What If Goldman Sachs & Morgan Stanley Actually Make Money? (GS, MS)

This is a very important week for earnings from brokerage firms (or the new bank holding companies).  Tomorrow morning we have earnings from Goldman Sachs Group (NYSE: GS) and on Wednesday morning we have earnings from Morgan Stanley (NYSE: MS).  Because of the new deleveraged climate, almost everyone on Wall Street is expecting these firms to lose money.  This is starting to seem like more of a stretch in today’s markets and today’s economy, but what if these companies somehow manage to actually post profits? 

Thomson Reuters (First Call) has consensus earnings, or losses, at-$3.50 EPS for Goldman Sachs.  If this comes true it will markGoldman’s first loss since coming public.  This expected loss compares with last quarter’s $1.01 EPS and $7.01 EPS in the samequarter in 2007.  The revenues are also going to look nuts and we arenot even using them because some are calling for actual "negativerevenues" because of the items.

Morgan Stanley (NYSE: MS) is expected to post a loss at -$0.37 EPS. The company isnot a huge money-loser, but it did report earnings losses of -$0.37 inthis quarter last year.

Let us be clear on thing here: while we wonder about maintaining profitability, we do not expect that Goldman Sachs willactually post a profitable quarter.  It has been too hard to makemoney in this market.  There is almost no underwriting business.  Thereare no major deals.  Goldman Sachs has not been ableto post the large profits in its own managed funds and client fundscompared to the gains of 2007 and into 2008 when the firm made hugebets against the mortgage markets.  And the value of everything exceptfor Treasuries is likely to be lower than its report at the end of lastquarter.  We would also expect that the new Madoff-doubt would cast ashadow where some might even challenge the notion that Goldman somehowmanaged to live up to its "Golden Slacks" nickname.

If things were so great, there wouldn’t be story after story of layoffs. There would also not be story after story of cost cutting in the sector.  It seems that the (very light) rumors or notion of Goldman and Morgan Stanley even considering a merger (which we doubt) also show the mood of how weak the prospects are ahead compared to the glory days of the past.  As far as what lies ahead, Wall Street has its own earnings expectations very low for the quarters ahead. 

We also first started hearing about the notion that Goldman Sachs wasgoing to post losses close to two months ago from institutional brokergossip.  It is only over the last couple of weeks that the consensusnumbers for each brokerage firm went into formal loss expectations.90-days ago, Goldman was expected to earn north of $4.00 EPS and MorganStanley was expected to earn $1.10 EPS.

A lot has happened since then.  We would note that this is the firstreal cycle where analysts might be ahead of the brokerage firm earningsreports.  That also means that there could still be many surprises.The brokers generally earned far more than analysts would carry astheir estimates.  Perhaps the analysts (analyzing each other) are beingtoo negative as well.

We’d expect tomorrow to be a possible game-changer for these firms.  We’d alsoexpect that the Goldman Sachs numbers for better or worse will also setthe stage for other brokerage firms set to report earnings.  That willcreate some changes to estimates even if the First Call numbers do notreflect that by Wednesday morning.

Goldman Sachs shares are down over 3% in the last hour at $65.58, andits 52-week trading range is $47.41 to $217.80.  Goldman also had morethan 14.5 million shares listed as being in its short interest as ofthe end of November report.  Morgan Stanley shares are down 3.5% at$13.37 in today’s final hour, and its 52-week trading range is $6.71 to$55.39.  Less than two years ago this was a $90.00 stock.  MorganStanley also had more than 53.6 million shares listed as being in itsshort interest as of the end of November.

Needless to say, the mood going into earnings is rather dark.

Jon C. Ogg
December 15, 2008