Why I Won’t Buy Goldman Before Tuesday’s Earnings

Goldman Sachs (GS) reports Tuesday, and I’m not buying it first.

Goldman’s not going to have bad earnings this quarter. But the forward-looking statement, what they say about the months ahead, might not be very nice.

When the bond market moves this much, somebody’s holding paper losses, a drop in value they haven’t locked in by selling. When bonds sell off like this, the balance sheets of these banks look absolutely horrifying.

At the end of June, U.S. banks were sitting on $326.7 billion in unrealized losses on their bonds and other securities, according to the FDIC. Rates have gone higher since then.

The 2.25% Bonds Your Bank Is Stuck Holding For 30 Years

Bond prices fall when interest rates rise. Some of these banks are getting paid two and a quarter percent on a 30-year bond, while the 30-year Treasury pays around 5.6% today.

Two and a quarter percent doesn’t even cover inflation. How pissed would you be?

So they sit in the board meetings, especially at the regional banks, and they say, “Well, if we just hold it for the next 30 years, they’re going to make us whole.” Every one of those people in that room will be retired by then.

Technically, they’re right. If you hold a 30-year bond for 30 years, you get your money back and collect the interest along the way. But the bond loses value every time rates climb, and the bank is stuck holding it.

Why Goldman Can Handle This Bond Selloff And Your Regional Bank Can’t

Most of the regional banks don’t have the sophistication to trade the bond market. Goldman and JPMorgan (JPM) do. They’ve got the capability, and they’ve got the size.

The regional banks just take your deposits and buy bonds to make a couple bucks off of it, because they’re not going to pay you crap. And remember, it’s not their money. It’s your money.

Goldman can take a hit better than most. But the big bank calls that kick off earnings season are where you start to find out who’s holding the losses. Listen for what they say about their bond portfolios and the months ahead.

So I’ll wait for Goldman’s call on Oct. 13. If you want to trade around earnings season without guessing what a CEO says next.