Goldman Sachs’ European Bet

European Central BankRecently, bank stocks have taken big hits following news of the trading debacle involving JPMorgan Chase & Co. (NYSE/JPM), causing the firm over $2.0 billion in losses. This has caused a market sector selloff across the entire investment banking space. But some interesting developments have occurred with some bank stocks.

The Goldman Sachs Group, Inc. (NYSE/GS) has recently disclosed that it actually increased its holdings of Italian sovereign debt. This was offset by selling Italian bank stocks. This is a very interesting trade. As of March 31, 2012, exposure to Italian government debt was over $8.0 billion, as opposed to just over $3.0 billion at the end of December 31, 2011. Conversely, Goldman reduced its holdings of Italian bank stocks to only $623 million, as opposed to almost $7.0 billion as of December 31, 2011.

Goldman Sachs is building a large inventory of Italian debt in its thinking that clients will want further exposure to sovereign debt versus holding Italian bank stocks. Many bank stocks in Europe continue to need more recapitalization and this will weigh down their share price for some time. Short-term sovereign debt of less than three years is actually backed by the European Central Bank (ECB), so is seen as a safer trade than the bank stocks. In that regard, Goldman has made a shrewd decision to avoid bank stocks in Italy, as I definitely see more problems arising in the future.

Goldman Sachs has been hit recently as well as many other bank stocks in a selloff across the entire market sector. However, over the long run, Goldman Sachs has found a way to produce profits over the long term. Within the market sector of bank stocks, Goldman has usually been a leader in generating trading profits. An example is can be seen by looking at the last quarter in which Goldman reported only one losing day; conversely, it also reported 24 days of gains of at least $100 million.


The possible downgrades by Moody’s Investor Service are worrisome for Goldman shareholders, triggering additional payments and collateral. The company is also pulling money from hedge funds ahead of the new banking regulations called the “Volcker Rule.”

bank stocks

Chart courtesy of

The stock is currently under pressure, as is the entire market sector. I would avoid bank stocks that have large amounts of unknown exposure. In general, this market sector is looking very weak and I don’t believe in catching falling knives. Right now, with the turmoil in Europe, who knows exactly what these bank stocks hold in their portfolios.

Looking at the chart of Goldman Sachs, I don’t see a drastic move up; in fact, I see a continued selloff until a base is formed. All of the support levels have been breached and the downward move is accelerating. Some might indicate that an oversold condition, as noted by the circled Relative Strength Index (RSI), is currently underway. While I do agree that the stock might temporarily bounce, I see all signs that any move upwards will be met with considerable selling pressure.

At this point, I would probably avoid this market sector for most of 2012. Once new regulations are enacted, then we can try to tackle what the true value for these bank stocks is. Don’t forget; with Europe falling apart, there are billions of dollars in credit-default swaps (CDS) that could blow up and take this market sector down even further.