Goldman Sachs: Profiteers abound!

13.4Billion! A staggering number when counting just about anything, but especially so when one is counting all of the dollars of profit made by investment banking titan Goldman Sachs (GS) in 2009. Revenue for the year topped out at $45Billion, another massive figure.

$4.79Billion in profits in the latest quarter sees Goldman once again having the eyes of the banking industry squared directly on itself. This time however, more than just the envious glares of rivals await Goldman, as the banking sector has been in the political cross-hairs for almost 2 years. Since spawning the credit crisis, which has been largely to blame for the prolonged recession Americans found themselves in, banks haven't had the easiest time with things like profits and bonuses as taxpayers ended up footing the bill for financial bailouts.

Having set a compensation record in 2007 with over $20Billion in bonuses, Goldman's bonus pool for '09 shot back up to $16.2Billion after falling substantially as the bank suffered credit losses and took government aid in 2008. Repaying TARP money and allowing the government to make a profit on its aid package to Goldman has alleviated some political pressure but the company surely still faces a substantial uphill battle. The next step for the company, why charity of course! Taking $500Million out of the bonus pool and putting it into the company's Goldman Sachs Gives foundation. Certainly a worthy deed by the company, however even this sizable donation will likely receive minimal press when compared to the overall pay practices of the nation's largest banks.

Comparatively in the year, Goldman will actually spend a much lower percentage of Revenue on compensation than its rivals, but one thing remains crystal clear; it's become business as usual on Wall Street, even though these firms are only one year removed from bringing global financial markets to the brink of collapse.

While shareholders are certainly happy with continued banking excellence at Goldman Sachs, investors are increasingly wary that 'business as usual' might not be an option in the near future. The financial sector is down today as a renewed push from the White House and President Barack Obama make it clear that going forward lawmakers will look to create legislation to restrict risk-taking, banking activities and the size and scope of certain financial institutions.

Most major firms are seeing red to the tune of 5% in today's trading session on the front page legislative news. The position that Goldman finds itself in, should give shareholders little reason to fear restrictive legislation as history has shown the firm to be a presence in all major financial law-making, nimble enough to avoid competitors pit falls, and sharp enough to continue profiteering like the stereotypical banker! And that, in the end, will be great for shareholders.

Disclosure: Author owns GS

Markets fading to start December. What's in store for Christmas?

The first week of December has been one dominated by the sordid affairs of Professional Golf's most notorious figure, and as the rumor mill churns to fill gossip websites and supermarket rags, critical economic, fiscal and international issues are bumped to Page 2. So let's take a look back at what's been making the rounds.

The President of the United States, Barack Obama, always seemingly juggling several critical agendas, has his work cut out for him as he steers the US Senate in the Health Care debate behind closed doors, outlines a plan to send 30,000 more troops to support the War in Afghanistan and holds a Jobs Summit to deal with unemployment. The administration hopes to deploy unused or paid back Financial Bailout Money to support small businesses in lending and hiring and to ignite country wide infrastructure and energy efficiency projects, and to top that all off, newest laid out plans call for the creation of the biggest government transparency project in the Nation's history.

Certainly an ambitious agenda that is sparking controversy from either side of the American political aisle, but as Health Care is being actively debated in the floor of the Senate a passage of a reform bill seems ultimately likely. As for jobs, a very positive report for November had the US losing only 11,000 jobs in that month, with further reductions in previous month loss estimates. A far cry from the over 700,000 per month that were lost in the early parts of the recession. Still, with unemployment sitting at 10% of Americans something more has to be announced and followed through by the Administration.

On the market's side, the recent rally in Gold finally hit a bit of a stumbling block as the US Dollar found some fitting via comments from Ben Bernanke and the Federal Reserve. An interesting trade on gold has been a double gold short fund, PowerShares Double Gold Short (DZZ), posting a 15% gain over the last 5 trading sessions, including a 4% gain Tuesday. As economic footing returns and the possibility of rising Interest Rates in the US into next year this is a really interesting speculation play on a breather in Gold's record rally.

Bank Of America (BAC) has indicated its intention of paying back $45Billion in financial rescue money it had received from the Government as part of the Troubled Asset Relief Program (TARP), leaving its banking brethren Citigroup (C) and Wells Fargo (WFC) still without plans for re-payment.

Technology news of the day has several firms in the spotlight. Google (GOOG) has recently hosted an event in which it showcased several new search initiatives including real-time search, which include public updates from social spaces such as Twitter and Facebook, a Google Goggles tongue-twister project, which allows mobile phones running Android, and soon other platforms to take photographs of virtually anything and get legions of information back to the smartphone.

Apple (AAPL) has purchased music streaming service Lala, which for all intensive purposes seems to likely fit into the mold of furthering a cloud based iTunes architecture and perhaps a streaming alternative to the pay for download model the company has currently been enjoying. With all eyes on a potential tablet offering from the electronics company, several publishers are already lining up to create a joint venture that will put the likes of Sports Illustrated and Time magazine in specific new tablet formats with advanced interactive and connectivity features.

In the entertainment world Activision Blizzard (ATVI) set all sorts of records with the release of Call of Duty: Modern Warfare 2, selling pretty much a bazillion copies of the popular franchise video game and making more money in 24 hours than any other release in the history of entertainment.

As Christmas comes around the corner, in the retail and tech space it'll be interesting to see what the must-have gadget of the year is to be. Will the iPhone dominate again, will console wars push to new sales highs, will consumer spending continue to rise as the jobs picture improves on a bedrock of subtle economic growth?

This time of year always seems to set traders into a bullish mood, and that will be especially true if reports of record bonuses from the financial industry continue to ring true. But just remember, Goldman Sachs (GS) can't be blamed for everything, or can it?

