Monday, September 22, 2008
2 Minutes Until the Equity Close.....
..and we are near the lows of the day. The forced "forward buying" from last Friday has faded like Jim Cramer's hairline. He mentioned today that the financial press should get their collective act together in commenting on valuation multiples with regards to investment and commercial banks. Specifically, (he owns GS in his charitable trust, I am short GS via an SKF long) Cramer thinks that the P/E of GS reflects value relative to commercial banks. Well, just because a P/E is low, doesn't mean it can't go lower. Investment banks trade at a P/E discount to commercial banks for a reason: volatility of earnings. The fact that an institution has a large amount of leverage DOES NOT mean that it should trade at a large multiple of earnings. In fact, it often means the opposite. GS has done well not because of leverage itself, but because they made the correct trading decisions with that leverage. Their ability to earn large profits will be compromised by becoming a bank holding company. P/E convergence will happen when they decide on a merger target, but GS @ $200 per share is years away.
Posted by MK at 3:49 PM