March 21st, 2008 by Swarup ||
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What if the other shoe drops but no one hears?
Standard & Poor’s analysts tested the tree-falling-in-an-empty-forest scenario, as it lowered the outlooks for Goldman Sachs and Lehman Brothers to negative while markets were closed.
Standard & Poor’s analysts Scott Sprinzen and Diane Hinton affirmed their AA-/A-1+ rating for Goldman Sachs Group (nyse: GS - news - people ) and A+/A-1 rating for Lehman Brothers Holdings (nyse: LEH - news - people ), pointing to strong underlying businesses and acceptable first-quarter earnings. But S&P also lowered the companies’ outlooks to “negative” from “stable” on expectations of 20%-to-30% drops in net sales after write-downs going forward.
The analysts also revised their outlook for the U.S. securities industry at large to “negative,” meaning there is a one-in-three chance that there will be a rating change in the next two years.
Goldman shares closed Thursday ahead by $13.14, or 7.9% , to $179.63 and Lehman stock added $6.42, or 15.2%, at $48.65.
Analysts, while acknowledging the Federal Reserve’s support for U.S. broker-dealers boosts confidence in capital markets, said negative outlooks for independent securities firms are appropriate since the potential for decreased profitability is still substantial.
The slashed outlook may be especially difficult for Lehman Brothers to stomach. The financial services firm, whose business mix most closely resembles that of virtually collapsed Bear Stearns (nyse: BSC - news - people ), has dismissed recent rumors that it’s headed down the same ditch as Bear (See: Financials Fall Into Bear Pit). Analyst Sprinzen says Lehman has done a better job managing its liquidity than Bear. As of Feb. 29, the firm’s excess liquidity structure was $34 billion.
“Lehman is among the largest proportionately of the U.S. broker-dealers, and its sources-to-uses ratio is the strongest of the five,” Sprinzen said, adding that earnings have held up and Lehman’s fixed income business remains profitable despite being directly affected by the economic slowdown and problematic asset-related write-downs.
Sprinzen called Goldman Sachs’ leftover mortgage and leveraged finance-related commitments “manageable” and praised the strength of its liquidity position.
“However … the firm’s emphasis on trading activities and its aggressive risk appetite leave it open to the possibility that major missteps could ultimately occur, leading to a change in investor sentiments,” Sprinzen said.
Although Goldman is the most profitable U.S. broker-dealer, Sprizen said last quarter’s profits were weak, with sales off 35% from the previous year.
Documents filed with the Securities and Exchange Commission on Thursday March 20 show that Goldman’s President and Co-Chief Operating Officer Jon Winkelried sold some 30,000 shares at about $173.85 each, totaling approximately $5.2 million, from Wednesday to Thursday. Vice Chairman Michael Sherwood unloaded some 7300 shares at a per share price of about $174.85, totaling close to $1.3 million Wednesday. Goldman could not be reached for comment
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