Goldman Sach's Profit

Goldman generated $3.44B of profit in the second quarter of 2009. The result wouldn't be paid any attention if it weren't TARP involved. Because of the result, Goldman allocated $11.4B for compensation in the first half of 2009, which was widely interpreted of paying $770K/year for every employee. This payout was also caused criticism. But how did Goldman got super performance to their peers?

In fact, Goldman's investment banking business shrank to a low level, similar to other investment banks. What made them outstanding was mainly trading gain. So what was this trading gain?

Trading gain in Goldman is they buying and selling of securities, with their own money. Since Goldman received TARP money and less competitors (Lehman and Bear Sterns were gone, the others were stranggled in troubles) so they could buy cheap. Other part of income comes from institution traders who use Goldman's services: trading analysis, clearance, hedging, and risk-management. All these generated profits for Goldman. In essence, Goldman is a trader, like any trader in the market who buy and sell and look for risk aversion. But they do this in a much wider scale beyond what typical trader does. They provide services to traders. Traders as small as day-trading ones need to pay attention to these aspects.

Another perspective of Goldman's trading gain is that traders need trading services, regardless of economical conditions. Traders out there still need to trade and hedge their risk. They may loss in the trade but the hedging can offset the loss.

Turning trading into a business is more than just buy-and-sell. Many have tried to explore other opportunities beyond trading: trading educational seminar/classes, analysis, selling books, software, etc. Goldman proves their model works very well.

Obama's fights

President Obama starts to press big banks harder than previous measures. He proposed tough new limits on the size and activities of the country's largest banks, including restrictions on some banks' ability to trade for their own account or set up in-house hedge funds. This comes at a sensitive timing at which the Dem lost supermajority in the Senate. Thus, this proposal ignites fight with the Wall Street. No doubt, also, a fight with the Rep, who had critized Dem's approaches on banking system regulation policies.

Understandingly but interestingly or even stupidly, the approach from Rep was rather unwelcome. One Rep congressman responded that the proposal would drain the financial system. At the time, big bonus on Wall Street firms drew wide critism, such voice isn't very smart and responsive to main street's resort.

In the mean while, since the supermajority is lost at the Senate. This is widely thought as a threat to the health care plan. President reiterates that he will sign the bill. Dem still has majority so that is not problem of passing the bill. The problem is that how long Dem can make the bill in place. In retrospect, Dem probably realized that they have to do something to get over the senate supermajority. The banking proposal is a good measure to main street voters. It is aiming at November, not now. So it is a good and smart move.

Another uncertainty is Bernanke's second term. Media overly stress the dispute in the government and congress about his second term. The truth is he has no problem getting it especially at this critical moment. Any speculation by media and traders on this regard can backfire and be taken advantage of.

In terms of financial world response, there is for sure rockier than most people thought at the end of last year. Traders have turned to bearish side while some insisted this be a good buy. It is not going to be easy for both sides though. The markets will be running sideway, at least before November.

Google's fight

Google threatens to pull out of China after it claims content cencorship is imposed by the government. The US government is also involved in the act. An economical dispute has been escalated into a political one. Where is the fight heading?

Google China plays a small roll in Google's earning, just $600M in 2009. But investment in China since early this century is huge. Google had been in disputes with Chinese authorities in the past: porn contents and copy right issues on Google Books. It can hardly say smooth along the path. But on Google's standpoint and management structure, China isn't an important pawn. After Kai-Fu Lee leaves Google China, no new role was appointed.

Both sides are standing firm on their stance. Chinese government releases to press that all internet businesses must obey local rules, as a public response. It seems Google's retreat is unavoidable. Is that so?

Chinese policy is rigid but not unchangable. Recall the HD DVD format back a few years ago, China wanted to bypass royalty charges from other manufacturer alliance so that they initiatiated their own standard. After a couple unsuccessful years attempt, their call was not a good call. Intel, a few years ago, collided with China on WiFi standard. Finally, China dropped their requirement on Intel. A most recent case was the mandatory internet censoring software installation. Chinese authority eventually released a statement that it is a voluntary software. Someone in the authority has been making mistakes all the way. They don't know the industry well enough.