Disclosure: Author owns C, GS, AAPL, GOOG

Banks are Gold, according to Goldman

Goldman Sachs (GS), long the darling (and jealously-driven scorn) of Wall St. just gave an emphatic gift to all its rivals by declaring the American financial system is a worthwhile investment. With its own shares more than doubling year-to-date Goldman gave its investing clientele the go-ahead to purchase other large banks, sending financial shares higher today and leading the market to gains or just about 1%.

By claiming large banks will outperform regional banks, Goldman spawned gains of between 2 and 6% for the major financial institutions. Despite the shot of love Goldman has thrown the financial companies, it finds itself battling one hell of a PR campaign on the topic of excessive bonuses. The company was looked at with balking eyes as it reported near record profits and bonus levels in the first half of this year, a year only one removed from the biggest financial and market failure since the Great Depression.

Perhaps Goldman wants to set the mood, favourable for all banks and it turn for itself. Since there's no shortage of politics now in finance, by giving an agreeable nod to the upcoming performances of the major banks, it'll soften the political blow when Goldman reports another record quarterly profit and annual bonus numbers that draft everyone else on the street.

The company is known for its shredding and fleecing of most it does business with, and a recent report showcased that Goldman receives $1Billion if the institution CIT fails, and price tag that would cost taxpayers $2.3Billion will do nothing to change that reputation. The well publicized bailout of AIG during the meat of the financial crisis, of which Goldman Sachs was one counter-party reportedly receiving billions of then federal dollars is just another such example.

But isn't that exactly what you want from an Investment Bank? To be the smartest group of guys in the room? I'd say so, and despite any public or political backlash over bonuses, Goldman is on tap to report another golden quarter. And that's something worth owning.

Disclosure: Author owns GS

That's why they call him the Oracle of Omaha...

Recommended Reading (Link): Interesting take from Bloomberg today on Berkshire Hathaway and its iconic Investment Mind Warren Buffett.

In short, in the midst of the financial crisis the "Oracle of Omaha" pledged support for Goldman Sachs in the form of a $5Billion investment of preferred shares and warrants to purchase $5Billion in Goldman common stock.

Mr. Buffett, for his company Berkshire Hathaway, has since made $2Billion in profits on paper on these warrants, since Goldman's earnings blowout and subsequent climb to the mid $160s. The warrants give Berkshire the opportunity to purchase Goldman shares at $115 anytime within 4 years. Not to mention the preferred shares are paying out $500Million in annual dividends.

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Disclosure: Author owns Goldman Sachs

Goldman, Johnson earnings upsides lead choppy day in the markets

Goldman Sachs (GS) was the center of the banking world over the last 2 days as an upgrade of the company by its lonesome propelled the entire financial sector higher to start the week. Today the numbers came and they were impressive.

Goldman, still as black-of-a-financial-box as there is on Wall Street proved that its formula still prints greenbacks. Despite an over-the-top piece in Rolling Stone magazine calling Goldman Sachs a money-sucking 20,000 Leagues Under The Sea creature, the bank just keeps on rolling and keeps on paying its employees. After taking in $13.8Billion in Revenues (vs. $10.6Billion estimate) the company set aside over $6.65Billion for employee compensation and earned $3.44Billion, or $4.93/share. The bright-eyed Wall-Streeters were expecting a still brilliant but in hindsight subdued $3.65/share in profits. Yes Goldman is taking on more risk with the VAR (Amount Goldman can lose every day) number climbing on a year-over-year basis to the $240Millions from the $180s Millions but GS has proven time and again to be the most adept at assimilating increasing risk, and with no TARP monkey on its back, the bank can continue to attract that top-prized talent, and compensate that talent well past market standards. Goldman stock is virtually flat today, as most gains were made yesterday on the pre-earnings analyst upgrade. A complete break-down of Goldman's earnings announcement is provided by Bloomberg (Link).

Despite Goldman tripling of its lows of $50 in November, and a double from its recent dip in March to $75, the company stock at $150 is still off of 2007 highs of $250/share. Now it certainly wont be easy to get there soon, and even the mighty Goldman will need economic help to continue surging, however it is the best company in its sector and despite a 77% upside performance year to date, it is a financial institution that is leaving its competitors in the rear-view mirror faster than any other industry leader can boast.

Johnson & Johnson (JNJ), the consumer giant, was also on tap in the earnings game and after a pre-market spike, the stock came back to hover up only about a single percentage point. Despite lower profits on a year-over-year basis JNJ still beat expectations and turned markets from a bearish tone into one that was decidedly more bullish. The ongoing recession, turbulence in global currencies and competition from generics were the main causes of blame for JNJ's 3% drop in earnings, however spending cuts and a tighter business belt helped the health company beat expectations in the quarter.

JNJ reduced spending on administration, research and sales by about 13% and reduced production costs by 6% according to Forbes. The company earned $1.15/share (vs. 1.17/share last year and estimates of $1.11/share) on $15.24Billion in Revenue (vs. 16.45Billion last year and estimates of $15Billion). So although both the top and bottom line numbers were down year over year, the company managed to top estimates on both important metrics in a economic marketplace that was called by the company CFO as one of the most difficult in company history. The company stills right in the middle now of its 52-week range, and with a yield of over 3% is an attractive consumer staple for a balanced portfolio. With re-assurances from management on 2009 profitability, its a name that will give steady market performance despite dragging American unemployment.

Disclosure: Author owns GS

For Bank Of America, $34Billion, what $34Billion?

Bank Of America (BAC) has been surging the last few days, up 56% the last 5 days, despite leaked information from the Federal Government Stress Test results. Even though the leaked details of BAC's capital needs seem ludicrously high, the number could have been a lot worse. Analysts have been on BAC's high horse, upgrading the stock, despite the need for $34Billion in capital! And here's why.

Despite the fact that $34Billion seems high, you've got to remember this is Wall Street thinking. The same Wall Street thinking that applauded a government move to secure defaults on over $300Billion in debt of Citigroup (C). Both banks have been surging lately as Investors jump back into an industry that was decimated by the credit crunch losses and prolonged recession.

