Goldman analysts Jim Covello, Sarah Friar and Derek Bingham wrote that they have become “incrementally more cautious on tech fundamentals given the current macroeconomic backdrop,” which suggests soft capital spending in 2008, in particular for the U.S. “We believe CIOs may delay their purchases in the early part of 2008,”they wrote.

The Goldman analysts write that “this is not a call to sell all tech stocks,” and that “while there is likely little upside for some areas of tech,” in particular software, on which the firm turned cautious earlier this week, other areas have underperformed this year, including hardware and semis, and “already likely reflect the pending fundamental weakness.”

That said, Goldman reduced estimates and cut price price targets for many names, “with particular focus on companies with large enterprise exposure and significant dependence on the U.S. consumer.”

The list of companies affected by today’s Goldman call is long:

In the communications sector, they cut estimates and/or price targets for:

Netgear
Corning
Cisco
Nortel
Aruba
Juniper

In the hardware sector, Goldman cut estimates and/or price targets for:

Dell
Directed Electronics
EMC
Emulex
IBM
Intevac
Isilon
Lexmark
Network Appliance
Sun Microsystems
Brocade

Payment processing companies affected by estimate and/or price target changes include:

ADP
Paychex
Global Cash Access
Global Payments
Master Card
MoneyGram
Amdocs
Convergys
CSG Systems
Synchronoss

IT services companies affected include:

Accenture
Bearing Point
Sapient
Affiliated Computer Services
Computer Sciences
EDS
Unisys
Cognizant
ExlService
Infosys
Patini
Satyam
Witpro

Chip stocks affected by estimate cuts and/or price target changes include:

Advanced Micro Devices
ATMI
Broadcom
Entegris
FormFactor
International Rectifier
Intel
Intersil
Microchip
Micrel
Marvell
Micron
Maxim
National Semi
Nvidia
Teradyne
Texas Instruments
Volterra

Goldman earlier this week made similar moves on software and analog semis.

Today’s Goldman calls helps explain the relative underperformance of tech stocks today; while the Dow gained almost 60 points or 0.45%; the Nasdaq Composite is off 7 points, or 0.3%.

Note: they don’t mention AAPL anywhere

In the hardware sector, Goldman cut estimates and/or price targets for:

HP and AAPL both absent from this list.

I understand…but no RIMM, GOOG, or AAPL.  Some of those companies are obviously in trouble and benefitted only from the rising tide.

On an aside,  it’s truly disgusting how ETFs and NDX funds are taking everybody up or down indiscriminantly.  It’s becoming more and more of a crap shoot since individual stocks matter less and less. And with the abolishment of the uptick rule, the players can play any direction they want, which leaves the small investor at the mercy of the big boys.

I apologize for not having the rant skills of the Tommo_UK master.

[quote author=“Play Ultimate”]I understand…but no RIMM, GOOG, or AAPL.  Some of those companies are obviously in trouble and benefitted only from the rising tide.

RIMM was wrecked after Piper Jaffray lowered estimates, and then Briefing.com ran a rumour of a hatchet job due from Barron’s this weekend.

GOOG held up until CNBC did a 5-minute rant about how it was losing its focus and was too arrogant and diverse to deliver shareholder value any more, then it lost 1.5%.

Then Briefing.com spread some baseless FUD about Steve Jobs and options backdating, and AAPL broke support and went red.

Sad, but simple.

What may not be factored into the report is a continuing move toward consolidation in the various tech industries. We may be moving back toward an ultra-low interest rate environment which will make acquisitions less expensive. I see 2008 as a year of acquisitions and consolidation.

There’s no way to increase enterprise productivity without some level of technology investment. Solutions drive hardware sales and productivity is key to enterprise success.

The dollar remains low and this will continue to benefit US-based businesses with significant global exposure.

HPQ and AAPL shouldn’t be on the list because both will continue to outpace the overall PC industry in 2008. Dell, Acer and Lenovo are on a collision course in the high volume, low-margin PC market. I see 2008 as a challenging period for all three companies. The problem for Dell is its antiquated view of the market, inability to compete in the higher ASP segments of the market and its pending plans to try and take volume from Lenovo and Acer close to or in their home markets. I expect Dell’s US share to continue to suffer as the company loses critical sales mass in the States.

The ever-controversial Ben Stein commits near-heresy by suggesting that - gasp - Goldman Sachs might be engaging in talking up its book (or rather, its short positions), and points out the much of the last few years’ outrageously irresponsible lending had the firm both cheer-leading the business and also riding it short:

http://www.nytimes.com/2007/12/02/business/02every.html?_r=1&th&emc;=th&oref=slogin

The Long and Short of It at Goldman Sachs
By BEN STEIN
Published: December 2, 2007

FOR decades now, as a writer, economist and scold, I have been receiving letters from thoughtful readers. Many of them have warned me about the dangers of a secret government running the world, organized by the Trilateral Commission, or the Ford Foundation, or the Big Oil companies or, of course, world Jewry.

