This may be a record. Never before has one of my stories become so relevant, so quickly.
It was just yesterday that I highlighted Charles Kirk's wonderful interpretation of his reader survey: People feared government and hoped for a correction.
Amazingly, both are coming true. Will investors act upon their hopes?
Today's Market Action
Quite a number of prominent pundits predicted a big market rally if Brown won in Massachusetts. The theory was that this would derail both big spending and big tax increases. The message would be heard, and the policy direction would change.
Brown won. Instead of a rally, we got the first meaningful selling in months. The pundits had to reach deeply for other explanations. Yesterday it was China. Today it was Obama.
It is amazing that anyone would think the Obama TV appearance had market significance. The Dow went down about 30 points during the speech and the breathless CNBC commentator said it was "crashing." There is a market psychology in place, established courtesy of the Bearish Blogging Network and a few famous pundits. When they can connect some dots between their political and market views, they are really vocal.
The Reality
Why did President Obama pick today for a statement on bank regulation? I'm not going to fight the obvious answer, a desire to do something after Brown's win in Massachusetts. I will leave it to others to decide whether this was foolish and/or ill-timed.
Is it significant? Mostly, it is not. Congress is holding hearings about the causes of the financial crisis. I'll get around to that topic in due time. Meanwhile, expect to hear plenty of debate. The eventual legislation is months away and passage is uncertain.
The Obama concept was so poorly presented that even those who are normally friendly or objective were having trouble describing what he had in mind. This is so far from legislation that it is laughable. Even if one imagined the strictest version of the Obama rhetoric, it would affect only a small portion of revenue from Goldman Sachs or anyone else following that model.
The Parlay
Those who deal with probability theory are familiar with the parlay concept. This occurs when a prediction requires several different events to occur before it will come true. Let us suppose that you want to calculate the odds of the Colts winning the Super Bowl. They must first beat the Jets (one element of the parlay) and then the NFC winner. If you thought that each was a 50-50 proposition the parlay would be 25% (.5 times .5).
The Obama parlay has much longer odds.
First, his concept has to be accepted as an amendment to existing legislation. A nice CNBC segment showed that this was unlikely.
Second, assuming that his approach made it into the bill, it would have to be passed by both Houses of Congress. The punditry was alive with commentary showing that proprietary trading did not lead to the crisis, and therefore should not be banned from banking.
Third, if the legislation did pass, what would be the reaction of Goldman and similar institutions? One should not underestimate their creative ability to find new ways to conduct profitable business.
Fourth, while they currently deny the prospect, Goldman could simply choose to go private, making money the old-fashioned way.
Finally, assuming that all of these elements went wrong for Goldman, the revenue from the proprietary trading cited by Obama is only about 10%. They could abandon that particular form of trading and substitute something else.
The Investment Conclusion
This is really pretty simple. We have a stock that is trading at 5 or 6 times earnings -- a money machine that has almost no equal. The company is the subject of attack from all sides for an assortment of populist and political reasons. The leaders and employees are often arrogant.
Is this about popularity and politics, or is it about making money?
Ben Graham created "Mr. Market" who would react to emotional swings and offer the wise investor a price each day. Goldman Sachs today reported blowout earnings, but Mr. Market is offering you shares at a big discount.
Investors responded to the Charles Kirk survey by saying they hoped for a correction, but I suspect that most do not have the courage or savvy to pull the trigger when opportunity knocks.
Meanwhile, I own GS and I am buying for new accounts. There are other possible names to buy, but I think this is the best play.