For Bank Of America, and several other banks requiring more capital, the easiest thing to do would be to convert preferred shares into common equity. In BAC's case, doing so would add approximately $28Billion in capital, according to an analyst from Morgan Stanley. The comprehensive analyst report from Morgan's Betsy Graseck details other potential asset sales that would raise the remainder of the required capital. All in all, a situation for BAC, that looks much brighter compared to several weeks ago. It was very recently that Goldman Sachs (GS) made a splash by raising $5Billion in a stock offering, in order to use the money to repay the government's TARP funds.

Ken Lewis having his role of Chairman and CEO separated has given shareholders a new life, and recent gains certainly helped cement realistic rebound expectations. All this, despite the the financial sector still on what can be described as slightly thicker ice.

What Investors are still most weary of is government control of the financial sector, and despite the new Administrations repeated denials of Nationalization the potential of having the US government as the largest shareholder of several major banks will do nothing to quell the argument.

For now though, When the Stress Test results are made public investors will await word of what exactly Bank Of America will do to raise capital. Till then, what $34Billion?

Disclosure: Author owns C, GS

A Tale of Two Cities: Easter News and Notes

A tale of two cities, screams to be profoundly appropriate in describing the current climate of the American markets. Those two cities of course would be Detroit and New York. Symbols representing two pillars of the American workforce and economic prosperity. Both the auto and financial industries have been decimated by losses, layoffs, and market indifference, producing for some, the biggest market fall since the crash associated with the Great Depression.

Detroit's auto stocks are still in tatters, and the news did not get much better. The US Treasury has provided General Motors (GM) with a specific set of instructions for the preparation of Bankruptcy on June 1. It looks less and less likely that GM will be able to avoid that scenario and Investors showed no confidence in any alternative as Monday's trade saw GM give back 16% to the $1.70s.

To counter that, New York was having a fantastic session as the optimism from the Wells Fargo Corp (WFC) pre-announcement of profitability sustained financial momentum. With important earnings announcements upcoming, Goldman Sachs (GS) and Citigroup (C) Investors are seeing a renewed confidence in not only profitability, but the ability of the government to do what it has set out to do. Rid the financial books of terrible assets.

Analysts estimate Goldman to earn about $1.30/share, but the street has begun its whisper-practice and with Goldman still seen as the strongest of the Wall Street brands the company is expected to beat its own number and handily. Citigroup, having alerted the market to profitable months in January and February is looking to continue, despite the accumulated average estimate of a $0.37/share loss (according to Yahoo finance). Goldman will likely set the tone for the banks, and if others in the sector can surpass their estimates it will go a long way to support this current market rally, and instill the type of institutional confidence that is needed to make the latest gains sustainable.

Also in the news over the weekend, besides a thrilling Masters golf finish, was reporting from the Wall Street Journal (Link) that Apple's (AAPL) iconic CEO Steve Jobs, is in fact still very much in the picture and involved in design and business decisions. Word is that Jobs was very much involved in the interface of the latest iPhone OS, version 3.0, and is also involved in the creation of the much-heralded Mac tablet/netbook device. The return of Steve Jobs, from a 6-month medical leave has been a cloud over Apple's stock despite sales growth and product innovation from the company. The recession may have curbed consumer spending habits severely, and Apple's premium brand did suffer, according to market research statistics, but with the company continually improving its Mac Computer and iPods lines recently and an upcoming iPhone announcement surely in June, Investors have begun to set aside worries about Jobs.

Should Jobs return on schedule and lead the next phase of iPhone evolution, expect resonant cheers and analyst upgrades on the anticipation of the next phase of Apple's product road-map. In fact Kaufman Bros. Shaw Wu conceded Apple's value in his latest report, bumping his price target to $150/share.

News reports of the rally's sustainability have been mixed, with some expecting negative trends to overshadow any glimmers of recovery. Thsoe glimmers however, are due to get brighter if the financial sector continues on this path of pre-announced profitability.

Anatomy of a Trade: Selling Calls in a Bear Market

Risk is without a doubt the de-facto component of any investment. There's certainly no free-lunches out here, especially in the Bearish climate traders are finding themselves in. With the majors touching November 2008 lows, the already fragile marketplace finds itself hanging by mere strings from a profound loss of confidence.

Anatomy of a Trade, as this article is titled, is thought of as the first in a series of pieces attempting to give some insight into a Traders mindset, which seems more prevalent now given the climate. A consistently volatile and bearish mood of the marketplace, can often cloud sound reason decision making by forcing a Trader to maneuver more swiftly and determinately than typical.

First, a brief introduction to the concept of selling options. Wikinvest (Link) has a brief primer on the concept of "covered calls", which in laymen speak is the process by which an Investor holding a stock position sells a call option to the marketplace giving another Investor the opportunity to buy said stock position at a pre-determined price on a pre-determined date. Several good and more detailed resources exist on the topic both online and off .

How this trade started! WC Power Tech Fund holds in its portfolio long positions in both Google (GOOG) and Goldman Sachs (GS) and as January was coming to a close, Covered Call Option positions were opened on both securities.

Jan 22: Covered Call Option position sold for Goldman Sachs with a strike price of $85 for February netting a premium of $2.23 per share.
Price for GS: $71

Jan 23: Covered Call Option position sold for Google with a strike price of $350 for February netting a premium of $5.70 per share
Price for GOOG: $324

Selling Covered Calls doesn't exactly tickle anyone's risk bone in the slightest because in the best case the options expire worthless and the seller keeps the premium received and their stock, and in the worst case the seller keeps the option premium but has to also sell the stock at the strike price despite the fact that in the market the stock is trading at a higher value. Either way there's technically no "loss" if an Investor chooses a comfortable Strike Price for their position.

