Monday, April 13, 2009

If Goldman's Selling... Beware of Buying

If I've learned anything, it is that when the "smart money" is selling, you SHOULD NOT be buying. The WSJ reports:

Goldman Sachs Group Inc., riding a rising market, is considering making a multibillion-dollar offering of its shares to investors as part of an effort to repay a $10 billion government loan, according to people familiar with the matter.

The move, which could be announced as early as next week, comes as the firm prepares to report solid first-quarter earnings Tuesday. Goldman executives haven't determined the exact size of the offering, but it is expected to be at least several billion dollars, these people say. They caution a final decision isn't made, and will be based partly on market conditions.
Although Goldman's stock price has been far from immune during this global downturn, a sale at today's equity valuation would be a substantial improvement (more than 2x) than seemed possible just a few months back.

Tyler Durden at Zero Hedge with the conspiracy theory behind this recent run-up (he also makes the case that this low volume rally is poised to crash):
Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.
Below is the data he references in chart form...

In other words, Goldman Sachs own trading has made up a HUGE portion of the program trading volume on the NYSE since the market turned in early March (here is a link to the past week of data, a week in which program trading was suspiciously higher than past weeks and one in which we saw a massive rally in financials). The chart below details how unprecedented this level of "program trading share" by Goldman is as compared to the first week of 2007 and 2008.

Goldman's principal trading amounted to 20%+ of all program trading reported on the NYSE, up from between 3-5% one and two years back. In other words, leading up to a period when Goldman may be issuing several billion dollars in an equity offering, their own principal trading has amounted to 4-5x more volume than what had been typical, in an illiquid market, potentially driving up the value of financial equities in the process... interesting.

Update: Zero Hedge has an update to the original post that makes Goldman a part of the run-up, but not the reason for the run-up (i.e. they are just delta hedging their book)

Source: Yahoo

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