Goldman Sachs Likely to Post Huge Profits, Analysts Say

Most of Wall Street, and America, is still waiting for an economic recovery. Then there is Goldman Sachs.
Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.
Analysts predict the bank earned more than $2 billion in the March-June period, thanks to its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so dramatically only months after the nation’s financial industry was shaken to its foundations.The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall."They exist, and others don’t, and taxpayers made it possible," said one industry consultant, who, like many people interviewed for this article, declined to be named for fear of jeopardizing business relationships.Startling, too, is how much of its profits Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 per employee. Top producers stand to earn millions. Goldman was humbled along with the rest of Wall Street when the financial markets froze last year. As a result, it lost money in the final quarter of the year, a rarity for the bank. Along with other big banks, it was compelled to accept billions of dollars in federal aid, which it paid back last month. Amid the crisis, it also converted from an investment bank to a more regulated bank holding company to make it eligible for government lending programs.
Goldman declined to comment over the weekend, pending its Tuesday earnings report.But if the analysts are right — and given the vagaries of Wall Street trading, any hard forecast is little more than a guesstimate — the results will extend a remarkable run for Goldman that was marred only by the single quarterly loss last fall of $2.12 billion. Goldman Sachs is betting on the markets, but the markets are also betting on Goldman: Its share price has soared 68 percent this year, closing at $141.87 on Friday. The stock is still well off its record high of $250.70, reached in 2007.In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible. “It is, in many respects, business as usual at Goldman,” said Roger Freeman, an analyst at Barclays Capital.Traders said Goldman capitalized on the tumult in the credit markets to reap a fortune trading bonds. It profitably navigated a white-knuckled run in stock markets. It bought and sold volatile currencies, as well as commodities like oil. And it reaped lucrative fees from the high-margin business of underwriting stock offerings, which surged this year as other, more troubled financial institutions raced to raise capital.Whether Goldman can keep this up is anyone’s guess. With so much riding on trading, the risk is that the bank might make a misstep in the markets, or that today’s money-making trades will simply vanish. The second half of 2009 looks tougher, many analysts say.
Goldman is not the only bank that appears to be returning to health. JPMorgan Chase is also emerging as one of the strongest players in this new era of American finance. JPMorgan and several other big banks are expected to report strong second-quarter profits as well this week, again in large part based on robust trading results.But to a degree unique among its peers, Goldman has turned the crisis to its advantage. Its perennial rival, Morgan Stanley, has refused to gamble in the markets and, as a result, is expected to post a humbling quarterly loss. The giants Citigroup cnbc_comboQuoteMove('popup_c_ID0EWDAC15839609');[C 2.71 0.12 (+4.63%) ]cnbc_quoteComponent_init_getData("c","WSODQ_COMPONENT_C_ID0EWDAC15839609","WSODQ","true","ID0EWDAC15839609","off","false","inLineQuote");and Bank of America cnbc_comboQuoteMove('popup_bac_ID0E3IAC15839609');[BAC 12.63 0.75 (+6.31%) ]cnbc_quoteComponent_init_getData("bac","WSODQ_COMPONENT_BAC_ID0E3IAC15839609","WSODQ","true","ID0E3IAC15839609","off","false","inLineQuote");, still in hock to the government, are struggling to regain their footing. Banks like Merrill Lynch, now owned by Bank of America, ran into trouble trying to replicate Goldman’s success. Richard Bookstaber, a former hedge fund executive and author of a “A Demon of Our Own Design,” wonders if Goldman’s resurgence will prompt other banks to push once again into riskier forms of trading, possibly at their peril. “Someone takes risks and makes money — maybe they were smart, maybe they were lucky,” Mr. Bookstaber said. “But then everyone else feels like they need to take the same risks.”While others are shying away from risks, Goldman is courting them. A common measure of risk-taking at Goldman and other banks is known as value at risk, which estimates how much money a firm might lose on a single day. At Goldman, that figure rose by more than 20 percent in the first quarter. Analysts predict Goldman’s V.A.R. ran high in the second quarter as well.“It’s taking opportune risk that others aren’t taking,” said Charles Geisst, author of the forthcoming “Collateral Damaged” and a Wall Street historian. “They are scooping up all the risks that are available.” On Wall Street, where money is the ultimate measure, Goldman is both revered and reviled. Its bankers and traders are sometimes referred to as the Bandits of Broad Street. An executive at a rival bank characterized Goldman traders as “orcs,” the warlike creatures of Middle Earth in J. R. R. Tolkien’s “The Lord of the Rings.”
Even mainstream America is taking notice. An article about Goldman in a recent issue of Rolling Stone, by Matt Taibbi, characterized Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Goldman dismissed the article as the ramblings of conspiracy theorists. For all its success, Goldman cnbc_comboQuoteMove('popup_gs_ID0E1PAC15839609');[GS 149.566 7.696 (+5.42%) ]cnbc_quoteComponent_init_getData("gs","WSODQ_COMPONENT_GS_ID0E1PAC15839609","WSODQ","true","ID0E1PAC15839609","off","false","inLineQuote");is not impregnable. In addition to the federal money it took last fall, it benefited from the government’s bailout of American International Group, receiving an almost $13 billion subsidy from taxpayers after losing money on counterparty exposure to the insurer and has $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Goldman’s chief executive, Lloyd C. Blankfein, has described the crisis as “deeply humbling.” But his bank bounced back with remarkable speed. In the first quarter, it posted profits of $1.66 billion. Now, the second quarter looks even better. “They are a trading firm,” said an executive at rival firm, barely able to hide his jealousy. “It’s what they do.”This story originally appeared in the The New York Times

Budget 2009-10 :What to expect?

