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WHAT WORRIES GOLDMAN SACHS HEADING INTO Q4

Goldman Sachs has been among the most optimistic of the big banks heading into the end of the year, but that doesn’t mean they aren’t worry free.    The following are what Goldman Sachs views as the pros and cons of the investment landscape heading into the 4th quarter:

On the macro front, Goldman sees things largely improving, though still relatively challenging.  Among their pros and cons to the macro outlook:

  • Unemployment will likely reach 10.2% which will add to the challenging consumer environment.  This estimate is down from their prior estimate of 10.5%.
  • Goldman see positive GDP of 3% in both Q3 AND Q4.
  • Goldman sees a challenging high yield default rate of 13.2%

Deflation and deleveraging remains serious concerns:

  • Overall asset price deterioration look less bleak.
  • Consumer appears to be stabilizing.
  • CRE is seen declining 40% from peak to trough.
  • New home sales should rise 30% in 2010.

Banks remain a risk to the financial system, though less so:

  • Core capital levels across the banking space have improved through a combination of: (1)
    common equity issuance, (2) asset/security sales, (3) exchanges or tenders for outstanding
    preferred/hybrids, (4) retained earnings, (5) dividend cuts, (6) additional government injections,
    and (7) the adoption of new accounting standards.
  • Continued losses are expected at firms with high government ownership.
  • Do not expect CDS to trigger at any of the major banks.
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