After That Release, Should Goldman Be Downgraded To Silverman?

That was nothing short of a brutal earnings report from Goldman Sachs GS and is worth of asking whether the prestigious investment bank has lost its luster on Wall Street. The New York-based investment bank reported earnings of $1.85 per share on $7.28 billion in revenues. Wall Street analysts had been expecting earnings of $2.27 per share on $8.14 billion in revenues. Expenses plunged during the quarter, dropping 23.3% as worries continue to persist that the bank will lay off employees to decrease headcount, as fixed income, currency and commodities trading revenue fell 53% to $1.6 billion. “During the second quarter, the operating environment was more difficult given global macro-economic concerns,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. “In addition, certain of our businesses had disappointing results as we reduced our market risk in response to attempting to manage fluctuations in prices and market liquidity. Despite these challenges, we continued to address our clients' needs through our strong global franchise and are well positioned to respond as economic conditions and sentiment improve.” Breaking down the revenues is where you start to see Goldman lose some of its luster. Investment banking revenues were sharply higher than last year, at $1.45 billion, up 45%. The company continues to deliver in the top spot of M&A advisory services, but everything else is starting to crack. Revenues from Institutional Client Services were $3.52 billion, 29% lower than the second quarter of 2010 and 47% lower than the first quarter of 2011. Net revenues in Investing & Lending were $1.04 billion in this quarter, and included a $176 million loss from its ownership of ordinary shares of Industrial and Commercial Bank of China Limited. Compensation and benefit expenses is where you are starting to see a crack, as the company had a 16% decline from last year for compensation. The company set aside $3.20 billion during the quarter. Shares have continued to suffer throughout 2011, and are at a new 52 week low in pre-market trading. Despite declaring its regular quarterly dividend of 35 cents per share, investors are bailing out on the "vampire squid" and have been for some time. The market sniffed these results out well ahead of time, if you use the share price as an indication. At less than 8 times forward earnings, shares are extremely cheap here. Shares are trading at less than 1 times book, and according to Anthony Scaramucci last night on CNBC's "Fast Money," investors can make a of money buying Goldman at less than 1 times book and selling for 2 times book. Goldman Sachs certainly has a PR problem, and this quarterly earnings miss probably has more than a few people on Wall Street, as well as Main Street cheering for the stock to be down roughly 3% or so as of the time of this writing. For years, the company could do no wrong, and even if it did, it would be backed up by the U.S. taxpayer at 100% (see A.I.G. bailout, Hank Paulson as Treasury Secretary). Goldman does appear to be losing some of its luster, though it will always be "Government Sachs" and will always attract the best and the brightest. The shine you are seeing coming off this morning is not from Lloyd's head reflecting in the sun. It is the bank for the first time in recent memory not being on top of its game, despite having practically invented the game. It is too early for Goldman Sachs to be downgrade to Silverman Sachs, but more reports like this and investors will not be so kind. ACTION ITEMS:

Bullish:
Traders who believe that Goldman Sachs will rebound might want to consider the following trades:

• Go long Goldman at these levels, particularly at less than 1 times book. The company purchased $1.5 billion of its own stock during the quarter, so it may be in the process of taking itself private.

• Another way to benefit is to purchase long dated calls if you believe what Anthony Scaramucci said last night.

Bearish:
Traders who believe that Goldman Sachs is starting to take a turn for the worse may consider alternate positions:

• Shorting Goldman here could be profitable, especially if you believe that Goldman is losing market share to J.P. Morgan, Morgan Stanley and others.

• Go long the other investment banks that could potentially be taking market share away from Goldman Sachs, such as J.P. Morgan JPM.

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