Douglas Kass, founder of Seabreeze Partners Management Inc., said the business model for brokerage firms no longer works and so he’s betting on Goldman Sachs Group Inc. (GS:US)’s shares to decline.
“The brokerage industry’s business model is broken,” Kass said today in a radio interview with Tom Keene and Ken Prewitt on “Bloomberg Surveillance.” “The group’s adverse secular changes are going to translate into considerably lower industry returns on invested capital and profits going forward.”
Kass said he’s “short” shares of Goldman Sachs, meaning he’s borrowed stock to sell and plans to buy it back at a lower price. “On any strength I’d be short some other stocks in the group,” he said.
The industry’s return on invested capital fell to 8 percent last year from 25 percent or higher in 2007, Kass said. “In my spreadsheets I have it improving to no better than to 11 percent in the next three or four years,” he said.
Goldman Sachs, the fifth-biggest U.S. bank by assets, made 58 percent of its revenue in the first six months of the year from trading stocks, bonds, currencies and other financial assets. The New York-based company last month reported its lowest first-half revenue since 2005 and said it plans to cut $500 million of expenses.
Goldman Sachs gained 0.2 percent to $101.12 at 12:06 p.m. in New York. The firm’s shares have advanced 12 percent this year.
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