To OTC Journal Members: 

I've had a good winning streak with large cap ideas of late, but on the small side I haven't had a win, and I'm getting a little frustrated. FXI, EWZ, GLD, and TBT have all be big wins this year, but I've been snake bit on the small stocks. On the plus side, Universal Travel (AMEX: UTA), which I covered in the weekend edition, is up another 12% today. A China company.

Wednesday's new idea could turn the tide. The market is buying small stocks with real numbers, and I have a $.60 stock that should earn $.20 per share this year, up from $.10 in EPS in '08. Stand by- this one shows signs it could really take off.
 

The Goldman Factor: TARP Money, Financials, Oil, and Dominance

Who could forget one of the early scenes in The Wizard or Oz when Glinda, the good witch of the South, asks Dorothy if she is a good witch, or a bad witch. 

The same question might be asked of Goldman Sachs today: Are you a good witch, or a bad witch? 

I'm not sure it was a good thing for the competitive landscape of the markets for both Lehman Brothers and Bear Stearns to shut down. No doubt they deserved to- no one forced them to use all the leverage to invest in shaky mortgage portfolios built on a house of feathers. 

However, the "unintended consequence" of the Bear Stearns and Lehman collapse has resulted in Goldman being the 12 million pound gorilla in the markets- forget the 1200 pound gorilla.

Let's long at program trading on the NYSE to start with. About 30% of all NYSE volume is programmed trading- in large cap, it's more like 60% when all markets are taken into account.

In principal trading volume (where a firm trades for its own account vs that of its clients), Goldman now accounts for 52.5% of programmed trading. That's amazingly oversized dominance.

What does this mean to you and I? Well, for one thing, it means that Goldman Sachs is operating with an enormous amount of influence on market direction. The market has become much less competitive, and Goldman's dominance might help explain the market's recent penchant to defy gravity.

Citi, Goldman, and JP Morgan all delivered surprisingly good earnings reports last quarter relative to expectations. Goldman coughed up and amazing $6.6 billion in trading revenues- A $10 billion improvement of Q4 '08. 

This suggests Goldman is in the drivers seat as far as the markets are concerned. For investors, its worth exploring the question- Is Goldman a good witch, or a bad witch?
 

Goldman and the Financials

Here's a chart of the ETF that tracks the financials.

This sector is defying gravity. Investors have been anxiously awaiting a pullback- myself included- looking for a lower risk entry point. After all, when securities double in price, don't they usually come back a bit?

No such luck with the financials despite dire warnings the recession is far from over. XLF is going to either extend out sideways for some time to come, or pullback- one or the other. A move much higher at this point in time would be mind boggling.

So, why hasn't this sector come back some? Many close to Wall Street point the finger at Goldman Sachs- but why? What does Goldman gain by having the financials continue to trade at such lofty levels?

Consider the billions in equity being poured into financials right now as banks raise capital to get out from under the TARP. It started with Wells Fargo and their $7.5 billion capital raise. Who collected huge banking fees? - you guessed it- Goldman Sachs along with JP Morgan and Wachovia, who were the underwriters on the deal. After the financing was priced at $22.50, the stock traded to $28 in short order. Funds were piling into the next $100 billion in bank financings as fast as they could bring them.

When Goldman delivers its Q2 earnings report, we'll find they have made billions in both trading profits and investment banking fees in the financial sector.
 

Goldman and Oil

This is another of my favorite topics. Oil is now up over 88% from its lows of the year. Clearly, it's not the supply/demand side of the equation driving up the price of oil. There are tankers filled with the stuff on oceans all over the world with no place to offload supplies.

The rise in the price of oil has more to do with the supply/demand relationship with the dollar to other currencies. The FED is printing money to bail out the financial system. When the FED prints money to these extremes, the dollar goes down, and the price of commodities to the US goes up.

Uncle Sam has been printing money to bail out AIG. In turn, AIG has been using the money to pay off its obligations in their highly toxic Credit Default Swaps. A lot of the CDS's were held by Goldman Sachs.

The number of oil contracts on the long side has increased very dramatically in the past 60 days. Who's buying those contracts- Goldman Sachs is said to be a major player on the long side.

So- think about. You and I are paying taxes. Those tax revenues are going to bail out AIG, who is using the money to pay off its obligations in CDS's to Goldman. Goldman is turning around and investing that money in oil futures, causing the price to rise significantly. 

In a sense, the taxpayers are paying Goldman to push up the price of oil, which has an inflationary effect. Goldman is using its massive profits to pay off the TARP money we taxpayers loaned them in the first place. Not a great deal for those who are paying taxes to the US Government. Your tax dollars are indirectly helping Goldman's CEO Lloyd Blankfein, and helping the OPEC nations make a fortune. Great work if you can get it.

I'm not saying higher oil prices are the worst thing in the world. It helps the Green Movement continue to move forward, which could generate of lot of jobs in the US. It helps the US Energy sector get back on its feet.

It also helps the demand side of the equation for China Energy Recovery (OTC BB: CGYV), and this week's upcoming idea.

Don't forget to stay tuned on Wednesday. I've been red hot in the large cap stuff of late (see FXI, EWZ, and TBT). However, I haven't caught a big win in small or micro lately. I'm overdue.

Wednesday's new idea might help turn the tide. I expect the company to deliver $.20 in EPS this year, and right now it's a $.60 stock. What a value. Could be a 10 bagger. 

Stay tuned for a great earnings play. The price of oil, and the Goldman Sachs role- whatever it is- should help drive up the price of this one.

So, have you given it some thought? Is Goldman Sachs a good witch or a bad witch? You decide.
 

Do You Twitter?

About a year ago I asked my techies if there was any way we could get ideas to investors with text messaging to cell phones. I was prepared to spend some money as I saw this as the easiest way to quickly notify investors of important events.

The folks at TWITTER did it for me, and it's all free. Worth waiting for. Set up your TWITTER account (free), and become a follower of the OTC Journal. I'll use it for quick updates and coming events.

Just go to www.twitter.com, and enroll. From there, adding to your Twitter network is a little tricky, and there's a learning curve. Then, go to the home page at www.otcjournal.com, and click on the "Follow" button on the Twitter box. Or, go directly to http://twitter.com/otcjournal.

Sign up today, join as a follower, and I'll start using it to everyone's benefit. Tell your friends to sign up as well.

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