Goldman Sachs Makes a Bundle
While Most Investors Bleed

Today's comment is by Eric Roseman, Investment Director for The Sovereign Society and editor of Commodity Trend Alert.

Dear A-Letter Reader,

Investment banking peers Merrill Lynch (NYSE-MER) and Bear Stearns (NYSE-BSC) have lost billions this year. They've both ridden sub-prime related securities right into the doghouse.

But meanwhile, the boys at Goldman Sachs (NYSE-GS) have been laughing all the way to the bank. This venerable and extremely savvy Wall Street firm has earned billions in 2007, during the worst financial disaster since the Savings & Loans debacle in 1989-1990.

Earlier this year, the group placed big bets that sub-prime securities would fall sharply lower. These big bets generated nearly US$4 billion in profits for the year ending on November 30.

And those profits amazingly erased the US$1.5 to US$2 billion that Goldman lost in mortgage-backed securities. So the firm actually turned a tidy net profit during the credit crunch market shock!

The Smartest Money on Wall Street

The boys at Goldman Sachs who generated sub-prime profits are expected to earn between US$5 to US$15 million in 2007, according to a The Wall Street Journal report.

Compare that to most other Wall Street firms which will see a major shaving in year-end bonuses. But at Goldman Sachs, famous for punching out those big salaries and bonuses, the median bonus later this month will fetch approximately US$335,000 in 2007.

Goldman Sachs is undoubtedly the smartest money on Wall Street. I've been following the investment banks' progress over the last 17 years.

A few of my own school buddies from Montreal landed jobs at the firm in the early 1990s. Now completely burnt out, withdrawn and immensely wealthy, both ex-Montrealers now live in New York and have taken sabbaticals following years of utter exhaustion and long hours. Goldman works its people just as hard as they pay.

Goldman Sachs is an Interesting
Dichotomy on Wall Street

Most of the financial sector typically suffers big losses when a protracted economic crisis hits the markets. But that's not always the case at Goldman. This firm encourages their multi-layered trading departments to take calculated risks against one another, often arbitraging different trading desks to hedge the firms' exposure. That's exactly what happened this year as sub-prime exploded.

One proprietary trading desk made bad bets heading into 2007 riding opaque CDOs or Collateralized Mortgage Obligations (losing US$2 billion). At the exact same time, another trading desk earned about US$4 billion in profits, more than offsetting the sector's trading exposure.

Goldman's Talent Goes Far

It's no wonder that Julian Robertson, former hedge fund legend who founded Tiger Management Corporation more than 26 years ago, used to pilfer Goldman's young trading talent. He lured them to his firm for substantially greater salaries.

Many of "Roberston's Cubs," as they were widely coined on Wall Street, or junior apprentices, have since started their own successful hedge funds managing billions for sophisticated investors.

Morals versus Profits

Virtually every bank has suffered big losses in 2007 as write-downs and exceptional items continue to surface on bank balance-sheets, including SIVs or Structured Investment Vehicles. Yet Goldman Sachs earned US$2.9 billion dollars in the third quarter while everyone else posted losses. In fact, Goldman had its best three-month period on record.

Morally, however, Goldman Sachs is not exactly a beacon for ethical trading. Of course, neither is the rest of Wall Street.

Goldman Sachs ranked as a major underwriter of mortgage-backed securities over the last several years. The firm helped grow a market that global investors now completely shun. But at the same time the firm peddled CDOs, the firm was placing major bets against the same asset class and benefited enormously when CDOs imploded.

Wall Street has No Morals

I've always had great respect for Warren Buffett. I believe he's arguably the world's greatest investor since the Rothschild's. Buffett is an investor, not a trader and doesn't make huge arbitrage bets like other Wall Street firms with scads of leverage. He builds large stakes in great management with solid cash-flows accompanied by brand-name recognition.

Goldman Sachs, on the other hand, represents everything that is truly great and equally pathetic about Wall Street. I don't like how Goldman pairs its own trading desks against each other while selling billions of mortgage-backed securities (a.k.a. garbage) to the public, making a fortune in the process. But that's market-based capitalism.

Don't feel bad for Wall Street this holiday season. They're already working on the next financial disaster by selling everyone else mostly trash.

ERIC ROSEMAN, Investment Director

EDITOR'S NOTE: Where will you be when the next financial disaster hits? Will you be safe and protected with a diversified portfolio full of value-based, bear-market-proof funds, currencies, metals and select commodities? Or will you be left out in the cold with the same old suspect stocks and mutual funds Wall Street pushed on you? We urge you to join us in St. Kitts this February 20 - 23 for our Emergency Money Summit. We designed this event specifically to shield you from the financial bust that is coming in 2008. You'll hear enough bear market investments to build your own anti-Wall Street portfolio. And we'll give you the details about which sectors and markets are poised to boom! Plus, sign up before January 1st - and you can bring a guest with you, FREE. Click here for more details.

Doomsday Delayed for the U.S. Dollar

So many dollar permabears have outlined the doomsday scenario for the dollar in recent years that you probably know it by heart. I can recite the "dollar doomsday" call in my sleep. It goes something like this...

