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.