Goldman Just Does Not Lose

Monday, May 10, 2010

Goldman Sachs' first quarter earnings for 2010 feature some absolutely out-of-this-world results. The company did not have a single losing day in their trading division in Q1 2010. Out of the company's $12.775 billion in revenues for the quarter $10.25 billion came from trading and principal investments (80% of revenues). Pre-tax earnings from the division came in at $4.685 billion representing 91% of Goldman's total $5.159 EBT. Goldman Sachs earned only 9% of its quarterly earnings from their investment banking and asset management and securities services divisions. Goldman is not an investment bank, it is a proprietary trading firm.

Goldman has never been willing to disclose how much of its revenues come from market making activities versus trading their own book. Yet, 72% of their trading revenues came from their Fixed Income, Currency & Commodities subset even while GS stated in its filing: "FICC operated in an environment characterized by strong client-driven activity, increased volumes across several businesses, tighter bid/offer spreads and a decline in volatility levels." While a pick-up in client trading volume is helpful, market makers do not benefit in an environment of tighter spreads and lower volatility, only investors do. Revenues from equities represented 23% of quarterly revenues in the trading division. Yet, also stated in the release: "Equities operated in an environment largely characterized by an increase in global equity prices and a decline in volatility levels". This can only benefit a firm with substantial longs on their own books or a firm highly engaged in particular high frequency trading strategies.

Goldman's trading net revenues are simply astounding. On 35 days in the quarter, GS made over $100 million from trading. Their worst days in trading still cleared $25-50! I realize Goldman is an excellent firm with the brightest minds on the Street but really?

I don't want to make any outlandish conjectures but I cannot help but have a great deal of skepticism towards these results. In a world of ever-increasing efficiency, I don't see how a firm can go full quarters without a single day of losses while clearing hundreds of millions of dollars. At the very least investors must know what they are buying when they purchase shares of GS. It is a proprietary trading firm that has done exceptionally well in recent years. Whether those returns can continue, I do not know but the sheer enormity of the returns makes me cautious. While this stance on my part may be foolish, I would rather stay away without a much clearer picture of how they are making so damn much money and never losing.

Update: My buddy, Elliot Turner, over at Alata Zerka has an excellent piece on this topic as well that includes some more probing questions and thoughts on Goldman's business model.
blog comments powered by Disqus