Greek Coffee: U.S. Policy & Goldman's Reversion

In Greece, old souls like myself like to drink a Greek coffee in the afternoon, after siesta. It helps fuel the passion that drives them to squeeze the lemon of life for all the juice it has.

(Stocks in this article: NYSE: GS, NYSE: BBY, NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ, Nasdaq: RIMM, Nasdaq: IRBT, NYSE: C, NYSE: BSC)

Hypocrisy

As we, occupier, protector, liberator of Iraq, sit back and watch a foreign nation invade that vulnerable country, I have never been more embarrassed or ashamed. Never have we looked so hypocritical and opportunistic. I, a man who supported the invasion of Iraq and now call for the pressuring of Iran, am ashamed. American ideals are not expressed by watching Turkey attack the populous of a country we are actively policing. I dare anyone to say we are not hypocrites in this instance.

You may rebut that the PKK is a terrorist organization, and to this I would answer, suppose Iran was invading Iraq and killing Kurds? Iran also does not get along with the Kurds. It's not so far fetched to imagine. Do you think America would sit back and watch Iran kill Iraqis, the people we have taken under our wing? No, we would not.

What we are doing with Turkey is preserving an important alliance, but how weak are we to allow Turkey to dictate policy to us? I say, flex your muscles with your allies as well when they get out of line. I'm sure Armenians agree with me on this topic, because what's going on is not much different than the genocide they suffered at the hands of the Turks. It's also not much different than the suffering the people of my island ancestry experienced at their hands. Nearly two centuries have passed, and nothing has changed. Enough!

Goldman

Like Cramer outlined, GS is being taken down. Here's why. There is a mathematical trend, maybe a human condition, called reversion to the mean. Usually, this describes a stock's rise above and fall below its true intrinsic value. In time, the stock should revert to its mean value. Often the market moves above a historic valuation and below it, and this activity generates a mean valuation. History dictates this value is significant and represents normal value. While secular changes can alter the mean, otherwise, it may be a good predictor of future value if your estimates are good.

Goldman Sachs (NYSE: GS) is the lone survivor of the investment banks. Perhaps through ingenious means, or luck, Goldman got onto the right end of trades and actually profited from financial sector woes, or at least offset losses with some smart trading decisions and solid risk management. But, now its valuation differs greatly from that of its peers. In order to keep that valuation, Goldman must continue to make the right decisions.

Outperformance of the past does not guarantee Goldman will make the same standout decisions in the future, and so I believe GS should revert to a mean industry value, and that value is substantially lower in my view. As earnings forecasts are based on past performance, analysts are likely missing the fact that Goldman operates in the same marketplaces as Bear Stearns (NYSE: BSC) and Citigroup (NYSE: C). In this cyclical business, trading earnings are not completely dependent upon a consistent driver. A gain one month could contrast against a loss in the next. This differs from most other businesses, even within the financial sector. Asset managers for instance, and Goldman is also one, earn fees on assets administered, and as that asset base is somewhat consistent and usually growing, you can base related future earnings on past results. Trading income is just different. Other than this, the IPO market and M&A activity could slacken in early '08 despite the Fed's efforts to provide expansionary aid. I just would not own the priciest stock in this business, despite past decision making wins.

While it has preserved more capital, Bear and Citi have raised capital, so I do not see any advantage at Goldman that can be assessed to its past success. Therefore, I expect its estimates are overstated and therefore valuation is as well. Also, I expect any valuation premium it holds due to past performance is not likely to play true either.

Market-Moving News

• AP/Yahoo!: Goldman (NYSE: GS) Slips Despite Strong Q4


• Bloomberg: ECB Injects $500 Bln.


• ECONOMIC REPORT: ICSC-UBS Weekly Same-Store Sales +2.1% Yr-to-Yr


• Bloomberg: SuperSIV Fund to Start Buying in Weeks


• State Street: Investor Confidence Falls to New Low


• CNN Money: FCC Alters Media Ownership Rules


• CNBC: Fed Endorses New Rules for Home Buyers


• CNN Money: New Home Construction Drops


• AP/Yahoo!: Oil Backs Off as Turks Withdraw


• CNBC: House Okays Energy Bill, Bush to Sign


• AP/Yahoo!: Higher Auto Mileage Standards Coming


• Yahoo! Earnings Calendar


• TheStreet: Research in Motion (Nasdaq: RIMM) Takes Tech for Ride


• AP/Yahoo!: Best Buy (NYSE: BBY) Profit Soars


• SeekingAlpha: iRobot (Nasdaq: IRBT) Cleans Up On Army Contract


• Economist: Turkish Incursion, Our Hypocrisy!


• BBC: Zuma Wins Leadership Election


• Economist: The Geopolitical Week Ahead


• Iran Daily: Tales from the Dark Side

Your support of our advertisers sustains our effort, so please take a minute to help fuel our bold independent endeavor. Receive Wall Street Greek FREE via email by subscribing here. (disclosure)