My Biggest Whiff for the Year: Goldman Sachs

Just thinking about writing this piece makes me cringe.

After celebrating gold’s fresh 18-month highs yesterday, it occurred to me that I need to review my biggest whiff of this year: Goldman Sachs (GS), affectionately called “Government Sachs.” I could just as easily call this one “how I missed out on at least 900% returns.”

In November, 2008, James Stewart wrote in the Wall Street Journal recommending a Buffet-like investment in GS by essentially evoking the notion of “too big to fail” (aka moral hazard). As part of his strategy, he advised buying Jan 2010 with a strike of $105 calls. At the time I looked, these were trading for $8.05/$8.55. Those calls are now deep, deep in-the-money at close to $85, a return of almost 900%. I granted Stewart his points but suggested buying 5 Jan 2010 $105/110 call spreads instead to limit downside risk, capping overall returns at 200% and coming far short of the profits on the one Jan 2010 call. No matter, I chose to pass on the opportunity anyway.

A week later, I revisited the GS play. GS’s stock was up 24% since the last piece. The Jan 2010 $105 calls were up 63%, and the Jan 2010 $105/110 call spread was up 42%. I passed a second time.

Now, roll the tape all the way forward to early February, where I finally declared “Now I Can Get Interested in Goldman Sachs.” The stock had gone through another violent sell-off in January, but in early February it was making new highs for the year. What got my interest was that GS expressed its ardent desire to return TARP funds. This time, I passed on GS again citing my expectation for the stock market to retest and break the November lows (which it did), but I confidently declared that GS “..is now firmly on the ‘buy on oversold dips’ list.”

GS became oversold around February 20 and even moreso around March 9. The now famed March generational lows did not take GS to a new 52-week low; in fact, GS was still 50% above those lows and was technically still on an uptrend from November. Unfortunately, by then, I had become too bearish to recognize my opportunity to get into my GS trade. As they say, the rest is history.

Today, GS stands at fresh 14-month highs around an amazing $189/share, more than double the March lows, and 4x the November lows…and it is still in the middle of a strong uptrend. The daily chart of GS makes it clear that the financial panic of 2008 is only a distant memory for Goldman, and, more than likely, that panic was exceptionally profitable for them. (I have made sporadic forays into GS in the past few months – the latest being a call spread that I sold yesterday – but those profits are mere drops in the bucket compared to what “shoulda/woulda/coulda been.”)

*Chart created using TeleChart:

At this point, I cannot imagine GS going much higher in the short-term even with its all-time high another 30% above. However, GS stays on the “buy on dips” list for now.

Be careful out there!

Full disclosure: long SSO puts