Market Mirroring Goldman Sachs?

Mention Goldman Sachs (GS) and strong reactions follow. Some respect the ability of the firm to constantly make money in nearly every market environment. Others begin thinking of conspiracy theories and Goldman's many tentacles. Either way, GS is not the typical securities firm and has often been viewed differently.

Having started my career there, I can say the firm is different. Over the years I have been at a handful of other firms, but the time at Goldman was unique.  I have yet to see one organization with the dedication, creativity, and drive that permeates the Goldman culture.

What keeps the culture so strong is debatable, but a possible answer lies within the firm's business principles. A list of ideals, it is meant as a blueprint of how each employee should operate. At the top of the list is the belief that "our client's interests always come first."

Anyone reading the news since the Securities and Exchange Commission (SEC) filed fraud charges last week will surely chuckle when thinking about Goldman putting "the client first." The SEC charges are complex and the legal battle ongoing, but in simplified form, GS is accused of brokering a deal between two clients without fully disclosing what one party was doing. When the CDO at the heart of the transaction imploded, one client saw great gains and the other tremendous loss. I guess Goldman forgot to determine which client's interest was coming first.

As this story continues to evolve we must be prepared for the legal arguments and spinning of public opinion. Looking beyond the current headlines, most analysts view the SEC case as a temporary setback for a great franchise. With GS's strength in so many different markets, some believe that any penalty will have little effect on the company's future. Using past events, such as the conflicted research settlement, as a proxy, the belief is Goldman may take grief for a few months, but a few superficial management changes and a big check will make its troubles disappear.

Relying upon past templates to make predictions is often a safe approach. However, this case will produce a different outcome. Some of the largest mortgage related losses were suffered by AIG and Royal Bank of Scotland (RBS), Fannie Mae, and Freddie Mac. Some may glance at those names and say they were companies that did a poor job managing risk. However, they also share an important similarity-government ownership.

Because the credit collapse triggered and magnified the recession and stock market crash, people are constantly looking for someone to blame. The risk taker who bought more house than he could afford blames his bankruptcy on greedy lenders instead of his own foolish actions.

With government owned firms on the losing side of Goldman's deal, politicians will demagogue. It does not take a lot of foresight to predict an opportunistic politician describing Goldman's action as a direct assault upon individual taxpayers. As elections loom both in the United States and Europe, the dangers of a politicians facing reelection will loom over Goldman's stock price for a long time.

How this case develops remains to be seen, but for now the market is concerned. The day before this news broke, 11 of the 14 markets I track hit new highs. Since then, none have bettered the recent peak. For GS, a quick collapse has brought the shares to key support at $160. As the market digests each new headline, the price continues fluctuating near support. Combining these observations leads to a picture of a market that refuses to rally and is showing hesitation for the first time in months. We can never predict how great rallies will end, but suddenly the warning signs are flashing.