Pay Close Attention to Goldman Sachs' Earnings

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A slew of corporate earnings announcements have recently marked the opening session of Q2 earnings. The positive note by many companies pushed the market to a new all-time high. One company that's always worth paying attention to is Goldman Sachs (NYSE: GS), the octopus of the financial world.

Why Goldman matters

Goldman has always been at the center of any major financial trend. It's basically a financial octopus with arms stretched into any financial arena you could possibly imagine. Another interesting point is that Goldman is always on the right side of any trade, be it a complicated derivative, an equity investment, or a real-estate deal. And that's why it's very important to make sure you're on Goldman's side of the trade, or not at all. Many of its clients have learned that lesson the hard way. The main point to take from this is that by reading through Goldman's report, you can often find clues on the next financial trend, and what's Goldman's position in relation to it.

Goldman's earnings 

Goldman posted impressive numbers in Q2. The investment bank's earnings rose from $962 million in the second quarter of 2012 to $1.9 billion last quarter. The firm saw gains in debt investments, investment banking revenue, and fixed-income trading. This segment of investment banking is particularly interesting. Investment banking revenue increased 29% to $1.6 billion. That's a world record in debt underwriting fees, as a result of companies trying to lock in long-term, fixed-rate debt before interest rates rise. The firm brought in $3.1 billion of revenue from investment banking in the first half, its highest number since 2007. And revenue rose 30% to $8.6 billion.

For over a year now Goldman has been advising all its corporate clients to borrow "as much as they're going to need for as long as they think they could need it" because of the low interest rate environment. And that's precisely what these corporate clients have done. So Goldman has been selling bonds like crazy. The firm hasn't been buying any corporate bonds, it has only been selling them. In a sense, Goldman was short the bond market.

So who joined the ride? 

The year 2012 and first half of 2013 have been a bond bonanza for companies that wanted to reach out for the bond plate. Below are a few examples. In May, General Motors (NYSE: GM) issued new debt paying a yield of only 3.75%. General Motors is sitting on roughly $100 billion in pension obligations. It went bankrupt less than five years ago. And it operates in a sector that's still suffering from massive overcapacity. For investors to sacrifice their capital for five years and be rewarded with 3.75% is nothing short of ridiculous. That's a sure sign of a top in the corporate bond market. And that's why Goldman was more than thrilled to sell that debt to yield-starved investors. And GM wasn't doing it alone. Higher quality companies also took advantage of this opportunity. 

In May, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) , whose cash hoard reached a record $49.1 billion in its first quarter, sold $500 million of 1.3%, five-year debt with a 57 basis-point spread and an equal portion of 4.3%, 30-year bonds with a relative yield of 135 basis points. Remember, Berkshire doesn't need all that cash - it took it simply because it could. And when Buffett is selling bonds, instead of buying them, everyone should stop and listen.

Even Apple(NASDAQ: AAPL)a company with historically zero debt sold $17 billion worth of bonds late in April. All the bonds bore very low yields. But the extreme series was 30-year bonds that yielded 3.85%. That's way too low for a 30-year bond. Obvious to anyone (but to Apple bond holders..), anything can happen in 30 years, especially to a technology company like Apple, which has risen and fallen several times in the not-so-distant-past.  Bondholders are eventually going to regret this purchase.

My Foolish takeaway

Goldman has been making obscene amounts of money from selling debt for his corporate clients to a crowd of yield starved investors. This means that Goldman is in effect shorting the bond market. The question now remains, whose side of the trade do you prefer to be on? I would take Goldman's side on any day. Invest accordingly. 

  


Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Apple, Berkshire Hathaway, General Motors, and Goldman Sachs. The Motley Fool owns shares of Apple and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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