Financial, Real Estate, Stock Markets Trends and Current Affairs

1. the SEC lawsuit
2. the increased regulation, in particular the Volcker rule and derivatives oversight
3. follow on litigation, which is virtually guaranteed, and virtually guaranteed to be extremely expensive, time consuming, and distracting from the core businesses.
4. a general decline in business since we are coming off of a credit and risky asset boom and going into a sovereign debt crisis that will make FICC much less predictable (seeThe Next Step in the Bank Implosion Cycle??? for a more on how this could end with the Pan-European Sovereign Debt Crisisdrama unfolding).
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Taking all of this into consideration, you tell me... Does Goldman really deserve to be trading at such a premium considering the myriad risks it is currently exposed to PLUS the murky business and regulatory environment? They are also losing talent on the sales side, and at the MD level to boot. Today's market is starting to see things the Reggie Middleton way.

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Now, let's factor in some more reality. No matter what your broker says about accounting earnings and revenues, they don't come free. They all have a cost of capital attached to them. Let's reference an excerpt from When the Patina Fades… The Rise and Fall of Goldman Sachs???

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

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Remember, practically everybody poo-poohed my research and opinion in 2008 when I said Goldman was drastically overvalued - Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis. Those 600% to 1000% gains on the put options proved otherwise. Speaking of which, those July 150 puts... Can you smell what the forensic analysis is cookin'???

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For those who haven't read my review of Goldman's latest quarter performance, please do: A Realistic View of Goldman Sachs and Their Latest Quarterly Results

More of Reggie on Goldman Sachs

Reggie Middleton vs Goldman Sachs, Round 2

Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off

Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!

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Subscribe Goldman Sachs Stress Test Retail2009-04-20 10:08:06 720.25 Kb – 17 pages Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb – 131 pages