How the Selling Covered Call strategy works against an Investor is the "potential lost profit" on a stock that continues to surge. And this is exactly what happened during a two-week run for both Google and Goldman Sachs stock prices as the Market experienced a Bullish bounce. The value of the sold options went increasingly higher and to buy the options back at market prices would have led to losses of 4 to 5 times the initial premium received.

Within a week the prices of the option positions were as follows:
Google Feb $350: $14.20
Goldman Sachs Feb $85: $8.35

This is where that seductive element of Risk steps through the door. The Naked, or Uncovered Call Option. Staring at unrealized losses on a short position of 400-500%, the Trader has the Option (pun intended) to sell more options. These are different from the original sales as the Investor doesn't currently have the stock to offer if the prices remain this high.

But in a Bear Market, the Anatomy of this trade had 2 main parts: Sell Uncovered options at the same strike prices to drive up the average selling price of the position. The thinking was that Bearish tones will overtake the general markets and bring prices back down prior to expiration of the options. This would present the ideal opportunity to close out this trade, by buying back the uncovered and covered options for less than a now increased average selling price! In simple terms, turn this heavily negative current position into a profitable one. That was the goal.

On paper, its a very risky trade, as the losses are potentially limitless if Markets kept proceeding higher. But by sticking with the prevailing notion that the Markets are Bearish, a small spike in prices presents an opportunity to sell into if not at the peak.

Initially the small spike, wasn't so small at all and both Google and Goldman Sachs kept being bid up and bought ever higher. By February 9th: Google's stock stood just shy of $380 (nearly $60 higher) and Goldman Sachs shares fetched $98 (nearly $30 higher). Nothing short of a complete disaster for a short-term trade.

Option prices on February 9th:
Google Feb $350: around $30
Goldman Sachs Feb $85: around $14

Some simple math based on the first covered call sells shows that the Google position had increased over 5 times! and the Goldman Sachs position had increased over 6 times!.

However with continued Uncovered Option selling mathematically the potential loss didn't look so daunting and the continued collection of premiums had built a cash position for the fund. The risks associated with the accumulation of short call positions in both Google and Goldman Sachs was that as expiration dates loomed ever closer the fund was on the hook for an increasing amount of stock, should there not be a sell-off.

So, what is the thinking at this point. The trade has gone against the Trader, and perhaps the smartest thing isn't to continue selling into the wind. When purchasing stock you're told to buy a position in pieces in an effort to average down if the stock moves the opposite way. Same thing applies to selling short, both stock and options. Whether this practice is smart for uncovered option positions in clearly debatable, it is however absolutely possible. By continuing to sell more Uncovered Call Options the average prices of each position had increased 3 and 4 fold by the infamous February 9th date.

Infamous because that day proved to be the peak for both Goldman Sachs and Google stock. The initial theory was beginning to prove correct, albeit after many days of market-watching worries and frantic paper loss calculations. By using Uncovered Calls the positions had grown but so had average selling prices.

January 23 & February 9th Position Average Selling Prices:
Google Feb $350: $5.70 on Jan 23 --> $17.10 on Feb 9
Goldman Sachs Feb $85: $2.23 on Jan 23 --> $9.10 on Feb 9

Now that initial convictions had been proven correct and the Market began making its way to November 2008 lows the current prices of both Option positions fell dramatically. As expiration approached, the Trade should look to be closed, and with that the Uncovered Call contracts bought back.

With each passing day in the third week of February the markets slipped and along with them, were the share prices of Goldman Sachs and Google, closing Thursday at $86.01 and $342.64 respectively. The WC Power Tech Fund closed all outstanding Google and Goldman Sachs option positions on Thursday. So although the bullish market spike in late Jan/early Feb as a threat proved formidable it was not, in the end, insurmountable.

February 19 Position Buy Back Prices:
Google Feb $350: position bought back for $1.54 --> net percentage gain
(kept 91% of option premiums received based on $17.10 average selling price)

Goldman Sachs Feb $85: position bought back for $2.54 --> net percentage gain
(kept 72% of option premiums received based on $9.10 average selling price)

In a market that hasn't been Investor friendly for a long time, there are Trades that can be very profitable. The Uncovered Call brings with it enormous and limitless risks, which don't translate well to the average Investor. There are easier ways to exploit Bullish Market spikes in a Bearish market, and options are one of the most cost-effective ways to do that. They are also amongst the riskiest. The WC Power Tech Fund uses and has since inception used Covered Call selling as a monthly income generator, to supplement dividends and supplement or offset capital gains and losses that positions incur.

So for all those nail-biting moments earlier in this month with these option positions, the end proved to justify the means, this time, and what was a very risk-intensive trade turned profitable in this inaugural Anatomy of a Trade.

Disclosure: Author owns GOOG, GS

Investor eyes to be on Goldman Sachs tomorrow

2008 will be remembered as the year Wall Street ceased to exist! The Investment Banking model essentially died with elaborate, excessive and downright dangerous investments in poor credit. The companies that have survived on their own, Morgan Stanley (MS) and Goldman Sachs (GS) had to change their business structure and take government money. A year to forget for all financial companies.

Write-downs have been aplenty, but somehow Goldman Sachs has been able to keep everything on the profitable level. While profitability has been in substantial decline for the firm lead by Lloyd Blankfein, Goldman was the one investment bank that could claim profits quarter after quarter. This time however, investors expect the party to end.

With Goldman on tap to report its quarterly results tomorrow morning, analysts are giving no chance of profitability by predicting about a $3/share loss. As bad as things were, Goldman was prior still expected to eek out a tiny profit. But with the market's latest downturn, the worsening of the US economy and the lack of business deals in a quarter marked with losses that eek has turned from black to red by those same analysts.

