Replies to post #493486 on Zeev's Turnips Patch-No Politics (ZEEV)

[steviee]

Chinks in Goldman's Armor
By Michael Comeau
Research Associate
8/17/2006 7:43 AM EDT

This column was originally published on RealMoney on Aug. 16 at 10:51 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Goldman Sachs (GS - commentary - Cramer's Take) has been a stellar stock-market performer over the past few years, rising over 100% from its 2002 lows. Given those gains, it's not surprising readers almost unanimously chose the "should I sell Goldman?" option in my recent survey.

In addition to being a great stock to own, Goldman has been a formidable industry competitor, easily fending off aggressive moves into investment banking by commercial bank giants like Citigroup (C - commentary - Cramer's Take) to retain its top spot on most of the league tables.

Perhaps most importantly, Goldman has been particularly adept at wading its way through complex transactions jammed with conflicts of interest, such as the NYSE Group's (NYX - commentary - Cramer's Take) merger with Archipelago, in which Goldman advised both parties while owning seats on the NYSE.

Goldman has also aggressively built up its private equity operations, even though this may conflict with the activities of private equity firms that use Goldman's investment banking services. Contrast this with JP Morgan (JPM - commentary - Cramer's Take), which spun off its private equity business in 2005 to avoid this type of conflict.

These two trends are indicative of Goldman's fundamentally powerful banking business, and why it's arguably the world's leading investment bank.

However, given recent market activity, there are signs that the party is coming to an end, as the weak equity markets are likely to take a toll on Goldman's results -- more so than most investors may realize.

Equity markets are the first area of weakness impacting Goldman. Recently, many stock offerings have either been pulled or priced lower. For example, retailer GNC, Internet-address registrar Go Daddy Group and RFID company Alien Technology all pulled their offerings. A common excuse for these events is "unfavorable market conditions."

In addition, numerous investment banks, including Deutsche Bank, Credit Suisse, Jefferies (JEF - commentary - Cramer's Take) and Thomas Weisel (TWPG - commentary - Cramer's Take), have cited difficulty in equities.

Go to NEXT PAGE