Budget 2009-10 :What to expect?

UPA Government won the elections against the overall opinion of a hung parliament and markets gave a big thumbs up to this. But after discounting the election results on 18May09, indices haven't moved much further as Sensex is up by just 4.4% from that day's closing. Will things be different as we go into the big event called Union Budget on Monday 06July09?Expectations - Sunny Side First:-Insurance Bill - FDI in Insurance to be taken to 49% from current 26%. This proposal, if passed, can benefit stocks like EXIDE, DABUR, HDFC, ICICI BANK, RELCAP, SBI, ADITYA BIRLA NUVO as they are having exposure to Life Insurance JVs. Education and Healthcare spending should receive a boost. Spending on these sectors remains very bad – the Indian Government spent just 4% of GDP on these areas as compared to 12% of GDP by the US Government. Priority Sector and Infrastructure spending will also rise and more PPP (Public Private Partnership) initiatives can come to the fore. Infrastructure finance companies such as IDFC, PFC, REC can get some facilities to raise cheaper funds, e.g. through tax-free bonds. If Budget re-introduces Section 10 (23G) which allows income from investment in infrastructure, both via equity and debt, to be exempted from tax would benefit IDFC, IDBI & IFCI. Extension of Section 80IA beyond 2010, if implemented, to benefit infrastructure developers like IVRCL, NAGARCONST, L&T’s Infrastructure SPV, and GMR INFRA. Introduction of Section 80M which provides for deduction in dividends received from subsidiaries for computation of dividend distribution tax - likely beneficiaries being companies which form SPVs like LT, GMR INFRA, IVRCL, HCC, NCC Economic Survey suggested removal of price controls on all drugs except on essential drugs - LUPIN, DR REDDY, RANBAXY, GLENMARK, BIOCON, CIPLA, GLAXO to benefit immensely Exemption under Section 80 for promoting R&D in Pharmaceuticals will benefit almost every Pharmaceutical company. Deregulation of Oil Prices - Oil marketing companies (mostly PSU) to benefit: HPCL,BPCL, IOC, MRPL, CHENNAI PETRO. Other beneficiaries include ONGC and GAIL as their subsidy burden will go down. Allowing Retail FDI up to 100% - key beneficiaries include companies that have exposure to retail trade like RELIANCE, BHARTI (with Walmart), PANTALOON Fiscal Stimulus to export sectors - Indian exports have dropped for 8 consecutive months on the back of global recession and Imports also have fallen largely on account of reduction in Oil prices. Some sectors like Textiles have sufferred the most and likely to get some relief. Other major exporters are Auto Ancillary, Gems & Jewellery and Software Exports. Extension of STPI (Software Technology Parks of India) scheme will benefit smaller IT stocks. Will the corporate tax rate be cut - It is unlikely to happen given large fiscal deficit but if it happens, the companies that pay large taxes can benefit, such as SBI, ONGC, PNB, BOI, BOB, HDFC, NABARD, ICICIBANK and other bigger PSUs like NTPC, BHEL Disinvestment - There must have been a lot of betting on this one and investors are looking very optimistically this time around with Left not present in the current UPA government. Eco Survey has suggested Rs 25000 Cr target each year for divestment. Given the large funding requirements for Infrastructure and other expenditure, Government may come out with a disinvestment target and likely candidates for that. NHPC, OIL, COAL INDIA, BSNL, Clarity on 3G auctions is also expected. Some key structural reforms can be discussed in this Budget, such as GST (Goods and Services Tax). A lot of stress has been laid on this front but we will know if it will really be implemented by April 2010, the Budget is likely to provide concrete details in this respect. Incentives for setting up urea capacities and paying subsidies in full cash instead of bonds + cash - TATACHEM, CHAMBAL, NAGARFERT, RCF to benefit Maintaining Zero Customs Duty on Newsprints or setting up of import duty to benefit TNPL, JAGRAN, HT MEDIA, DCHL Capital infusion into PSU banks by Government - likely beneficiaries PNB, IDBI Infrastructure status to Healthcare Industry will help APOLLO HOSP, FORTIS HEALTH, MAX HEALTH, WOCKHARDT HOSPITALS, they will be able to increase investment but in addition to that easy funds availability will also be possible.

Infrastructure status to hotels - positive for all hotels (INDIAN HOTELS, EIH, HOTEL LEELA, ROYAL ORCHID, KAMAT HOTELS) Abolition of FBT - positive for many Tech companies, especially large to medium like INFOSYS, MPHASIS, TCS, WIPRO, TECHM, KPIT, PATNI FDI in Aviation up to 49% - beneficial for aviation companies in reducing debt (KINGFISHER, SPICEJET) Steel industry demanding safeguard duty which if implemented fully can benefit HRC makers like SAIL, TATASTEEL, JINDAL STEEL, JSWSTEEL Increase in income tax exemption for interest payments on home loans to Rs 2.5lakh/year - positive for realty companies focusing on residential projects (UNITECH, PARSVNATH, DLF, OMAXE) Reduction in excise duty on Textile Machines - to benefit LMW and textile sector as a whole. JAIN IRRIGATION should benefit from a government focus on farm productivity, rural development, water infrastructure development and a potential increase in outlays for a micro Irrigation subsidy Bankruptcy Law:- Eco Survey suggested introduction of a separate Bankruptcy Law or a new section in Companies Law to facilitate exit of old/failed management easily. Also strengthening existing Companies Act to avoid re-occurrence of events like SATYAM. Reduction in STT and details on complete abolition - overall boost for stocks