Thursday, September 10, 2009

Blackstone Group (BX) Rallies on Goldman Sachs Addition to Conviction Buy List

Congrats! Another win to the "trading huddle" (allegedly) - while the last few posts have been about stocks going up for reasons they did in the old days, today's upgrade of Blackstone Group (BX) is more likely a representation of the new "financially innovative" and "fair and balanced" stock market. I just got lucky I added to the position yesterday, but generally "luck" has nothing to do with these things of late.

If you are unfamiliar with the Goldman Sachs (GS) trading huddle please see this post [Aug 27, 2009: Goldman Sachs Trading Huddle] - now before I get into conjecture let's see what Goldman sprung on us today.
  • Goldman Sachs added Blackstone Group (BX) to its "Americas conviction buy list," and raised its price target on the asset manager's stock, citing a better M&A cycle and an improving lending and investing environment.
  • Analysts at Goldman view Blackstone as capable of seizing M&A and restructuring opportunities via a growing advisory business, and see robust earnings possibilities in its distressed funds and fund-of-funds businesses, which they feel are taking market share and driving assets under management (AuM) levels higher.
  • Goldman expects Blackstone's advisory business to account for about 35 percent of revenue in 2009. "Blackstone benefits from improving capital market trends... with ample dry powder to deploy," the brokerage said, and raised its price target on the company's stock to $18 from $16.
Sounds great, and I appreciate the 5% move today, Goldman Sachs. But let's wonder outloud how much better we could of done if we were one of the Goldman Sachs top clients.


Based on the Wall Street Journal story, there is basically a 1 week lag between when Goldman gets its "top clients" into a stock, along with a very special trader who attends the trading huddles - he/she is called a franchise risk manager. Now let it be known that there is supposed to be a Chinese Wall between the trading side of the business and the research side, but I guess if you put fancy names on traders (hey look its a F.R.M.!) they don't count.

Anyhow long story short - the excuse is, as long as Goldman gives counsel to its client list first, then the trader can act on the information... even though traders are not supposed to interact with the research department per "landmark" regulation passed earlier this decade. The conflicts of interest are countless. So if you have these "morning huddles" at 8:30 AM I suppose you have to wait to 9:31 AM to begin trading on the information because that allows your top clients a minute to act on the information before you.

So following the model as stated in the WSJ story for Janus and MetLife... this is of course all alleged as is the timeline I post below... a very cool meeting happened last Thursday (perhaps Wednesday), when Blackstone stock was trading in the low $12s. The analyst who covers Blackstone (allegedly) could say on the call (which only the top 20-40 hedge funds listen in on) "hey I sort of like this Blackstone Group but certainly not enough to publicly upgrade it - but just enough to recommend it to you my friends".

So everyone on the call quietly nods and winks in a virtual sort of way at each other, and quickly scurry to get those orders in for Blackstone Group stock. The Franchise Risk Manager of course goes back to his trading turret and waits for 9:31 AM to allows Goldman's hedgie clients to buy first... he doesn't want to break any rules mind you. Then said trader can begin buying for the Goldman account at 9:31 AM. He of course is taking a 50/50 chance (cough) that the stock could go up...

Of course no other traders ask the FRM what was said at the morning huddle... because traders don't talk to each other. (ahem) So in no way, shape or form did a host of other Goldman traders perhaps buy Blackstone Group that day... in the low $12s. Nope.

As we know, this was just a short term trading call (allegedly, if such a meeting occurred) but if the Janus and Metlife examples in the WSJ story are the model, a week later the analyst has a "come to Jesus" moment and decides I want to go public with an upgrade! I only liked it enough last week to tell our best clients, but this week I'm ready to tell the world! In fact, I like it so much (like the Metlife upgrade) I want to put it on the Goldman conviction list. ZOOM ZOOM! This morning, we can be certain cheers could be heard on hedge fund desks and on the Goldman trading floor as Blackstone was upgraded! Boo Yah! Free markets working their charms yet again. The stock got as high as $13.85 this morning.

If an alleged trading huddle happened last week, following the EXACT same model as the Janus and Metlife trading huddles - then this short term call generated a resounding 14% gain in a week, as the hedge funds, and internal Goldman Sachs traders can sell (if they choose) into the public upgrade. Not that this would ever happen...

And this boys and girls is how (a) you claim your success is based on being smarter than anyone else in the world and (b) derive a 97% win percentage which frankly is impossible. [Aug 5, 2009: Goldman Sachs Q2 Winning Percentage: 97%] Unless the board is tilted in your direction.

Of course all this is alleged, and I have no idea if a trading huddle happened last week in which Blackstone was passed around as a "great short term" play. But that is the exact same way Janus and Metlife were played. Now extrapolate this on a daily basis, week after week, month after month.


Now I don't want you to worry about this being unfair. Once the Wall Street Journal uncovered this practice, the SEC woke up and said "thanks for doing our job! We'll take it from here!" If past patterns are any indication the path from here is

(1) the SEC will find no wrong doing (generally a 99.99% probability)


(2) the SEC will find wrong doing, at which time Goldman will pay a fine equal to about 1 hour of trading profits, while of course admitting doing nothing wrong. The fine is being paid out of generosity.

Just remember, whatever the outcome - Goldman Sachs employees are smarter than everyone else, and that's how they almost always win.


Frankly, I am just flabbergasted Goldman has the guts to put a trader into these meetings and then say there is nothing wrong with it, because we allow our clients (only the top few) to trade off this information ahead of our trader. But when you have a captured regulator I suppose you are the fox with the keys to the hen house and do as you please. I would just love to have records of every trading huddle and how many days later the same stocks recommended in the huddle were upgraded to the public. That would be fascinating. Maybe the attorneys at the SEC can work on this in their free time.

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