1. The gapping U.S. current account deficit and Washington's chronic budget deficits can only be financed by the benevolent actions of investors abroad willing to finance said deficits, but this cannot go on indefinitely.

2. Overseas investors are getting tired of watching their U.S. dollar holdings fall in value. Therefore, they're likely to pull the plug at any moment and stampede out of the buck with massive selling of dollar denominated assets including Treasuries, stocks, corporate bonds...you name it - they will be dumping it!

And it's not that these arguments aren't valid. But a funny thing is happening to the dollar on its way to the dump. Don't look now - but the greenback is rallying! Shhh!

As my colleague Sean Hyman recently wrote: "Just when everyone was about to put the "buck" on the endangered species list, the U.S. dollar came back with a vengeance. Lately, the hunted dollar has actually become the hunter."

Far from finding dollar-denominated assets distasteful to hold, overseas investors are actually buying into the beleaguered U.S. dollar at an even faster clip these days.

In fact, according to just-released Treasury Department data, net foreign purchases of U.S. securities surged to US$118 billion in October, up from US$56 billion the month before.

Offshore buyers snapped up US$30 billion worth of U.S. stocks, and a whopping US$87.8 billion worth of U.S. corporate bonds.

That's the biggest single-month bond buying binge on record for corporate bonds! Net purchases of U.S. Treasuries jumped close to a record, thanks to private investors. Foreign banks preferred corporate bonds. Those among the biggest buyers include Japan, Great Britain, Brazil, and the OPEC nations...

So it would appear rather than selling the weak dollar, overseas investors are backing up the truck to buy with both hands. They're sensing that dollar-denominated securities are a bargain after the multi-year slide we've seen in the buck.

We already know that oil rich Middle Eastern Sovereign Wealth Funds (SWFs) are on the prowl in America, snapping up (perceived) bargains like Citigroup. And China's SWF is likewise hunting for "strategic" investments in U.S. financial assets, such as private equity firm Blackstone Group. The latest Treasury data show that other offshore buyers are likewise being attracted to bargains in dollar-based assets.

All this buying may continue to give the maligned greenback a lift in 2008. According to Sean Hyman, "Now it's time for the pendulum to swing the other way. You'll see the dollar get a bit of a breather and recoup some of the ground that it's lost." Stay tuned!

MIKE BURNICK, Senior Editor & Global Markets Analyst

Privacy & Wealth

Want to Leave the U.S.? Now, You'll
Pay an "Exit Tax" for the Privilege

Should you have to pay an "exit tax" if you want to permanently leave your country?

Nazi Germany and the Soviet Union imposed crushing exit taxes. And now, the United States is about to join them.

On December 12, the U.S. Senate unanimously approved a military tax relief bill (H.R. 3997) that would impose an exit tax on U.S. citizens and long-term residents who expatriate (permanently leave) the United States.

The House of Representatives approved similar provisions earlier this year. The House slid this provision into bills to amend the alternative minimum tax relief (H.R. 3996) and to end the IRS's private debt collection program (H.R. 3056).

The exit tax therefore appears to be a "done deal" unless the House fails to insert it in its version of the military tax relief bill, or President Bush vetoes the measure. Neither appears likely.

In most countries, all that's necessary to "expatriate" is to permanently depart. After a prolonged period of non-residence (generally one year or more), you're no longer subject to tax in your former country. And once you establish a permanent home outside your former country, you can avoid whatever inheritance tax you might otherwise have to pay.

It's much more difficult for Americans, because Congress, in its infinite wisdom, imposes tax liability based not only on U.S. residence, but also on U.S. citizenship. To permanently disconnect from the U.S. tax system, you must not only leave the United States, but also give up U.S. citizenship.

It is this type of departure that the exit tax bill targets. The provision will require anyone who gives up U.S. citizenship or long-term residence (eight of the preceding 15 years) to pay a tax on all unrealized gains of their worldwide estate. The gains will be assessed based on the assets' fair market value. The tax is due within 90 days of expatriation.

Gains smaller than US$600,000, adjusted for inflation annually, would be exempt.

The proposal would also create an onerous tax regime for most pensions and deferred compensation plans. It would also penalize any expatriate's gifts and bequests to U.S. persons.

The image of a former "fat cat" American living tax-free in some tropical paradise is an irresistible populist target. And while only a few hundred people, many of whom are not wealthy, permanently give up their U.S. citizenship annually, I've long warned that some form of exit tax is inevitable.

And now, it appears to be fait accompli.

The most obvious way to deal with the exit tax is to sell appreciated property and pay the 15% tax on long-term capital gains before you expatriate. Other strategies may also be possible, as discussed in a report I've prepared on this draconian proposal. Click here to learn more.

You'll also need to obtain a passport from another country, if you don't already have one. Click here to learn how you can obtain a citizenship from countries all around the world.

MARK NESTMANN, Privacy Expert &
President of The Nestmann Group
www.nestmann.com