Destroy Goldman?

Will this be the Greek bailout plan that sticks? We’ve seen enough stops and starts that I can’t blame anyone for being a little skeptical. Or even a lot skeptical.   


But this time, Germany Chancellor Angela Merkel is doing a victory dance as Greece was forced to accept some pretty strict austerity measures to get its budget deficit below the 3% the EU mandates by 2014.   


Greece was originally asking for $55-$69 billion in aid. The final package comes in at $146 billion. That’s a big difference, but it makes sense. Greece needs some cushion to assure investors that it will be able to pay its debt.   


But that amount also leaves the EU a bit strapped if other countries need help. Apparently, the EU would be able to handle aid to Portugal, but not Spain. Spain is right out.   


According to Bloomberg, Austrian Finance Minister Josef Proll said yesterday’s agreement “will send a clear signal to the markets that Europe is able” to handle the crisis and “minimize the risk” of it spreading.   


Hmmm. Not really. I, for one, think the only clear signal that the EU sent was that there’s a lot of dissention in the EU.   


But at this point, money talks. And the money is saying that Greece, at least, will be OK. For now…   


It may not be as harsh as the austerity plan that Greece has adopted, which include a three-year pension and wage freeze and raising the sales tax to 23% from 21%, but an AP poll of 44 U.S. economists suggests that American consumers will continue to keep a close eye on spending and save more.   


Two-thirds of those economists say that the recession has created a “new frugality”. For instance, the savings rate, at 3.1%, is still higher than it has been for years.   


Consumers are not taking on as much credit card debt. And there’s anecdotal evidence that new home buyers are not stretching their budget to buy as much house as possible. 


Household wealth is 21% below its pre-recession peak of $65.9 trillion. And given the housing market alone, it would seem unlikely that household wealth will make up that 21% gap anytime soon.   


But as an investor, all this doesn’t mean that the recent stock market rally is doomed to failure. After all, at the end of the day, the stock market moves on corporate profitability. And profits have been good, because companies have done a good job adjusting their costs to current demand. 


It’s inevitable that there will be corrections. That’s life in the stock market.   


And if you’re a bit concerned about what financial regulations might mean for profits in the financial sector like I and other investors are, that’s legitimate. It’s always wise to look ahead for potential problems for profitability. But those problems don’t necessarily mean stocks area bad investment.   


In fact, the more well-known the problem, the more likely it is that stock prices reflect that potential. Serious corrections are usually caused by surprise events, and not the ones we see coming.   


Which brings me to an interesting question I got from a reader over the weekend.   


Henry S. wrote: Will the government destroy Goldman-Sachs? Will it be the sacrificial lamb for all the other faults in the system?   


It seems you are correct that the market will go higher once the fed and government blames are put aside. Will it reach the highs of two years ago?   


Will look for your comments. Keep up good work.   


The case of Goldman Sachs is very complicated. It would seem that targeting Goldman is politically motivated, as a way to push financial reform through Congress.   


At the same time, Goldman has been investigated before, most recently during oil’s superspike to $147 in 2007. 


I have no problem believing that investors will use their influence to manipulate an outcome that leads to profits. Really, do we have a problem with Warren Buffett says he thinks the U.S. dollar is headed lower when he’s massively short the U.S. dollar?   


Goldman Sachs is important to the U.S. economy. And the government is no doubt aware that “destroying” Goldman would be very disruptive. But there’s also no doubt that Goldman has engaged in questionable behavior. We don’t yet know if it was illegal, but we have to find out. Simply giving Goldman a pass because it’s important is more long-term disruptive than reeling them in a bit.   


As far as the market reaching its highs from 2 years ago, that seems like a stretch to me. I suspect the S&P 500 has entered a “fair-value” range given the current economic conditions.   


Now, that doesn’t mean there isn’t upside for individual stocks. And it’s likely that the S&P 500 has some upside, too. But probably not another 20%.   


Over the weekend, I ran across several commentators suggesting that we might see a ban on off shore drilling after the awful oil spill that’s headed toward the Gulf Coast  


While an outright ban is unlikely, the mere suggestion that it could happen should send land-based oil & gas exploration companies higher in the near future.  


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There are a couple really nice plays on exploration in the Bakken area. If you don’t know about the Bakken Shale Oil formation, you’re missing out on what could be the biggest oil investment opportunity in the U.S. in decades. 


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