Goldman Sachs reports March13th: facing very tough comp's

Last week we said that Lehman Brothers (LEH) was going to kick off earnings season for the brokers, but in fact Goldman Sachs (GS) starts the Feb '07 quarter's reporting with the release before the bell tomorrow morning.

Wall Street analysts are looking for $4.72 per share from Goldman Sachs on Tuesday morning which amount to roughly a 1% year-over-year (y/y) decline in eps. The revenue estimate per Thomson First Call consensus is $10.692 bl or 4% y/y growth in revenues.

The real challenge to tomorrow morning's reports is that Goldman is facing whopping comparisons to last year's February quarter when the brokerage giant reported $10.34 bl in revenues versus a $7.5 bl estimate and $5.08 in eps versus a $3.29 estimate. The respective "upside surprises" for Goldman last Feb '06 was 41% and 54% for revenues and earnings respectively.

The last four year's Goldman's y/y growth in earnings per share (eps) has been 46%, 52%, 26% and 76% respectively, so with a p/e ratio of 10(x) - 12(x) earnings, an investor has (seemingly) gotten a lot more reward for the perceived risk assumed for Goldman's equity.

However, what few retail investors know or understand is the poor job most Wall Street's analysts do is forecasting their own business, and the volatility inherent in the business of Wall Street.

It is my own opinion but the majority of Wall Street analysts do a poor job forecasting results because of the opaque nature of the trading and investment banking firms. One trader or trading desk can be hugely profitable (or unprofitable) based on market conditions, and although the risk management functions have dramatically improved at Wall Street firms since the 1980's, the business still lacks transparency, which is just how Wall Street likes it.

Finally, while a lot of attention will be focused on the recent turmoil in the subprime market, I consider the real risk to the brokerage stocks to be widening credit spreads in the high grade and high yield corporate bond markets, since this will impact not only trading but fixed-income investment banking, and portends negatively for the equity market, if and when credit spreads widen. The subprime loan market is still just 5% of all outstanding bank loans, and likely a smaller percentage of the Wall Street firms available capital.

As of this posting, the high grade and high yield credit spreads indicate that there is no pressure being felt in the corporate bond markets.

Finally, by looking at a "weekly" chart of Goldman Sachs, the stock has closely tracked the 50 week moving average since the year 2000, thus there should be soild support for the stock near the $175 - $180 area, which is where the 200-day and 50-week moving averages converge.

This last equity market correction started on February 27th, or the second to last trading day of the quarter for the major brokers like Goldman and Lehman. That means they still had 89 of 90 days in the quarter with a market tailwind.