Stuart Goldenberg
I always scoff at these letters. The world is far too complex a place to be run by any one group. But the closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

This all started percolating in my fevered brain last week when a frequent correspondent, a gent in Florida who is sure economic disaster lies ahead (and he may be right, but he’s not), forwarded a newsletter from a highly placed economist at Goldman Sachs named Jan Hatzius.

That worthy scholar recently wrote a detailed paper about how he thought the subprime mess would get worse and worse. It would get so bad, he hypothesized, that it would affect aggregate lending extremely adversely and slow down growth.

Dr. Hatzius, who has a Ph.D. in economics from “Oggsford,” as they put it in “The Great Gatsby,” used a combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound — and this would slow the economy.

This would occur, he said, if the value of the assets that banks hold plunges so steeply that they have to consume their own capital to patch up losses. With those funds used to plug holes, banks’ reserves drop further. To keep reserves in accordance with regulatory requirements, banks then have to rein in lending. What all of this means — or so the argument goes — is that losses in subprime and elsewhere that are taken at banks ultimately boomerang back, in a highly multiplied and negative way, onto our economy.

As the narrator in the rock legend “Spill the Wine” says, “This really blew my mind.”

So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression, although we surely could be headed in that direction), and that this would lead to a drastic increase in defaults and losses by lenders.

This, as I see it, is a conclusion that is an estimation based upon a guess. I found especially puzzling the omission of the highly likely truth that the Fed would step in to replenish financial institutions’ liquidity if necessary. In a crisis like that outlined by the good Dr. Hatzius, the Fed — any postwar Fed except perhaps that of a fool — would pump cash into the system to keep lending on track.

I mentioned this via e-mail to Dr. Hatzius. He generously agreed that there was some slight merit to my arguments and that he was merely pointing out tendencies and possibilities (if I understand him correctly).

BUT forecasting is tricky, and I have a hard time believing that financial events to come will be qualitatively different from those that have already happened.

I do want to emphasize Dr. Hatzius’s gentlemanliness and intelligence. But I also want to emphasize that, as I see it, his document was mostly about selling fear. A spokesman for Goldman Sachs categorically denies this point and says that the firm’s economic research is held to the highest levels of objectivity and that its economists’ views are completely independent.

As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history. (In this respect, he is much like many economic journalists and commentators who sell newsprint by selling fear. The common cause of journalists and Wall Streeters in this regard is a subject I will address in the future.)

Now, let me make a few small points here and then get to my own big point.

Goldman Sachs is a huge name in terms of moneymaking and prestige. I totally understand the respect it receives for its financial dexterity. The firm is a superstar in that regard, and I, a small stockholder, am grateful. But it has never been clear to me exactly why its people are considered rocket scientists in any other area than making money.

Dr. Hatzius’s paper is a prime example of my puzzlement. It shows extreme intelligence but basically misses the point: yes, there are possible macro dangers, but you have to go all the way around Robin Hood’s barn to get to them, and you have to use what I think are extremely far-fetched hypotheticals to get to a scary situation. (This is not to diminish the real risks in today’s economy, I’m just not as gloomy about them as Dr. Hatzius.)

Why, then, is his document circulating? Perhaps as a token of Dr. Hatzius’s genuine intelligence, which is fine. But to me, his paper seemed like a selling document in the real Wall Street sense of selling — namely, selling short. (Dr. Hatzius notes that he has long been bearish on housing, since faraway 2006, but I respectfully note that that is a lot different from predicting a credit catastrophe. The spokesman for Goldman also noted the company’s bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.)

More thoughts came to me as I read a recent piece in Fortune by my colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the life and death throes of a Goldman Sachs-arranged collateralized mortgage obligation. He shows how truly toxic waste was sold to overly eager investors who now have major charge-offs, and he also points out that some parts of the C.M.O. were indeed safe and were either current or had been paid off.

But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years.

My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.

The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.

The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.

Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.

From what I have observed over the years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. The long-ago scandal of the Goldman Sachs Trading Corporation, which raised hundreds of millions just before the crash of 1929 to create a mutual fund, then used the fund’s money to prop up stocks it owned and underwrote, was a particularly sad example. The fund, of course, went bust.

Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But it’s not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.

To my old eyes, the recent unhappiness about mortgages and Goldman’s connection with them are not examples of sterling conduct. It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets.