According to MarketWatch, analysts expect a $2.83/share loss for Goldman Sachs, while a similar number is seen from Zacks Investment Research, with an average loss of about $3.30/share expected. Goldman shares have been on a steady decline, but were propped from lows in the $50s to a near term high of about $80. Investors should note that Goldman has surprised before, and can surprise again. The first quarterly loss during the public history of the company seems inevitable via the collective of analysts but the size of the loss will determine Goldman's direction going into 2009. With shares sitting in the mid 60s, a positive (relatively speaking) result may spark shares back to near term highs.

While economists and market analysts expect 2009 to be tumultuous to say the least, the common perception is that the latter half of 2009 will proliferate a US recovery, spurred by President Barack Obama's infrastructure initiatives and a return to typical lending practices for the major banks. Goldman will be primed for a recovery rally with the market, but as it is transformed further into a bank, expectations will be muted for sometime to come.

With that in mind is Goldman a good investment? A resounding yes! The smartest folks on Wall Street work for a company that has seen all but one of its competitors go bankrupt or be bought up by larger financial institutions. MarketWatch analysts have an average target of $135, but $100 may be more reasonable over 2009, based on market recovery, which potentially finds Investors of Goldman netting a 54% gain.

The competitive landscape has surely changed but Goldman was left standing. It had always been the strongest in its field, and after investors digest tomorrow's results a case can be made whether it will continue to be.

Disclosure: Author owns GS

Global Market Fears Return Friday, Sell-Off Continues

Corporate Earnings results have trended towards the "not too bad" and "above lowered expectations" columns more times than not this quarter, however the expectations game and fears of a drastic 4th quarter slow down have stocks reeling worldwide. From Europe to Japan, the sentiment this morning was profoundly negative, causing a halt in Dow futures trading as contracts dropped significantly in the early-hours.

At the open, American markets led off with a 500 point drop in the Dow, and while some Traders have bought off the bottom the morning is still holding to about a 400 point decline, roughly 4.5%.

Major corporations have been forced to plan layoffs, amongst other cost-cutting ideas, to not only shore up business capital but to provide Wall Street investors with any-type of strategic plan to try to hold down sellers. More recently it was Yahoo (YHOO) and Goldman Sachs (GS) announcing a round of firings.

As all the headlines surrounding the markets paint the gloomiest of pictures, it should be a time to make the sideline Investor think of potential opportunities. But this is one of the types of attitudes that has not worked recently. The Dow continues its slide and has dropped to 10,000....9,500....9,000.. down to its current levels of 8300. As this credit and financial crisis has expanded, it's become abundantly clear that its effects have been and are worse than anyone in the economic field imagined. The fear of the typical market participant and consumer are at all-time highs. A feeling confirmed by action in metrics such as the Volatility Index.

As the US approaches the Federal Election, perhaps the hope of a change in policy will divert the economic fears enough to showcase a plan of action and a call for change. While Barack Obama continues to lead in most polls, running on a platform of change, John McCain still finds himself within striking distance as the race closes in on Election Day. Americans will determine on November 4th who will lead them away from these economic fears and into a future of change and prosperity.

The resolution of some uncertainty and a Call to Action from a newly elected President could be the catalyst the market needs going into the finale of a rough, tumble and volatile trading year.

US looking to President and Nominees to push bailout plan

Dire times call precisely for dire measures, and the proposed US Government bailout of the Financial Crisis is certainly one of those times. A crisis which has been called one of, if not the worst financial implosions in history. President George W. Bush went on Television to reassure Americans and to pledge support of the historic $700Billion plan to rescue the financial system and the markets.

Bush, also planned meetings with candidates Barack Obama and John McCain to detail, not only the urgent need for passing the proposed bill, but also to outline a strategy for moving forward to sustain economic activity. And furthermore to appeal to the American people that such a drastic monetary package is necessary to avoid a long and likely complete economic slowdown, the likes of which not seen in decades. The word collapse has been thrown around far to often in these discussions but it strikes an important chord as the emphasis on the swift approval of a bailout is seen as vital for market recovery.

Treasury Secretary Henry Paulson, a former Goldman Sachs (GS) chief, was the driving force behind the broad outline of the bailout plan and negotiations with lawmakers on Capitol Hill have been ongoing for days now. As these talks languish, in turn so do the buying trigger fingers of the investor community. President Bush speaking to the population is a direct result of the waning attitude towards the bailout package and its needed swift passing.

While the Dow experienced a two day gain of nearly 1000 points following the announcement of the Bailout proposal, the sentiment has been mixed since. The old adage of 'When government gets to talking the whole process stalls' had been floating around, while it may be unfair to pigeonhole that complaint here, it still provides the media a talking point. Something this drastic and this complex needs to be thoroughly discussed and with issues ranging from individual consumer tax protection, executive compensation, and specific borrowing terms there is bound to be differences of opinion in any Congressional discussion on these topics.

Today's news brings with it the optimism that the bailout package is just about complete, and all major details have been worked out. To that end, the Dow and the other majors are seeing Bullish activity. This morning, the Dow averaged stood higher by almost 200 points (1.8%), with equal percentage gains also present in the Nasdaq and S&P.

Markets eye huge open as SEC bans Short Selling Financials

Following Thursday afternoon rally, which led the Dow to a 400 point gain, the US SEC stepped in announcing a temporary ban on short selling 799 Financial stocks. A move that had been called for by Investors and members of the industry for the last few days. A move that is certainly seen by Investors as curbing the tide of massive profiteering by manipulators betting with the Financial collapse.

The news, along with the Federal Reserve's talking points about a sweeping plan to fix things in the tumbling financial sector, gave traders a renewed optimism. On this day the bull wins in the morning. The usual finance suspects are making the most waves as buyers are coming back in full force in pre-market trading.

Before the open some of the big names in the sector were looking well up.
Citigroup (C) up 34%
Goldman Sachs (GS) up 32%
Bank Of America (BAC) up 26%
Morgan Stanley (MS) up 49%
JP Morgan Chase (JPM) up 19%
Wachovia (WB) up 65%
Washington Mutual (WM) up 58%

An incredible buying turnaround from where these companies were just a few days ago.

