Hedged Trade Idea: Long Bear, Short Goldman
September 21, 2007
– Comments (5)
12:05 PM
After having written out my three busted myths in yesterday’s blog post, I was absolutely chuffed to see that James Melcher, who manages Balestra Capital, agreed with me that the Fed rate cut won’t solve deep-seated problems in the housing/ debt markets. He was quoted as saying: "It’s [The rate cut] certainly is going to help, but part of these problems we are facing are intractable”. In August, Melcher was reported to be up 100% for the year in his flagship fund thanks to a bearish bet on subprime mortgages. From what I have read, he seems like a deep, contrarian thinker and he has enjoyed much success running his macro fund.
But on with my topic for the day. With the brokers having reported (mixed) results this week, I think there is an interesting idea for a hedged trade in this sector. Goldman Sachs blew the doors off, with a 79% increase in net income, while Bear Stearns suffered a 61% decline in the same. Obviously, you want to own Goldman, right?
Wrong.
I think going long Bear Stearns and shorting Goldman will prove to be a winning trade over the next year. Although Goldman proved that it is incredibly nimble for a financial behemoth, anticipating the subprime crisis and positioning itself accordingly in its proprietary trading, I have to believe that the results they have recorded this quarter and for the past few quarters are well above trend. Indeed, despite the awesome display of strength in the current quarter, the stock failed to reach its 52-week high. Meanwhile, expectations for Bear Stearns, which remains a wonderful franchise, are much lower.
That’s my call: long Goldman and short Bear Stearns. I will track the results starting with yesterday’s closing prices and over a 1 year time horizon. Perhaps I should log it in CAPS (one leg might hurt my accuracy, though).
Have a good weekend.
Total: 315 words
Time: 11 minutes [went over slightly!]
*** The above text was written (and spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***
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