Gold Man, Gold Bug, Golden Opportunity, Goldman Sachs (NYSE:GS)
The big news in the markets and media is Goldman Sachs (NYSE:GS), just charged with a fraud suit that alleges they didn’t disclose material information about a CDO they packaged and sold in 2008. The stock promptly sold off to the tune of 15% (down nearly $30, to $155) before rebounding to settle at $160, down 12.79% for the day.
Give us a break. In the first place, a lawsuit over a charge like this isn’t going to amount to a hill of beans – even if it results in Goldman losing or making a deal with prosecutors. And it certainly isn’t worthy of knocking $12.5 billion worth of market cap off the stock. Call it an overreaction, call it oversold, call it what you will; it’s plainly ridiculous.
What’s likely going on here is political cover to make the Fed and Congress’s job easier to pass legislation limiting the size and scope of private banking operations. We say nothing material will come of the case against Goldman.
Here’s Goldman stock for the latest six months:
For those who bought GS stock on our initial New Year’s recommendation at $164, you’re now down exactly 2% on the trade, and you’ve got a far sounder technical picture going forward. Hold your Goldman stock, and if you didn’t have a chance to buy back then, consider opening a position here.
Why?
1. The shares are holding above the January lows and clinging well to support at the 274 day moving average.
2. Two gaps in the 164 and 182 range had to be filled – Friday’s trading accomplished that in one fell swoop.
3. Volume shot up to six times the average daily trade, indicating possible panic capitulation among sellers.
4. RSI and MACD technicals show a mixed picture, with Relative Strength now below the bullish ‘waterline’ level. MACD, in contrast, may be signalling a mere aberration in a continued uptrend.
The short and the skinny is this: ignore the hype. The time will come to transition out of the financials – and it may be soon. But a panic jump from Goldman Sachs is completely unnecessary at this point.
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A Second, Shinier Victim
The other (unlikely) victim of Friday’s trade was gold bullion, which plummeted by roughly $30 at the same time that the Goldman selling was gaining traction.
It appears that panic set into the bond and currency markets, where the ten year note yield dropped by two full percentage points and the buck rose thirteen basis points to retake both its long term and 50 day moving averages.
Here’s the dollar:
The dollar is making higher highs and higher lows, and both RSI and MACD maintain bullish postures above their respective waterlines.
All this bodes well for the general stock market and less well for gold. If the dollar and treasuries are where the scared money is now running, it may be that gold’s safe haven inflows may be nearing an end. Further strength in the dollar will underscore this point.
This Week’s Trade
The Goldman nonsense opens up a rare opportunity for us to make an intra-financial options trade that looks quite exciting.
Here’s the background.
Many will remember the embattled insurer, MBIA (NYSE:MBI), from previous issues of Wall Street Elite. That company gave us several profitable trades and, most recently a lovely 13.5% profit in seven weeks (see ‘Banking on Banking Lawsuits’, January 27th, 2010).
When we recommended that trade in we wrote,
The long and the short of [it] is that if any of these hundreds of cases now pending are successful, the entire bond insuring consortium of companies stands to gain materially, and their share prices, needless to say, should also come into the sun.
Well, it appears the market was already factoring a potential headline news case into its pricing of MBIA shares, because the stock has been extraordinarily strong of late. Here’s MBIA for the last six months:
While Goldman and Gold were tumbling, investors were jumping into MBIA (and other debt and mortgage insurers) like frenzied kangaroos. MBIA was up on last Friday’s trade by better than 5% — today they are up 2% already — and they’re not even involved in the Goldman suit.
• The volume was excessive, too, in our opinion – five times average daily volume.
• And RSI is now nearing extreme readings.
It’s all overdone as far as we’re concerned, and this is how we’re playing it.
We’re betting on some steep moves: higher for Goldman and lower for MBIA. Or, conversely, should the financials fall, we expect sellers to be more active with MBIA than Goldman – since the selling on the latter, in our opinion, has already occurred.
Those who see it like we do should purchase the November MBIA $8 PUTS, now trading for $1.40, and sell the October Goldman $100 PUTS, currently selling for $1.90.
The trade is meant to be ‘zero premium’, but pocketing $50 per pair traded never hurt.
Also note that the expiry months are different. That’s because the two don’t have matching options available until January of 2011, and we didn’t feel it necessary to go out that far. At the same time, we fully expect to close out the trade well before either expires, so there’s no great danger with the differing months.
Note: regarding our April 11 recommendation to write covered calls on MGM Mirage (NYSE:MGM), the trade came through famously, pocketing for us every bit of the 10.43% profit we expected in the six week time frame we allotted for it. Congrats also to those who took it on.
Wall Street Elite recommends purchasing one MBIA (NYSE:MBI) November $8 Put for $1.40 while also selling one Goldman Sachs October $100 Put for $1.90.
With kind regards,
Hugh L. O’Haynew
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