for the most part -  A-B-C corrective structures. Unlike GS we have been bullish on both, in fact you would have quadrupled your money with MS.

      Getting back to GS, the only clear possibility that I can see is that the stock never peaked in a 5th wave and is only doing so now. The best count would be for a diagonal, that is a wedge, rising all the way from the lows of 2008.  Alternatively we may have a triangle followed by a 5th wave (not shown). Much less likely (but quite possible in MS’s case) is a 1-2, 1-2 situation. That would imply that GS is presently in a third wave and is ultimately on its way to $400 to $500. For this to happen every single bank regulation would have to be scrapped and GS would have to almost become the de facto administrator of the US.

     We think GS is a sell here or a few dollars higher.

GS, Goldman Sachs Group

gs dec 10 2014

We would be sellers here of GS simple because of the EW pattern. This is a huge flat that has completed waves A and B (give or take) and is about to start C in the near future. You do not want to go along for the ride as C waves can be messy and should take the stock below the lows of the A wave. Right now the stock is still creeping up on borrowed time but this should stop any moment now. The RSI, MACD etc. suggest a turn is right around the corner.