Thursday, January 21, 2010

Goldman's Earnings: The Market-to-Market Miracle at 85 Broad St.

Nice try Lloyd "I am the real Jesus" Blankfein.  Next time you announce your earnings, make sure you bring plenty of lube for everyone who is willing to bend over and believe what you have to say.  I know that at least Steve Liesman is buyin' it.

Goldman's earnings were ushered in with great fanfare on Bubblevision TV (CNBC and Bloomberg).  And of course this is based solely on looking at the net income number, which blew away estimates and expectations.  Of course, as per usual, there is a much different story to tell if you examine the bowels of a financial statement, especially bank financial statements.  So I took out my "Greg House" marker pen and board and took a look at Goldman's 8-K SEC filing, which contains an expanded version of the press release that the monkeys on CNBC regurgitate.

The bottom line is that a substantial portion of Goldman's net income for Q4 '09 appears to have been derived from marking up illiquid positions sitting in its Fixed Income operations and is not attributable to the interest rate and currencies segment of FICC, which means the numbers came from fixed income products like mortgage and asset-backed securities. 

I'm going to summarize and analyze some of the details from the 8-K, but the link to it is here:  GS 8-K.

Most of Goldman's revenues (66%) come from its "Trading and Principal Investments."  In Q4 '09 Goldman reported $6.4 billion in net revenues for TPI vs. negative net revenues of $4.4 billion in  Q4 '08.  The negative number is based on the massive write-downs Goldman took at the end of the year last year (remember those huge markdowns Wall Street took?), before Tim Geithner funnelled billions of taxpayer dollars to monetize a lot of these catastrophic "Principal" bets. 

Specifically, the big bump in revenues came from Goldman's "Fixed Income, Commodities and Currencies" segment within its TPI Division.  Regarding the Q4 '09 results, Goldman states:  "The increase in net revenues [in 2009] compared with the fourth quarter of 2008 reflected significantly improved results in credit products and mortgages."  Translation:  "the FASB and SEC extended the timeframe and framework by which we can mark up to fantasy all of the remaining positions that Tim Geithner has not yet monetized."

They specifically cite "credit products and mortgages," which means most of the revenue bump this quarter came from the kind of garbage that buried Lehman and Bear.  How do I know this?  Because they explain in the 8-K with respect to the FICC business:  "Net revenues in interest rate products and currencies were significantly lower [in Q4 '09] compared with the fourth quarter of 2008, while net revenues in commodities were essentially unchanged."  This means that most of the revenue differential in the FICC segment, which represents close to 40% of Goldman's total revenues for the quarter, came from fixed income products AND most of that revenue is likely can be attributed to mark-to-fantasy accounting.

Just to mention Goldman's other operating segments:  Asset Management revenues were 10% lower in Q4 '09 vs. Q4 '08 and Investment Banking revenues were up 58% in Q4 '09 vs. Q4 '08 - but IB represents a mere 11% of Goldman's revenue base.  The 600 pound gorilla is the FICC segment of Goldman's operations and that's where the proverbial canary in the coal mine is caged up.

Of course, we have to wait until Goldman files its 2009 10-K to see the most recent balance sheet and cash flow statement,.  And since it's a 10-K, they have 90 days to file it.  By then everyone who participates in the financial markets will be on to the next crisis and forget to look at the entrails buried in the Goldman 10-K in order to get a slighly better idea just how accurate my analysis is.  Until then, unless Goldman is willing to lift its skirt and show the world why I am wrong, we can assume that Goldman's profits are no more real than than the fiat paper used to buy Blankfein's next Mercedes.


  1. GOFO (Gold Forward Offered Rates) are way low, lowest since Nov 2008 I believe.

    Any significance attached to this - is this an indication the gold market is getting tight?

  2. The difference btween GOFO and Gold Lease rates is mental masturbation and LIBOR. In general as the GOFO/Lease rates become low or negative, it means the central banks are trying to force physical metal into the markets by incentivizing bullion banks to lease it and dump it.

    BUT, as you can see, gold leasing rates are moving higher:

    which usually precedes a big move higher in gold

    Lease rates in silver have been negative across the board since July, and since central banks don't stockpile silver, i think we can assume that the silver is coming from SLV.