Doesn’t this bear some slight resemblance to Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were? How different would it be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgage issues into the market?

HERE is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?

When the Depression got under way, the government created the Temporary National Economic Committee to study just what had happened on the Street to get the tragedy going. Maybe it’s time for an investigation of just what Wall Street and Goldman did to make money as they pumped this mortgage mess into the economic system, and sometimes were seemingly on both sides of the deal.

Or is Goldman Sachs like “Love Story”? Does working there mean never having to say you’re sorry?

Very well put.

Although GS may have screwed up, it doesn’t mean the economy is going to tank. Let’s get on with trading.

Unfortunately Ben Stein’s insight isn’t what the likes of CNBC and Barrons pumps. GS can get whatever they deem profitable (for themselves) proclaimed throughout the land as if it were gospel. All too often the market responds to the loudest voice rather than the sanest.

[quote author=“willrob”]Unfortunately Ben Stein’s insight isn’t what the likes of CNBC and Barrons pumps. GS can get whatever they deem profitable (for themselves) proclaimed throughout the land as if it were gospel. All too often the market responds to the loudest voice rather than the sanest.

Ben Stein’s piece is getting a LOT of very heated discussion on CNBC, both for and against.  Fascinating stuff here.. hearing the Goldman whores leap to their pimp’s defence is predictable but depressing.

Re: The Day Goldman Sachs Wrecked Tech

[quote author=“Tommo_UK”]

Note: they don’t mention AAPL anywhere

Why is MSFT not on the list if both AMD, Intel AND Dell are on it?

I apologise in advance for asking this mere mortal question.

[quote author=“Tommo_UK”]
Ben Stein’s piece is getting a LOT of very heated discussion on CNBC, both for and against.  Fascinating stuff here.. hearing the Goldman whores leap to their pimp’s defence is predictable but depressing.

Until just now I had not read the piece, though I heard it discussed on CNBC during the day.

I must say that it reads much differently than it was portrayed.  Stein raises good questions.  And it is hardly an attack piece on Hatzius.  In fact he could be as pure as the driven snow, and Stein’s piece loses little of its force.

Unfortunately, I cannot visualize an “investigation” having any real effect, because I doubt whether a credible investigator could be found.  Surely not Congress.  And does anyone think the SEC has the independence and competence necessary?  Maybe, but I doubt it.

As an aside, I think Paulsen’s plan to bail out some subset of subprime borrowers is a cartload of crap.  If adopted, it will in the aggregate make matters worse.

DT:  I hope your unbounded optimism proves accurate.  But I worry that government meddling is dangerous.  Whether it takes the form of bailouts, tax increases, protectionism, subsidies or what not, the risk is palpable.  Free markets work.  If only we let them.

[quote author=“capablanca”]DT:  I hope your unbounded optimism proves accurate.  But I worry that government meddling is dangerous.  Whether it takes the form of bailouts, tax increases, protectionism, subsidies or what not, the risk is palpable.  Free markets work.  If only we let them.

My apparent optimism may make it seem from time to time that I was born yesterday. But I can assure you it wasn’t late last night. 

Wall Street is in a recession. A recession of its own making. From the perspective of the major investment houses things look really bad. From the perspective of the financial media based in New York things look bad too.

Bonuses at major investment houses (which make up a significant portion of annual compensation) will be really poor at any firm with significant sub-prime write-downs and exposure. Too bad. That doesn’t mean the economy is in trouble.

The Fed will bend to reduce rates, decreasing the costs of funds and increasing yields on mortgages. It will also (slightly) help mitigate the tens of billions in additional losses in any kind of mortgage reworking package offered to a small segment of the foreclosure risk population.

Losses at the big finance and investment firms will continue with big write-downs yet to come. There’s no easy way out of the box. But….that’s not Main Street’s worry. It’s Wall Street’s concern. On Main Street things are doing fine. That’s why there’s no political support for a bail out program and at best any program offered is little more than putting lipstick on a pig. Guess what? It’s still a pig. 

Wall Street screwed up. But those mistakes don’t make for a national recession no matter how much it’s wanted to obfuscate how badly these firms misplayed a market of their own making. For GS and others, it’s a huge loss of prestige.

[quote author=“DawnTreader”]
My apparent optimism may make it seem from time to time that I was born yesterday. But I can assure you it wasn’t late last night. 

I was not thinking you naive.  There is much to be optimistic about, and there is nothing wrong with seeing the glass half full.  In fact positive comments by you and others have been a source of strength.

From The Times today:

Citigroup and UBS admitted today that their losses on sub-prime mortgage-related products exceeded the profits they had made from the high-risk loans.

