Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Wisdom

Goldman Sachs rides the Tiger

The world’s best known; and most-hated investment bank, Goldman Sachs (NYSE: GS), is a value investment but it is not for the faint of heart.

Goldman Sachs can be considered a value investment because it makes a lot of money by some metrics. The bank pulled in $11.094 billion from its financing cash flow in 4th Quarter 2017 but reported a free cash flow of -$7.46 billion and an operating cash flow of -$6.623 billion for the same period.

Two of the three cash flows were losses because to make big money in lending, you have to take big, bold risks. Basically, to make a lot of money in investment banking, you have to be prepared to lose a lot of money.

Goldman Sachs Gambles Big in AI

One area where Goldman Sachs is taking some big risks is in technology. It just hired machine learning expert Charles Elkan away from Amazon (NASDAQ: AMZN).

Elkan who formerly ran the Artificial Intelligence Laboratory at Amazon Web Serves will serve as a managing director in charge of machine learning and AI at Goldman Sachs, USA Online News reported. Elkan has also served as a computer science professor at the University of California at San Diego, a visiting professor at Harvard, and a researcher at Stanford and the Massachusetts Institute of Technology (MIT).

“In this role, Charles will build and lead a center of excellence to drive machine learning and artificial intelligence strategy and automation,” Elisha Wiesel, Goldman Sachs’ chief information officer, wrote in a memo. “Charles will work in partnership with teams across the firm looking to apply leading techniques in their businesses.”

Goldman Sachs has several AI initiatives in place including Marcus; an AI lending and banking platform that makes loans to individuals. Marcus recently expanded to offer high-yield online savings accounts.

Elkan is only the latest big brain from Silicon Valley to migrate to Goldman Sachs. The bank recently hired senior software engineer Reinaldo Aguiar away from Alphabet (NASDAQ: GOOG) to work on its Marquee platform.

What is Goldman Sachs’ Marquee?

Marquee is an electronic trading platform that is billed as a new way to connect our people, our capital and our ideas.

Marquee Trader offers investors access to foreign exchange, exchange-traded funds (ETFs) and commodities markets. It apparently offers a high level of liquidity and four tiers of electronic execution for traders. Curious people might wonder if Marquee involves the blockchain.

My guess is that Marquee is more likely some sort of sidechain. Present-day blockchains simply lack the scalability for the kind of high volume trading that would be profitable for Goldman Sachs. Goldman Sachs has several electronic trading efforts in progress including Goldman Sachs Electronic Trading (GSET).

Is Goldman Sachs Getting into Cryptocurrency Trading?

Goldman Sachs is experimenting with cryptocurrency trading. The bank was laying the groundwork for a cryptocurrency trading desk in December 2017, Bloomberg Markets revealed.

The desk is supposed to be up and running by the end of June, Bloomberg Markets speculated. Note: Bloomberg’s reporting is unreliable because the sources of the information were identified only as “people.” That means the article was based largely on hearsay.

The Goldman Sachs cryptocurrency team will be based in New York and work within the bank’s existing fixed income, currency-trading, and commodities unit. If true this would make Goldman Sachs the first major Wall Street firm to get into cryptocurrency trading. Bloomberg did not say what cryptocurrencies Goldman Sachs plans to trade or how the bank will enter the cryptocurrency markets.

How Much Money is Goldman Sachs Making?

The activities at Goldman Sachs are risky but potentially highly lucrative. Goldman Sachs generated a net profit of $7.834 billion during 4th Quarter 2018 but reported a loss of -$1.928 billion for the same period.

The company did run a lot of cash through its till in the form of an operating income of $3.108 billion. That gave the company $110.051 billion in cash and equivalents on December 31, 2018. That amount was down from $116.610 billion in September 2017 and $121.711 billion in December 2016.

Despite all the cash, Goldman Sachs is a super risky business it reported $500.838 billion in debt and $834.533 billion in liabilities on December 31, 2017. Those numbers were up from $471.776 billion and $807.152 billion a year earlier.

Is Goldman Sachs Really Worth $256 a share?

My take is that Goldman Sachs is worth the $256.57 a share it was trading at on 10 April 2018. The huge amounts of cash the company generates from financing and the far-sighted investments GS makes in technology and trading make it worth that much.

Intriguingly, Goldman Sachs shareholders received a juicy dividend of 75¢ a share on 1 March 2018. Goldman Sachs’ dividend has stayed at the 75¢ a share price for the last year, before that it sat at 65¢ a share for nearly two years from May 2015 to March 2017.

This is an example of very responsible dividend management. The dividend is just large enough to reward investors without draining funds away from the company’s activities.

This makes Goldman Sachs a good long-term buy and hold stock even at the $256.57 share price. The company is generating a lot of cash in the here and now while investing aggressively for the future. Goldman Sachs is a great investment in the future of financial technology and a good dividend stock.