Goldman Sachs 4Q15 Earnings Call Notes

Harvey Schwartz

Kind of a non-answer answer to the question of credit cycle

“look obviously the first couple of weeks of the year have been difficult from a market perspective and the last half of the year and continuing the dramatic decline in commodity prices broadly has been disruptive for the market. I think if you talk to our folks, obviously that sector of prices remain where they are, it’s going to be under stress, that’s an inevitability. But it does feel at this stage where perhaps the market is discounting some of the benefits of the declining commodity prices, we’ll have to see how the market evolves. Look, these things are never going to be a straight line and so it’s not surprising to some extent that the markets responding to China, reduced activity volatility in markets this way.’

It’s the kind of market where your clients really want you to stay close to them

“So, from our perspective we feel well positioned and in this kind of market environment, its type of market environment where your clients really want you to stay close to them and that’s what we’re doing.”

There’s certainly an upside case for fixed income

“Look, as we go through parts of the credit cycle it’s very natural for spreads to widen after having a period of such strength in the contraction. But even right now you’re seeing the market, which has been under stress, be thoughtfully selective about those transactions and there’s been a lot of appetite for certain parts of the market. So I think as we look forward over the next couple of years, when you start adding in things like the competitive environments. For all the potential activity around hedging and other activities, I think you could construct a pretty impressive bull case for fixed income and again it’s not the way we generally run the businesses, we’ll react to that as we see it. But there’s a — there certainly is an upside case.”

We think we’ve taken share this year

“it’s pretty obvious we took share in Investment Banking over the course of the year. I mean assuming you saw the big uptick in M&A, you saw a big outperformance by our team. In terms of the FICC activity, it’s hard to see it when activity is low but certainly really not in comparison to commodities where activity has been high to us, we’ve picked up significant share but that’s probably not surprising given how much people have pulled resources out of their commodity businesses or least they said, they have over the last couple of years globally.”

We feel like markets are not paying attention to thh degree to which lower oil prices are a long term tailwind to consumption

“When we talked to our people internally, it feels like the degree to which the market is focused on energy exposures has managed to discount the long term tailwind to the consumer and a reduction in cost across the globe. But that’s how the markets we act into are now. So there maybe information content in that too.”

It was a tough year for trading micro products, but an improved year for trading interest rates and currencies

“one of the things that shouldn’t get lost about the fixed income discussion in 2015 for our Firm is that, while it was a difficult market for the micro products for credit and mortgages, it was actually an improved year for interest rates for currencies. ”

Financial services is a cyclical industry

“one of the things that we haven’t talked a lot about, we haven’t talked directly about is our philosophy and how we manage cyclical businesses. Everyone has to acknowledge that financial services is a cyclical industry and one of the things that we’ve been very thoughtful about is not over investing at the top of the market. So, you didn’t see us do that in 2009 when FICC had a record year and making sure that we don’t overshoot in the bottom part of the cycle. Now we were early to the cost cutting because we felt the activity levels declining after 2009 and that’s how we managed through the cycle and you’ve seen us do this in the equity businesses and sometimes these cycles are long.”

The things that drove M&A last year haven’t really changed: low organic growth

“I think you have to take a step back and you have to ask yourself what are the factors that drove the M&A environmental [chord] over the past 18 months and are they still in place? And those core factors, is really limited organic growth, companies were struggling to find top line growth. You had positive but modest economic growth in major economies and companies had done quite a bit of work both on cost and refinancing going into that cycle and there was high level CEO and Board confidence. Those were the factors that drove the big pickup in activity. As we sit here today after couple of weeks of volatile markets, we wouldn’t say that those factors are significantly diminished.”

I don’t think two weeks of volatile markets would stop a powerful M&A trend

“I think that we’ll have to see obviously if markets stand the stress and you get into questions about finance-ability and other headwinds and then if we saw a loss of confidence, but we wouldn’t say that two weeks of volatile markets would stop a pretty powerful M&A trend”

There needs to be confidence

“I think look again at its core, we’re correlated to long-term economic growth and what we’re really seeing in the markets in the second half of the year was really general concerns about economic growth that might be isolated to specific markets but really that’s what was driving activity levels. I think more than anything else client conviction and I mean that in all spaces, whether we’re managing a client’s money, their conviction, their confidence, whether we’re advising on a merger transaction, the CEO and the Board and the CFOs, their confidence levels. The same thing exists in the capital markets businesses and fixed income and equities. Now what leads to that, confidence in economic growth, reduced uncertainty. And so those are the factors that fuel activity.”