Is Goldman Starting To Offload Prop Positions?

Abby Joseph Cohen must have threatened with retirement and David Kostin is here to pick up Olympic torch. Goldman Sachs just raised its 2009 year end S&P target to 1060, "13% above the current level" meaning Goldman prop positions are full and the great offloading to marginal buyers has begun. The justification: "After trading in a 10% band for the past three months, our “Pop, Stall, & Sustained recovery” framework, sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009." More specifically, 85 Broad is raising its 2009 EPS to $52 from $40, and 2010 EPS to a patently absurd $75 from $63, a 45% increase in bottom line earnings. And just so it seems more credible, "measured on a pre-provision and pre-write-down basis our estimates are $69 and $81. S&P 500 trades at 12.5x our 2010 operating and 11.6x our pre-provision EPS." In other words, pure rose-colored glasses halcyon.

As Q1 and Q2 earnings "beats" have demonstrated, all bottom line upside surprises have come from companies trimming the fat and mass firing employees left and right: alas for the most part revenues have been flat if not materially lower to expectations - just look at GE's recent results for a good recap of what is happening wth the economy theme. Arguably, there is no more SG&A extraction available to the vast majority of US corporations, meaning Goldman is expecting an unprecedented pick up in revenues. And with the US consumer completely tapped out and unable or unwilling to borrow, this implies that foreign countries will have to pick up the pace in bailing out our top line: so look for much more weakness in the dollar to even remotely justify Goldman's prediction. This will put Bernanke's claim of pursuing a strong dollar policy to the biggest test, as well as Europe's resolve to continue playing in this highly rigged version of F/X "game theory."

But back to Goldman - up until this point the firm has been at least slightly sensitive about catching marginal end buyers. Now the guns are blazing, and as all Wall Street professionals tongue-in-cheekly know all too well, a forceful upgrade is when any firm (Goldman most definitely included) starts to sell into a call (in this case its own). So buyers please beware: you are now implicitly buying the shares that Goldman and other brokers have been accumulating over the past 4 months.

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