☀☕ Goldman Sad

Happy Monday!

Market Roundup 📊 06-Mar-23

US large-cap S&P 500 closed 1.61% UP ▲
Tech-heavy Nasdaq Composite closed 1.97% UP ▲
Pan European STOXX Europe 600 closed 0.92% UP ▲
HK’s Hang Seng Index closed 0.68% UP ▲
Japan’s Nikkei 225 closed 1.56% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Mar 6, 2023

📝 Focus

Goldman Sad

📊 In the Markets

Higher for Longer for Real.

Salesforce Activism (CRM)

📖 MoneyFitt Explains

🎓️ Investment Banking

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📝 Focus

Goldman Sad

Last week, at the second investor day in its 154-year history, investment banking 🎓 giant Goldman Sachs underwhelmed its Wall Street brethren with its strategic push to boost its asset and wealth management businesses and a slightly confused message on consumer banking.

► Goldman Sachs is mainly a trading business, with market making and other principal transactions (where the firm risks its own money rather than other people’s, with no fees or commissions) making up about half of total revenues. Trouble is that a dollar earned from a trading business is volatile (as are investing banking fees), and because of that, harder to rely on from year to year, and because of THAT, seen by investors as less valuable than a dollar earned on more boring, steady businesses. Hence the shift to relatively boring businesses like consumer banking (oops, harder than it looks) and asset & wealth management, where GS already has a strong but not industry-leading presence, though it does generate 1/4 of all revenues. (Fees are targeted to hit US$10 billion in 2 years, from $8.8bn last year.)

“I appreciate that everyone wants more answers on the consumer platforms and their trajectory going forward… I know that everyone wants answers to things… Clearly I can’t answer that.”

David Solomon, CEO of Goldman Sachs, not answering

► The consumer banking business (now under “Platform Solutions”) was supposed to be how GS was going to smooth its earnings and generate strong and more stable returns on equity (profits as a percentage of each dollar owned in the company by investors, an important measure of management effectiveness) across market cycles. Goldman somehow managed to lose almost US$4 billion (!) over the past three years there and is promising to scale up operations in credit cards and instalment lending… while suggesting that parts could also be sold off (“strategic alternatives.”) This clearly led to confused muttering from Wall Street’s Finest, particularly as instalment lending platform GreenSky was only just bought last year for over $2.2bn. In hindsight, it’s unclear what Goldman brings to consumer banking that would make such a business more efficient or profitable than more experienced consumer banks.

CEO David Solomon, seeing an opportunity for Goldman Sachs in consumer banking.
– Image credit: Our Gang (Little Rascals) / Hal Roach, WBD via Tenor

► It’s hard to ignore comparisons with arch-rival Morgan Stanley (which we wrote about in a mid-January MFM Focus piece) given Goldman’s pivot to expand Asset and Wealth management and shift away from its foray into losing giant sums in consumer banking, all while retaining its top tier position in its traditional core businesses. Morgan Stanley had started the process decades earlier, leading (briefly) to the creation of “Morgan Stanley Dean Witter Discover & Co.” back in 1997, and it too was also far from a smooth process, with huge credit card losses and massive culture, management and shareholder clashes along the way. Morgan Stanley was (and still is) an investment banking and trading Wall Street powerhouse, Dean Witter was a nationwide network of retail brokers formerly owned by the retailer Sears, and Discover –later spun off entirely– is a credit card scheme, like a smaller Visa or MasterCard. The merger with Citi’s Smith Barney unit after the 2008 GFC led to the creation of Morgan Stanley Wealth Management.

“…the firm’s expert on pricing large global equity underwritings, said he believed that because so much of the firm’s profits came from trading, an IPO would be priced at well under two times book value—a big discount from Morgan Stanley’s market valuation at nearly three times book value.”

Charles Ellis, in his 2008 book “The Partnership”, on discussions ahead of Goldman’s 1999 IPO.