The issue may be settled when more parties are involved because many foreign investment are using Google in their chinese operation. The stakes on the Chinese side is bigger than Google's, both economical and political. The presence of Google in China is not an issue. The most important issue, however, is that the broken relationship may take much longer to fix.

JP Morgan's Earnings

JPM's $13B earnings in 2009 marks a great come-back year. JPM usually is the first one of the big banks shows their results. Looking back, JPM's results appeared to be a reliable indicator how other giant banks are doing. So it won't be surprised to see others doing well in 2009. Another side observation is that banks are allocating tremedous amount of bonus for their employees. That also verify the projection.

Put this earnings aside, however, JPM's Dimon is still cautious about the recovery. Bad loans are increasing and earning estimates aren't certain. Why did he make such comments?

Note that the performance in 2009 was attributed to the stimulus plan. Not only the banking industry and in the States, others industry and nations had similar stories. The fundamental question to ask in 2010 is, how much the recovery is relying on the stimulus plans? Certain factors would need to be considered if stimulus plans were withdrewn: less money supply and higher interest rates. That could mean stronger US dollar and higher mortgage rates. Then the housing markets would be even harder for home owners thus cause more foreclosures. So these are well considered to pay cautious attention.

But no doubt, the plans are expiring. Various media pressed the Fed to raise interest rate to support weakening dollars. The outcry has been lasting since last December. But the Fed remains the stance of low interest rate. This brings in a murky view of future.

Other big economical entities who handed out big bonus are considering exit strategies. Entities like Japan and Gemany that didn't hand out relatively tremedous stimulus are in relatively better shape. China and Asian countries can't wait to remove their plans in various form even though the governments still openly support their plans. Having huge monetary supply in their system causes more pains now than 12 months ago. Inflations have more visibility now, especially in housing market, that have driven up everything. It is ironic to see housing has been the main power of wealth buildup in the past 20 years but it also cause wealth collapse in the States. When this bubble in developing countries burst, another tide of crisis would come.

In conclusion, Dimon has plenty of reasons to be cautious, selfish or not. Regular investors, regardless how are brain-washed to be optimistic in 2010, should also be cautious.

GDP vs. Bubble

Many nations that had initiated large sum stimulus plans in 2009 see themselves in 2010 facing various exit problem, including when and how much. A common point of view is that smaller economical entities will increase interest rates before larger ones, if they ever have had any stimulus plans. The U.S. may be last one that withdraw its huge stimulus plan. For example, Australia had hiked their interest rates as well as Vietnam. Other indirect ways of adjusting rates could include exchange rates, e.g., HK Dollar. But murky view of global economy doesn't come to consensus on the exit strategies within nations and among nations.

This situation is further complicated by different nations own economy growth goal. For example, China has, may be the only one, had GDP growth goal of 8% in 2009. There is not secret of achieving this goal when seeing housing bubbles arose. Recently, Premier Wen stressed that China won't retreat stimulus plan before he sees solid recovery. On the other hand, the red-hot housing market forces houses become unaffordable for millions of people even overall increasing wealth. Even Wen admitted that inflation is looming.

Housing is a big part in China's GDP, about 30%. The argument is that as achieving GDP goal is hailed, is it a good indicator? While the GDP causes instability such as housing and health care system, the price of paying this growth may be too costly and unwelcome. Nonetheless, the train has to be pulled forward by either this one or the other, but certainly not housing again (it played a key role in GDP before). In conceivable future, we will certain see China will expand their financial product lines and new energy lines to diversify GDP engine.

Another immediate problem is whether the growth is sustainable or not. As China's economy sizing up, the problem becomes more complicated beyond an economical issue. For example, the Weather Summit brought China into a hot spot to address non-economical topic. Such cases will have conflicts and impacts to China and other nations. In the Weather Summit case, China had ferociously protected their rights to keep growth engine running.

In conclusion, recovery in 2010 is highly probably for many nations. However, keep profile low and cautious in the New Year.