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On May 11, 2010, I looked at some macro data that did not make sense in regards to the U.S. economy. But today we will turn to a micro case that has been in the news -- Goldman Sachs (NYSE:GS). "Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before."

This really is quite astounding, so I pulled up the GS quarterly financial results on advfn.

I went to the income section part; it told us that GS made $3.456 Billion in Q1 2010. I then moved to the statement of cash flows and it showed operating cash flow of -$7.5 Billion. I then looked at net cash flow and it is $-11.2 Billion. "If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash. " 1 It appeared a deeper look under the hood was needed so I moved onto the balance sheet.

One finds that shareholder equity has only increased by about $2.2 Billion in a quarter where GS made about $3.4 Billion. Also, GS increased its liabilities by just under $30 Billion. Looking more into the financial statements, we find that GS spent $2.27 Billion on share repurchases yet the diluted shares outstanding still exploded up by 31.9 million shares quarter over quarter and by over 100 million shares year over year. Also, the value of trading securities whose values are directly reported on the income statement fell by about $3 Billion (Now of course some of those were sold for a profit and are no longer reflected on the financials2). Bill Fleckenstein has stated before that he does not invest in financial companies because they are a black box of accounting; as the link below shows just how "flexible" the rules can be.

This leads me to think that traders and investors who are buying GS thinking they will come out of the political process just fine might be overlooking the flags raised in the financial statements and the massive dilution occurring to shareholders. If you can't trust GS to sell you a CDO should you trust their EPS if the operating cash flows don't match up?

1.www.accountingcoach.com

2. www.investopedia.com

Disclosure: No position short or long or in options

Source: Goldman Sachs: Exceptional Trading or Something Else?

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