Monday, November 20, 2006
Broker Dealers- Balance Sheet Hyper Growth
A brief glance at the explosion in the size of the Broker Dealer (BDlr) balance sheets ought to give rise to pause when evaluating the merits in investing here. Themania for the stocks is also reminiscent of the fever for buyng the GSE's in the Nineties (FNM and FRE) when their mortgage portfolios were jumping by leaps and bounds, and of the speculation in Japan Inc (and the asset speculation of banks) during the Eighties. Too vague. Well so is what is on the balance sheet of GS. Does anybody really know? It can only be funded by adding debt (on balance sheet and off through securitizations and illiquid derivatives), a fact that accounts for the unusual facility of adding poorly disclosed assets. The unholy alliance between GS and "hedge funds" makes this that more interesting. The current valuation of GS now discounts an ROE in the low twenties practically for the next five years. While myself and many other have been incapable of getting our arms around the money making magic, be advised that GS would have to earn an average ROE of 20%+ through 2009, with declines from the 20%-plus to the mid teens beyond that time to justify the current price. Anything short of this continued spectacular showing would spell trouble.