Goose, Moose, And A Lot Less Leverage Moving Forward

Goldman Sachs and Morgan Stanley are announcing earnings in the near future.

Goldman Sachs which has converted to a bank holding company is still aggressively expanding its principle trading and investment banking operations, is expected to report its earnings on April 13TH, the stock has gained some 70% the last 2 months versus a roughly 14% loss for the S&P for the year. Moose has returned some 75% from its February low. Both are way off its all time highs, but is there any more room for these guys to run up? I don't think so, but I do like Goldman's chances somewhat longer term. Morgan Stanley wants to pay back TARP, and they are going to have to raise money via Private Equity or Public Offering to do it.

Goldman Sachs as we all know is huge in principle trading, they have deleveraged as so as the rest of the planet, but they are still very aggressive in their trading strategies. This is the wild card. They are betting big as they always do. They are in the front of the class in derivative and swap trading. If the credit markets can escape (BIG IF) another meltdown, Goose can come out ahead on the basis of:

1-Improved trading environment/economy
2-Less Competition
3-Large principle transaction gains.
4-Culture of controlled risk taking.

The Goose has come out swinging in what they do best- Trading. They have taken a far more aggressive posture then the Moose. Goose's liquidity/leverage ratios are fine, but they still need government money to support their operating model. This is why they registered as a bank holding company, there was no future for them as a pure play investment bank. The volatility in trading was to great. Goose currently has a gross leverage ratio of 17-1, which has decreased some 50% since 2008. The adjusted(Assets to Tangible Equity) leverage ratio is 8-1, also a decline of 1/2. These are the lowest leverage ratios that the Goose has had since it became a public company. Obviously these numbers are helped with Berkshire's investment ($5.75B) and the $10 Billion from TARP, but the leverage will go down from here as well, as they really have no choice, they have to hedge their volatile trading operations.

As I have stated before, The Era Of Wall Street is over. If there is no securitization, then there is no leverage, no leverage means no big bets made in principle trading. No big bets made in principle trading means no P/E multiple expansion.

Moose on the other hand, has taken a much more conservative approach. They want to pay back TARP, so they are in no mood to make big bets in trading. Investment Banking/Trading is under severe pressure, because of credit market turmoil and lack of leverage. Moose's gross leverage ratio is 12-1, lower then Goose, and a 60% drop from 2008 levels. Again, The Moose can survive, as they have less exposure (like Goose) to RBMS, credit cards, and auto loans, but what they do have is considerable exposure to risky real estate/commercial loans, and still a very volatile trading book of CDS/CLO/CDO's. Net...Net...If things go south once again (50/50 chance), Moose probably does better then Goose, but if things pick up Goose will do much better.

What is certain for both companies are the following:

1-More Write Downs in distressed securities
2-Pair back risk exposure, although Goose is still aggressive here.
3-Deleveraging will have to continue.
4-Gains will be made as there is less competition going forward.
5-Will do better then commercial banks as their securities books are already marked to market.
6-Profit margins will suffer as risk is pulled in.
7-If things go south, watch out for more funding from TARP/TALF.

Random Thoughts-

Markets did run past 800 on the SPX and 7500 on the DOW. But we needed a close above those levels. We are in wait and see mode. If the markets cant get above these levels, then a move back down below 7000 is expected. with financials leading the way down. I do like energy as Crude has rallied above $50.

Aggressive short covering in the dog banks. (I am short the Banks BTW as of yesterdays close) Citigroup has gone from 1 to almost 4 on short covering alone. No value here in Citi. There are multiple arbitrage trading strategies currently involving Citi, so its going to be a volatile ride.

The stuff happening at AIG is beyond ridiculous and border line comical. Iowa Senator Grassley's suggestion that AIG execs should kill themselves is the most refreshing thing I have heard out of DC ever. He exemplifies the mode/tone of the country to a T! Hats off to him in showing courage to make such a statement. While tax payer traitors like Connecticut Senator Chris Dodd keep making rules enabling the out of control and absurd behavior from the likes of CEO's. Why has there not been a public demand for his resignation? He purposefully put in the part approving bonus payments to TARP recipients in the last bailout package.

Treasury Secretary Tim Geithner is on very thin ice. He just hired the top economist at Citigroup to his inner circle. Again...how in the world do you expect to regulate banks when the very people regulating them used to work at the banks! This is the problem. Obama and the White House are in total damage control mode with the Treasury Department. Expect Geithner to tender his resignation by April end.

Back to Citigroup- They currently have 2/3rds of their bad assets ($300B) in Mortgage and Real Estate Securities. 26% of these mortgages are sub prime, 25% of these are in delinquency. They have current exposure of $20B in Credit Cards and $17 Billion in Auto Loans. With employment trends still weak and no turn in the economy till the end of the year, this is very telling. Citigroup just wont be able to make it without massive government support going forward. This just means more shareholder dilution...meaning much lower prices in its common stock.

BOFA has one shot at making it. They have to start selling off assets like pieces of Merrill, NYSE Specialist Operations, and other assets to offset losses. They still have not marked their trading books to the market. They currently have an over valued loan book of $44B, based on current mark to market rules. BOFA had cumulative $3.2B in Credit Card losses in 2008, which will be much worse this year. Give them credit, they modified 230,000 mortgages so people can stay in their homes. They also had combined $6.45B in trading losses in 2008 not including Merrill. To put this into perspective, they lost $1o Million or more 1 out of every 4 days in 2008. Ken Lewis has to just shut up and resign.

Ben Bernanke and The Fed just keeps on doing the same stuff that hasn't worked from the beginning. They keep printing money and buying assets that are NOT troubled. They just want to keep the market afloat. Yesterdays announcement of buying $300B in treasuries does nothing for the credit markets except lower interest rates. This only creates artificial buying of stock equity futures. They are creating a massive liquidity trap. These guys just dont get it, the only way to fix the situation is to force the banks to mark their securities to market, then sell them to the government. This will revitalize bank balance sheets, shrinking them down to size. The banks will take huge hits in their common equity and ratios, but eventually the credit system can be unfrozen. The banks want no part of taking any responsibility, they want the treasury to just keep printing money, congress to relax mark to market regulations, so they can go back to overcharging the public on fees, and in the mean time, hand out billions more in bonuses.

All of this excess liquidity hitting the capital markets is no good for everyone involved expect the banks. The dollar has collapsed the last few days, Crude Oil which is a dollar play has rallied above $50. All other major commodities have also risen. Gold once again is marching towards 1000. All of this means that massive inflation is in store in a few years that will be just as painful as what we are feeling today. The treasury and the government is just feeding another potential bubble. You watch...after the market falls apart once again...another bogus round of buying useless treasury securities is in the cards.

If you can refinance/buy a home locking in 4-4 1/2%....DO IT. You wont have the opportunity ever again.