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Goldman Sachs: Green This Morning, Hurricane Tonight?


Goldman's too smart not to know this is only in the eye of the storm.

Last night, Goldman Sachs (GS) announced its first-quarter earnings early, following Wells Fargo's (WFC) early release last Thursday.

From my perspective, corporations only accelerate positive earnings news under 2 conditions: a) There's serious market doubt about the ongoing viability of the company, or b) The company wants to take advantage of the good news to issue securities (debt or stock), and the lawyers require updated disclosure.

While I remain uncertain as to Wells Fargo's goal (other than to wonder whether it was really the Treasury's doing) in pre-releasing earnings last Thursday -- into a thin market, ahead of a 3-day weekend -- based on Goldman's concurrent news of a $5 billion common-stock offering, I think the rationale for the latter decision is clear.

As longtime Minyans know, I believe that companies only issue common stock under 2 circumstances: a) when they absolutely have to, and b) when they're stupid not to. And it's with these criteria that I evaluate every stock offering.

To listen to Goldman's management, they must repay TARP because its related government restrictions adversely impact the firm's business model. And in that regard, management's message is highly consistent with the views coming out of other TARP banks.

Similarly, with the firm's stock price up over 100% since the fall, I can also see why they would feel stupid not to take advantage of the opportunity.

But everything feels very rushed -- albeit highly choreographed -- as if both Washington and Wall Street (and dare I add Omaha, since Mr. Buffett is a major shareholder of both Wells Fargo and Goldman Sachs) want us to believe that, with "green shoots" popping up out of the economic soil left and right, record or new record earnings out of at least these 2 banks for the first quarter, and the hope that the government will permit Goldman Sachs to repay the TARP (looming stress tests notwithstanding), the private sector should once again purchase common stock in financial services firms in size.

Judging by the tone to the financials this morning, I have no doubt that Goldman's offering will be an overwhelming success.

But at the risk of being labeled unpatriotic, I believe we're in the eye of the storm, where mark-to-market accounting has largely done its damage, and -- thanks to FASB accounting -- firms have successfully positioned first-quarter 2009 charges into prior periods. But where others look down and see green shoots, I look up and see storm clouds on the horizon.

And I wonder: What if Goldman Sachs sees the same storm coming, and just really needs the money to put plywood on the windows? (And in this regard, I would remind readers that Goldman is the same firm that annouced it was forming a fund to purchase private-equity interests.)

Don't get me wrong; the current news is great, but financial staying power works both ways. You either have it or you don't. And if you don't, the only way to get it is to buy it from somebody else. This morning, Goldman Sachs is the a buyer. And, notwithstanding their public comments, if the smartest firm on the Street is buying, I think you have to at least step back and wonder "What if..."
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Position in FAZ, JPM
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