Uncertainty remains within Brokers Morgan & Goldman

Last of a dying breed? Morgan Stanley (MS) & Goldman Sachs (GS) remain Wall Street's 2 independent brokerage houses, and for that fact, their shares are being sold off heavily day in and day out. Despite the fact that both companies beat reduced earnings expectations for the quarter, they are being lumped into the same selling frenzy as their industry com padres due to their heavy reliance on leveraged investments.

Goldman profit fell 70% year-over year but the company still managed to make ends meat. The yearly comparisons are not pretty considering Goldman's record 2007 financial year. $810Million in profit ($1.81/share) vs. $2.81Billion ($6.13/share) last year. Overall revenue was down also from $12.3Billion to $6.04Billion.

Morgan Stanley, which had its own set of difficulties over the year reported profit that fell 3% year over year, $1.43Billion vs $1.47Billion, which translates into $1.32/share this quarter. With net revenue reaching $8Billion, a 1% year over year increase, Morgan showed it can still deliver results, however the pressure on the company to make a deal with a bank is staggering.

The old leverage issue again, as Investors feel the only way to shore up capital and assure broker survival is to pair up with a bank and the giant vault of deposits that go along with it. When Merrill Lynch (MER) made the deal with Bank Of America (BAC), followed by Lehman Brothers (LEH) bankruptcy, both of which followed JP Morgan Chase (JPM) rescue of Bear Stearns the Street was down to 2 stand-alone investment houses.

The rumor-mill has run wild of late regarding Morgan, with reports of conversations with Citigroup (C), Wachovia (WB) and China Investment Corporation, which if done would leave Goldman Sachs as the sole big name brokerage left on Wall Street. Investor publications have held a positive opinion so far on BAC's deal for Merrill, so for Citigroup or Wachovia picking up Morgan Stanley on the cheap would also feel like a win.

However, in the turbulent times that are continuing, with a financial crisis unseen in most Investors lifetimes, the "Let's make a deal" talks are very cautious to say the least. If Morgan does join with a bank, and signs are pointing more likely recently that they will, Goldman will find itself in a unique position, having its main competitors under the corporate shells of some of the largest financial institutions in the country. The optimist finds that this will allow Goldman to thrive as the economy strengthens and underwriting and M&A advisory work become more prevalent, but the pessimist finds a single brokerage model struggling to survive in these economic tidal waves.

As Markets see-saw between down 400 point and up 400 point days, the successful trade is being on the optimist/pessimist part of the see-saw on the correct day. Lately though, the pessimism has run rampant.





Disclosure: Author owns GS, C

Finance Fails Again! Dow Drops 500 points

Monday started poorly and ended worse for Markets as the weekend turmoil of Lehman Brothers (LEH) and AIG (AIG) weighed heavily on the financial sector and stocks as a whole. As hope for a bailout of Lehman, or at least heavy asset sales dwindled Sunday, leading suitors heading for the exits, the company had no choice but to file for the bankruptcy protection.

Still standing, but sharing the negative spotlight is AIG, the insurance giant, which said that it may need $40Billion to keep moving forward. A remarkable number, when considering the company is reportedly backing nearly $60Billion ($57.8Billion according to Bloomberg) in sub-prime mortgages. AIG is looking to raise about $20Billion in capital and sell off another $20Billion in assets. New York has allowed the company special permission to access $20Billion in an effort to shore up some liquidty. The mathematics are still working heavily against AIG as shares plunged 60%, cutting half of AIG's market cap. Still not as bad as Lehman though, which lost 95% of its value due to its bankruptcy plans.

As Bank Of America (BAC) and Barclays (BCS) walked away from Lehman bailout talks on the weekend, BAC was busy getting another deal done as it agreed to purchase Merrill Lynch (MER) for about $50Billion, valuing the firm at $29/share. While Merrill jumped at the open the market's selling sentiment dragged it down to $17 from a high of $22.

And the rest of the financial doghouse followed:

Citigroup (C): down 13%
Bank Of America: down 21%
Wachovia (WB): down 25%
Washington Mutual (WM): down 26%
JP Morgan Chase (JPM): down 10%
Goldman Sachs (GS): down 12%
Morgan Stanley (MS): down 13%

The markets have seen down days like this before, albeit not to this extent, and many traders start talking themselves into the so-called bargains, but as former Fed chariman Alan Greenspan put it, and I paraphrase, 'This is the worst economic situation I've ever seen'.

Even the strongest of financials can still go lower from here, but for the ones who can ride it out, show they can stay afloat and show they can stay profitable, bargain basement prices wont be around for that long. That's a big reason why the Street will be looking so closely at Morgan and Goldman earnings.

Disclosure: Author owns C, GS

Bernanke comments lead to rally in Financials

Comments by Ben Bernanke, Fed Chairman, today lifted markets, especially for those battered companies in the Financial sector. In what could be called a "relief" rally, the worst 3 to 6 month performers in the sector received today the biggest lift in months.

Bernanke's comments sought for the Fed to increase its oversight ability and its power/resources in order to prevent future financial turmoil. In essence Bernanke wants to Fed to have new regulatory responsibilities and supervisory oversight of the Financial markets and Financial companies.

In light of the commentary and an almost $6 drop in Oil Futures, The Financial sector posted a board of green.
Bank Of America (BAC) up 8%
Washington Mutual (WM) up 15%
Citigroup (C) up 5%
Wachovia (WB) up 10%
Lehman Brothers (LEH) up 4.5%
Goldman Sachs (GS) up 3%
JPMorgan Chase (JPM) up 4.5%

While today's rally definitely was a relief for longer term holders of these companies, the industry as a whole, is by no means out of the woods. The Financials will still feel the pressure of the lingering sub-prime and mortgage troubles, and it wont be till the losses and write-downs fully subside can it become business-as-usual for some of America's most recognized corporate names.

