Goldman Sachs still king of the mountain

Goldman Sachs reported Q2 earnings this morning that were significantly better than the consensus estimates. As I listened to the conference call, I was reminded again that Goldman's stock really is special and I am angered by the whole situation.

First, why is Goldman special?

• This is one of the very few stocks in the financial sector where the expectation is for them to beat expectations. Normally, this is a very dicey position to be in for a stock as it creates the possibility of a dramatic drop in sentiment if they miss. I think JP Morgan might be one of the other stocks that is broadly expected to beat expectations.
• Long-only investors "trust" Goldman more than any other financial stock I have seen. One could argue that Goldman has earned this trust by outperforming its peers for quite a few years now and surviving the financial meltdown of 2008. The reason this is important is that it would be hard to convince these investors to sell their Goldman stock, which makes a short thesis problematic. "Goldman will figure out how to make money," is a widely held view and therefore I think sentiment on the stock could survive an earnings miss that would damage almost anyone else. I think even Warren Buffett is a bit too enamored with Goldman.
  
• Goldman is possibly the most politically connected firm in the US. This is a double-edged sword, but at least so far, it would appear that it has only helped, without much, if any, backlash.

Why does all this make me mad? Well, lets start with the financial meltdown of 2008. Bear Stearns crashes and burns. The Fed steps in to backstop a sale to Barclays, but shareholders are ravaged. Merrill crashes and burns. This time Ken Lewis decides to pay a huge premium which turns out to be stupid, but at least the Merrill shareholders were not ravaged. Lehman crashes and burns. The Fed and treasury stand on the sidelines and let it burn. Shareholders are ravaged. All of a sudden Goldman Sachs starts to be under pressure. Oh no! Two giant hedge funds, formally known as Goldman and Morgan, are allowed to sign a few papers and magically become bank holding companies which allows them to borrow directly from the lender of last resort and effectively saves them from the liquidity freeze.

Then TARP was rushed through Congress. Ten systemically important banks were basically forced to take equity infusions. Some of those, most notably J.P. Morgan, probably really didn't need or want the capital. Goldman however needed all the help they could get. Their business model had clearly been under attack and confidence was shaken. As the crisis has since receded, Goldman has fought to return the capital and be free of Congress' heavy hand (I can't blame them for that).

I think what bugs me is that Goldman was basically saved by the government, but there is no humility. Despite being a bank holding company, their last quarter made it crystal clear that Goldman has not really changed at all. They have reduced their leverage, but no one reading through their earnings release would be thinking, "Oh, this looks like a bank". But to listen to their conference call, it is as if nothing weird happened in the last year.

Am I just jealous because they are so good and I did not own the stock from $60 to $150? I am jealous that they are so good, but I'm also suspicious. Almost all banks (I would say all, but there is probably an exception I don't know about) report a lot of detail about their balance sheet and business. Goldman is famously light on detail. Someone asked on this morning's call how much of their FICC revenue came from commodities and they wouldn't answer the question. That specific question isn't that important to me, but it underscores yet again, that we know so little about how they make their money.

The blogs have been buzzing about the stolen code from Goldman's proprietary trading business. I read that the FBI was called in because, in the wrong hands, the code could be used to manipulate the markets. I hope Goldman itself isn't the "wrong hands." But with such little disclosure and such high-powered friends, we may never know.

Despite all my annoyance at Goldman, I think it is very hard to short this stock. My guess is that the M&A cycle will start to improve very soon and this is a high beta stock that will most likely do well in the bull market I am expecting. And as I mentioned, it is hard to come up with a catalyst that would dislodge such a loyal and devoted shareholder base.