    I wrote this up this a.m. and sent it into Midas, have not checked to see if he posted it:

    I happened to look at silver lease rates this morning, which have been negative since July. Then I tried to understand where the silver was coming from that would be leased out, given that central banks do not have any. We obviously know that negative lease rates mean that central banks are trying force metal onto the market, since it means the borrower/lessor is being paid to borrow/lease. So, where would this silver be coming from? The ONLY place it can be coming from in quantities to suppress the market is SLV. And JP Morgan just happens to be the Custodian of the SLV trust. And JP Morgan also happens to be by far the largest short position in silver on the Comex. This also explains the massive compression in premiums on 1 oz. silver eagles. In late 2008, premiums were as much as 60% over spot. During 2009, they've compressed down to a little over 10%. I had been wondering during most of last year where this silver was coming from. If you bought 2009 vintage silver eagles or maple leafs, I would bet good money that the silver used can be traced to bars that came from SLV. I would like JP Morgan to prove to the world my analysis is wrong, because until they do, it is 100% correct.

  3. What do you estimate SLV's actual reserves of silver are today? I know Ted Butler keeps claiming they are real but then he keeps banging on about how Chairman Gensler is going to take us to the promised land.

    I noticed there was a shooting star in the USDX today. Is this the double top go you think?

  4. I don't know enough about the probabilities of outcome associated with various technical candlestick formations. I will say that today's shooting star would have been more bearish if the DX closed below the open, which it did not. BUT, if you use simple moving averages, the dollar tested the 200 SMA and then sold off pretty hard.

    At this point I think we have to just wait and see where the market takes the dollar, but you could technically argue that the dollar has good chance of heading lower from here.

    In terms of trying to figure out what is real and what isn't at SLV, the only way we'll ever know for sure is if the Trustee did a full-fledged physical audit that was completely independent. It's another one of those deals where all the circumstantial evidence points to fraud going on, but it's very difficult to prove until someone can "call" SLV on its inventory.

  5. Dave,
    Maybe I get my shot at AU-$950 and Ag-$15.50 after all?

    Tough few days and Greece and probable less US bailout/stimulus money is giving the "Dolla a Holla" short term. Crazy week so far, cannot wait until tmorrow.

  6. Hey gyc. I can't wait for Sunday kick-off! LOL

    Hard to say on gold/silver. One thing that has held true for over 8 years, the depth of corrections to the downside always surprise me with how far they can go. Having said that, if you read JB's report in tonight's Midas, you'll note the premiums in India, Viet Nam and Shanghai are going thru the roof. One of the big Japanese banks commented that physical supply appears to be tight in Asia.

    I have a hard time seeing gold going below $1049, which is the price where India bought that 200 ton chunk. Coincidentally, $1049 is where the longer term trendline on the Privateer's 2x3 PnF gold chart intersects:

    I think they may be setting the markets up for the Fed to come out and "hint" at new QE measures, as it is becoming increasingly apparent the housing market/mortgage market is headed back into another tail-spin. If I get motivated, I'm going to do blog about that.

  7. Dave,
    I was thinking the same thing!!!!!

    All this dollar strength really sets the board for QE 2.0/MBS buys 2.0/Stimulus 22.0, but after the election can they do it?

    If Unemployment is 9% or more by June they will regardless. I think you know ehere my money is on that one.

  8. Eric de Groot's trading notes on the dollar:

    The swing high within the gap has been tested on almost half the volume of the previous attempts.
    While price has retested its highs, it does so without confirmation from cumulative force and momentum. REV and MOVB remain at lower highs.
    These two conditions suggest that force of the rally is weakening.

  9. No doubt there's resistance just below 78.50, the RSI on the daily has rolled over and the macd looks about ready to rollover.

    I said a month ago I didnt' think a dollar rally would get up to 79. And then there's this:

    Talk about a great contrary indicator

  10. Kranny, QE2 has yet to set sail, she's moored offshore in the Bahamas with an extra zero and reportedly listing badly.

    QE3 is in dry dock with ten extra zeros.

    Dollar rally is impowering the Carry Trade with that stinky green piece of Fiat. Should embolden additional moral hazzard.

    Obama's recent parade with Volker is an attempt at "perception" management.

    Never cared for Volker as he was grossly over-rated and a Fed Vampire. What's he going to do now? Nothing, we crossed the Rubicon in full regala and are marching towards Rome.

    It's going to be fun watching Timmy fall on the sword, Ben may follow if Summers get his wish. It seems the White House and President O'Brotha and what remains of his herd of whorshippping WeeBees is running out of options.

    When the proles figure out they have been herded into Debt from a Government that has no intention of not pushing the button, I do want to see Marie and Louis beheaded, publically.

    Let them eat shit as an American it is my God given right to eat cake and bacon, whilst imbibing a single barrel bourbon.

    PS: If you check out the weekly HUI, it's working on an extremely BULLISH IT Pattern which should send it to 800/850 with relative ease. The fun might not begin until April - November though.

  11. Great commentary JM. I've been telling everyone that what we've seen so far from the Fed/Treasury in terms of QE is the pitcher in locker room getting ready to go out and warm up. The game hasn't even started yet.