Disclosure: Author owns C, GS

On the heels of Lehman losses, Goldman shines again

As the turbulent and tumultuous times that are the Investment Banking earnings season move from just-around-the-corner to in-full-swing, all Wall Street eyes were on the leader of the pack. Goldman Sachs (GS). With the market continuing to see credit losses dragging down the performances of the Financial sector companies, there wasn't much to look forward too, and even less to be optimistic about.

Lehman Brothers (LEH), reported the first quarterly loss in the company's public history, and it was fairly hefty at that, $2.8Billion! Now that the cross-hairs are on Goldman, it was up to the darling of the Investment Banking world to reassure the industry all is not lost. Profits and Revenues were expected to decline at Goldman Sachs, but the company's ability to maneuver through the credit crisis gave it the ability to keep its head more than above water, while rivals continued to stumble.

Goldman's results were better than expected, despite year over year declines, and the executive branch at the head of the organization are singing their own praises. This little ditty from Lloyd Blankfein pretty much sums up the atmosphere around the sector and Goldman itself:

"Given the difficult market conditions, we are particularly pleased to be able to report strong results for the second quarter."

So you know it's party city down at the Goldman camp (Let's hope no one invites Henry Nicholas).

GS delivered profits of $2.09Billion, which equates to $4.58/share, down 11% from last year. On the top line, the drop was only 7.5% to $9.42Billion. Considering analysts were expecting $3.42/share on revenue of $8.74Billion this was indeed a substantial earnings beat. After an initial jump Goldman shares are coming back to the general market and as this company sits in the 180s it's time again to ask, just what the possibilities are for a trade from here?

Granted Goldman's Price to Book ratio has been notoriously higher than its peers at around 1.9, but that doesn't make it expensive. The industry, through this downtrend and the losses is in a time of consolidation and new metrics. In fact, Goldman, on Price to Book is inching closer to the sector near the high 1.7s. Since P/E ratios don't mean much if they're negative, for some other Investment firms, analysts need new ways of valuation. But GS, has always been on a profitable path, and its trailing P/E now stands at 8! In a perfect world this ratio would be at 12 and it's forward number about the same.

An opportunity exists over the next year or so, to truly make a splash with Goldman Sachs! The cream rises to the top as they say, and a year from now, when GS is looking at trailing earnings once again getting $20/share with a trailing multiple near 12, shareholders getting in the company at this $170-$180 stage will inevitably be 30 to 40% to the good.

Disclosure: Author owns GS

Investment Banking Earnings start the Rally, Fed rate cut kicks it into Gear

Markets came out to a flying start this morning as Goldman Sachs (GS) and Lehman Brothers (LEH) showed the Street that in fact all is not dead in the world of Investing. Lehman, which was creeping into talk circles of being the next Bear Stearns, showed just how well it can keep itself going with a better than expected quarter.

More of the same came out of Goldman Sachs, which beat estimates again, providing the guiding light for buyers jumping back into the financial sector. The earnings numbers were sharply lower than a year ago at both firms, but both also registered upside surprises on top of beaten down analyst opinions. Lehman earned almost $500Million of $0.81/share vs. the expected $0.72/share. More importantly the company on the conference call downplayed any cash strapped concerns by announcing that Lehman has a strong balance sheet with $30Billion in cash on hand as well as $64Billion in very liquid assets. A very strong foundation that'll keep it afloat, by any measure!

Shareholders and investors rejoiced at the quarter sending depressed Lehman stock up almost 50%. At the other end of Wall Street, Goldman Sachs shares gained 16% to $175, following a better than expected quarter. Goldman earned $1.51Billion, $3.23/share in profit vs. the expected $2.59. Management gave speeches of confidence in the cash position at Goldman and investors were very impressed at the raw numbers and the ease at which GS seems to maneuver around the economic landscape.

The market momentum continued throughout the day and once the news hit the wires that the Federal Reserve cut the Interest Rate in the US by .75% the market seemed poised to go nowhere but higher. The day finished at the peak of the session, and the Dow (420 points, 3.5%), the Nasdaq (90 points, 4.2%) and the S&P (54 points, 4.2%) all recorded substantial gains.

Disclosure: Author owns GS

Goldman Sachs Future rewards outweight Current downward pressure

Goldman Sachs (GS), the darling of Wall Street when it comes to Investment Banking, those smart guys who were shorting bad loans when everyone else was hiding from losses, have been feeling economic pressures as much as any other company on the Street. At this point, with the stock in the mid $160s it is a bargain if Investors expand their time lines.

Weakness in the overall economy has brought a wave of selling, cutting the best performing market stocks, contracting P/E ratios and pessimistic earnings outlooks have been the main culprits over the last quarter and Goldman Sachs has been no exception. Although Analysts still hold a high regard for the company, it has been difficult getting any momentum back for the shares. Falling from a high of over $250 to its current values makes for a 40% valuation hit. While that is in line with virtually all of its peers in the financial business Goldman has proven with its track record to just simply be more flexible, better managed, and in fact Smarter than the other Investment Firms.

While earnings expectations have been toned down this year to around $19-$20 and $22-$23 next year, there is no reason for Goldman to be trading in the 7 P/E range. Even though 2008 profitability is expected to be lower than 2007, it still only values Goldman with a FP/E in the 8/9 range. This is a company that had over a Trillion Dollars worth of assets on its balance sheet at the end of 2007. It made almost $12Billion in profit on revenue of $88Billion. Just staggering at the money machine that is this bank, moving in all sorts of Investment directions.

Recent investments into Mexican Highways, Asian Manufacturing and the rumbling of wanting to invest $800Million Euros into Eurotunnel (The connecting tunnel between the UK and France) has broadened Goldman's investment portfolio, all the while management continually signals that through tough times in the US the company will continue to be intelligently short. Not a bad bet to take given current economic headwinds. For these reasons, Goldman is the best player in the Investment Banking game and I think, while sideways trading may keep this good name down for longer than most would like, the opportunity is there to use current weakness to build up or start positions in this name.