Top executives from the banks were addressing a hearing of the Treasury Select Committee this morning, alongside representatives from Goldman Sachs and Deutsche Bank. MPs were questioning the banks about the part their companies played in the credit crunch that hit global markets in August.

Bill Mills, chief executive of Citigroup’s EMEA investment banking business, told the MPs that “[Citigroup’s] losses greatly exceed the profits we’ve made on [sub-prime] business over several years”, while Jeremy Palmer, UBS’s EMEA investment banking chief executive, said that he was unsure whether his own bank had made a profit on sub-prime but that he was inclined to think that it had not.

Jerry Corrigan, a managing director at Goldman Sachs and co-chairman of the bank’s risk management committee, said: “On balance, [Goldman Sachs] probably made money”. Lord Aldington, the UK chairman of Deutsche Bank’s investment bank, said that he was unsure whether the bank had calculated whether it had made a profit. “My guess is that we’d have been more in the Goldman Sachs camp but that is a guess,” he said.

Mr Corrigan attributed his bank’s success to clever hedging. “In our second quarter in May we did sense that the deterioration, particularly in the sub-prime space, was worsening and we did begin to hedge our exposure in ways that turned out reasonably well from a financial point of view,” he said.

The bankers denied that they had been reckless in the way that they sold complex credit products to customers, but admitted that there were many lessons to be learned from the sub-prime crisis. “Mistakes were made but it’s also true that the conditions that materialised were by any standards quite extraordinary,” Mr Corrigan said.

They attributed the growth in the market for such products to the appetite amongst investors for high-yield investment products. “The reach for yield on the part of institutional investors goes a long way to explaining the rapid eexpansion of structured credit products,” Mr Corrigan said.

Goldman Sachs translation: we sold the world on the idea of these subprime and CDO deals. Then we arranged the deals. We knew they would end up worthless and in the shitter, so we shorted the entire business. So long, suckers!

[quote author=“Tommo_UK”]
Goldman Sachs translation: we sold the world on the idea of these subprime and CDO deals. Then we arranged the deals. We knew they would end up worthless and in the shitter, so we shorted the entire business. So long, suckers!

Not sure who the sucker is: the CitiGroup CEO got a nice severance package. WIsh I could screw things up like that.

Wow - Ben Stein has really stirred up a hornets nest! Are the chickens coming home to roost?

Senator Dodd Asks Paulson About Goldman Subprime Role
By Christine Harper

Dec. 4 (Bloomberg)—U.S. Senate Banking Committee Chairman Christopher Dodd called on Treasury Secretary Henry Paulson to answer questions about Goldman Sachs Group Inc.‘s role in the collapse of the subprime mortgage market.

Dodd, a Democratic presidential candidate, said in a statement today that he was ``deeply concerned’’ by questions about New York-based Goldman Sachs that were raised in a column by Ben Stein in the New York Times on Dec. 2.
The column asserted that Goldman, the world’s biggest securities firm, sold bonds backed by subprime mortgages and also profited from bets that the value of the securities would drop. Paulson was chairman and chief executive officer of Goldman from 1999 until he became Treasury Secretary last year.

``It is in the best interest of resolving this crisis if Secretary Paulson, who was leading Goldman at the time in question, addresses the concerns raised by Mr. Stein’s article,’’ Dodd’s statement said. ``Failure to do so may be cause for a more formal investigation.’‘

U.S. home foreclosures almost doubled in October from a year earlier as the least-creditworthy borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29. Unlike rivals such as Morgan Stanley and Merrill Lynch & Co., Goldman said it profited in the third quarter from investments that gained in value as the mortgage market declined.

`Flat-Out Wrong’
Paulson is ``working with members of both parties to develop solutions for struggling homeowners,’’ said Michele Davis, a spokeswoman for the Treasury Department. ``This is where all of us need to focus our attention.’‘
Goldman is the only one of the five biggest U.S. securities companies that has climbed in New York Stock Exchange composite trading this year. The firm set aside $16.9 billion for the first nine months of the year to pay employees, more than the full-year total for 2006, according to the company’s third-quarter earnings report.

``The premise that this firm acted inappropriately is flat- out wrong,’’ said Michael DuVally, a spokesman for Goldman Sachs, in response to Dodd’s request. He declined to elaborate.

Other securities firms and banks including Merrill Lynch and Citigroup Inc. have announced about $66 billion of losses and writedowns this year on assets linked to subprime home loans.

Paulson, 62, is negotiating a deal among banks, mortgage servicers and securities-industry lobbyists to freeze some subprime mortgage rates before they reset higher and trigger a new wave of defaults.