► On its traditional trading core, Goldman pushed the idea that while these are volatile businesses individually, the firm has managed to build “a business model that’s designed to capture the upside volatility in the world without being as volatile ourselves,” partly thanks to diversification across markets. It made over $100mn on 92 days last year and lost money on only 36, with the number of giant days increasing over the years. It’s also been increasing its lending to hedge funds. As Matt Levine of Bloomberg puts it: “Instead of (just) using its balance sheet to own assets and take market risk, it will use it to lend against assets, take senior claims on them, and ideally not lose money on any of them. Obviously you can mess this up too, but in theory a portfolio of secured loans against trading assets should be safer and more boring than a portfolio of those assets themselves.” From a valuation standpoint, this is a good thing!

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📊 In the Markets

Stocks rallied on Friday to close off a volatile week, with US Treasury bonds also rallying, taking yields down off recent highs (since bonds and yields, the interest you actually get at that price, move in opposite directions.) Bonds were supported by some firm economic data, with better than expected demand for services in February, new orders rising to the highest in over a year, and a pickup in hiring (that red-hot labour market again.)

On another day, those numbers could have sparked a bond and stock market selloff, but last week they helped investors look past the likelihood of a Federal Reserve keeping interest rates higher-for-longer, which has been belatedly dawning on Wall Street’s Finest all February. The S&P 500 closed out the week 1.9% up, with the Nasdaq up more, with a 2.6% gain.

Higher for Longer for Real. 

Meanwhile, US central bank officials continued to bang the drum, saying that interest rates will need to increase further and stay high into next year to curb inflation. Atlanta Fed President Raphael Bostic said interest rates would need to rise to between 5% and 5.25% and then remain there “until well into 2024” with Minneapolis Fed President Neel Kashkari saying he was “open-minded” on whether the next hike would be 0.25% or 0.50%

But does the first cut in March 2024 count as “well into 2024”?
– Image credit: CME FedWatch Tool, manually via The MFM

“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will probably be necessary… Restoring price stability is our mandate and it is what the American people expect.”

Mary Daly, president of the San Francisco Fed

Salesforce Activism

Salesforce, the leading maker of cloud-based software for Customer Relationship Management (CRM, also the stock’s stock market identifier, or “ticker”), posted better-than-expected earnings and revenues and shot up over 11% despite projecting continuing slowdown in revenue growth.

Traders bought on billionaire CEO Marc Benioff’s fresh focus on profitability in response to pressure from six different activist investors, which have been pushing for management changes and better margins. And traders loved that he said the company would double its share buyback plan to US$20 billion. Salesforce is now running more efficiently after more than a decade of prioritising revenue growth, Benioff, a protegé of Larry Ellison at Oracle, said.

The tech giant had already announced a major round of layoffs in January, cutting 10% of its staff, or 8,000 people with mouths to feed (after which poor Benioff spent 10 days doing a “digital detox” in French Polynesia.)

Poor billionaire Marc
– Image credit: Tenor

📖 MoneyFitt Explains

🎓️  Investment Banking

Investment banking is a financial service that provides a variety of services to companies, governments and other organisations, including underwriting and issuing securities (like stocks and bonds), advising and facilitating mergers and acquisitions, often along with the financing needed.

The industry is also known for its high-pressure (some say toxic) work culture, high earning potential and a focus on short-term results.

During the Global Financial Crisis of 2008, many standalone investment banks, such as Goldman Sachs and Morgan Stanley, got commercial bank licenses and Federal Deposit Insurance Corporation (FDIC) protection in order to access support from the Federal Reserve and to take deposits from retail customers as a way to diversify their funding sources. This gave them access to the Fed’s “discount window”, which provides liquidity to depository institutions during times of stress (though it also subjects them to additional regulations, oversight and compliance requirements.)

In recent years, many investment banks have also expanded into wealth management services (private banking) as well as asset management in order to diversify their revenue streams and provide additional services to their clients.

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