The company is known to keep its business close to the vest, which may be a turnoff for some Investors but the company has executed so well in the past, it is hard to argue with this method. Furthermore, their track record demands a certain trust in the company direction. Analysts are similarly dumbfounded as the range of estimates for the current quarter ($2 low, $6 high, $3 average) and the current year ($16 low, $25 high, $19 average) prove exactly this point. The lack of transparency in the Investment business provides a small stumbling block for Institutional money to really drive buying. I think this block can be avoided and once Goldman presents its current quarter numbers on March 18th, Institutions will have another data point, and more importantly another level of trust in just how well Goldman executes on its business objectives.

I expect a good quarter, because as the credit situation has further deteriorated I think Goldman kept being short and curbed its own losses as much as it could. This driven by other fees and a very diversified investment strategy, especially in overseas markets will allow it to handle the US economic storm not only swiftly, but profitably as well.

Disclosure: Author is long GS

2007 Ends with a Bearish Tone, Dow loses 100 points

The Dow ends the year down 101 points, and while the average is in positive return territory for the year (about 6.5%) the latter part of the year has become increasing volatile and negative. The credit crisis dominated the market headlines over the last few months and Big Finance has endured billions upon billions of losses in their asset valuations.

These bad bets have cost the big banks plenty as the hit list is broad and plentiful. Since Mid Year highs, there have been nothing but bad news from the Financial sector. (Apart from consistent blowout quarters at Goldman Sachs (GS))

• Citigroup (C) is down 48%
• Bank Of America (BAC) down 24%
• Wachovia (WB) down 34%
• Merrill Lynch (MER) down 46%
• JPMorgan Chase (JPM) down 19%
• Morgan Stanley (MS) down 31%
• Lehman Brothers (LEH) down 24%
• Bear Stearns (BSC) down 38%
• Goldman Sachs down 14%

These numbers are staggering and many analysts are painting an even bleaker picture for the Financials in 2008. While I think there's the potential for big rebound gains into the 2nd half of the year for these companies my major worry is that once Dividends start getting cut, more investors will flee to other safe havens. The rumors of Citigroup needing to cut its dividend by 40% certainly have hurt the stock over the past couple of weeks.

There will be opportunities in 2008 for the Investor, as I feel the recession fears are overblown and selling based on those fears is overdone. The selling was done consistently throughout the past couple months, timed with the Federal Reserve Interest rate moves.

2007 will go down as the year of the iPhone from Apple (AAPL), and the popular mobile phone gadget has helped the technology company to another breakout year by more that doubling since the device's unveiling. Look for Apple to extend its reach with iPhone in the coming months (Europe, Asia etc.). Technology and Oil were the leaders for better parts of the year in 2007 and this will likely continue going into 2008. I believe there is tremendous commodity and trader pressure to get and keep oil above the $100 mark. Should this happen it will continue to put pressure on the consumer and big ticket spending (Homes, Cars) will soften still, putting further pressure on the overall market and North American economy.

Luckily though, all metrics the market has gotten lately have pointed to a stable and growing US economy, and consumers seem to be taking high gas prices in stride. All signs point to a strong Christmas season, led broadly by Technology (Gaming & gadgets), and with this the chip makers should see continued strong demand, specifically Intel (INTC).

It's the first end of year trading session for the WC Power Tech Fund Blog and I'd like to thank all the readers throughout the first few months here.

What a Difference a Day Makes, Markets rebound Tuesday

Four Days of heavy sell-offs for North American Markets were met with enthusiastic buying as earnings, financial executive appearances and economic data supported a more bullish tone. Technology led the rise with the Nasdaq gaining more than 3.5% while the Dow Jones and S&P followed with gains of 2.5-3%.

Earnings from Wal-Mart (WMT) pushed stocks higher at the open as the benchmark retailer said it was expected a solid Christmas shopping season. Investors applauded the earnings beat and forecast and sent shares up more than 6%.

In the financial sector, a day after E*Trade Financial (ETFC) plunged 59%, a somewhat rebuttal to the bankruptcy fears from another analyst sent E*Trade soaring back 40%. A swing trader's dream stock the last couple of days, but the risks with this company still remain. E*Trade has assured it is well capitalized to absorb loan write-down losses and that bankruptcy is not in its future. In other financial circles, Bank Of America (BAC) reported that it will write down $3Billion more in losses, while Goldman Sachs (GS) CEO Lloyd Blankfein spoke at a conference showing the street once gain how brilliant the business and trading side of Goldman is. The context of Blankfein's talk; Goldman will not be taking any more write-downs and is still shorting Sub-Prime sectors. I for one think that Goldman's earnings will once again be stellar and prove to Investors it is not only Best of Breed on the Street but seemingly in its own Pantheon of Investment Banking. Shares of GS rallied heavily today, up almost 9% coming back to $233/share.

Technology was a big winner, as the Nasdaq paced gains, with Apple (AAPL) up 10%, Baidu (BIDU) up 13%, VMWare (VMW) up 13%, Google (GOOG) up 5% and Research In Motion (RIMM) up 9% all regaining some lost ground. I said very recently (Link) that Technology would be back and investors should look for strong fundamentals to find winners during the panic-stricken sub-prime selling crisis. Now by no means does today mean that all that can be forgotten and momentum will continue but it does provide a foundation for bullish sentiment.

There are several economic measures coming, including two key metrics this week; Producer Price Index - (PPI), and Consumer Price Index - (CPI), Wednesday and Thursday respectively. Now although the housing indicator released today showed a slight percentage gain, compared to the estimated percentage loss, the outlook pointed to things indeed getting worse from here on out before they get better for the home building sector.

Disclosure: Author owns GS, BAC, AAPL, GOOG