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Weekly Chartology, Or What To Do When You Are Dead Wrong And Every Economic Release Disappoints Relative To Consensus

Tyler Durden's picture




 

Goldman's David Kostin is out with his latest chartpack which is as always chock full of pretty pictures, and the usual set of Monday morning quarterbacked recommendations. Just as it was Zero Hedge who first called Goldman's BS out in December of 2010 on their economic "fundamental shift" resurgence call, so it was ZH again first who suggested the QE Unwind compression trade, "Utilities and Consumer Staples as the long led in a compression trade, while shorting Industrials and Consumer Discretionary." Sure enough here comes Goldman observing "The rotation away from Cyclicals (Financials, Industrials, Materials) and into Defensive sectors (Health Care, Utilities, Consumer Staples, Telecom) continues to follow closely the historical trading pattern typically exhibited when the ISM index is declining from a peak back to 50" following a week in which  "every US economic data release disappointed relative to consensus expectations. ISM manufacturing index (53.5 actual vs. median consensus expectation of 57.1), consumer confidence (60.8 vs. 66.6), nonfarm payrolls (54,000 vs. 165,000), and unemployment rate (9.1% vs. 8.9%) all posted negative surprises and pushed the cumulative 22-day rolling US MAP (macro data assessment) score to its lowest level since  the beginning of our data in 2001. Domestic vehicle sales (9.2 million vs. 9.7) and home prices as measured by S&P/Case-Shiller index also disappointed." Perhaps it is time to launch the REDI Zero soft dollar machine: if Goldman makes billions and is dead wrong all the time, we would be trillioniares...So naturally, here's Goldman, pitching the high "Sharpe Ratio" basket, or back to defensives. Of course, anyone who listened to use almost three weeks ago already has this on.

From Goldman:

Every US economic data release this week disappointed relative to consensus expectations. ISM manufacturing index (53.5 actual vs. median consensus expectation of 57.1), consumer confidence (60.8 vs. 66.6), nonfarm payrolls (54,000 vs. 165,000), and unemployment rate (9.1% vs. 8.9%) all posted negative surprises and pushed the cumulative 22-day rolling US MAP (macro data assessment) score to its lowest level since the beginning of our data in 2001. Domestic vehicle sales (9.2 million vs. 9.7) and home prices as measured by S&P/Case-Shiller index also disappointed.

S&P 500 fell 2% this week and has now dropped more than 4% since the end of April when it peaked at 1363. The rotation away from Cyclicals (Financials, Industrials, Materials) and into Defensive sectors (Health Care, Utilities, Consumer Staples, Telecom) continues to follow closely the historical trading pattern typically exhibited when the ISM index is declining from a peak back to 50. We discussed this playbook in our US Equity Views report Managing the US business cycle transition and global rotation (May 4, 2011) and it is one reason we recently adjusted our sector recommendations to raise Consumer Staples and lower Consumer Discretionary weightings. We remain overweight Energy. History also suggests net profit margins will begin to contract a year after ISM peaks, consistent with our 2012 forecast.

How should investors position a portfolio given the transitioning macro environment? We believe many mutual fund managers could boost the performance of their funds on a long-term basis by incorporating riskadjusted analysis in their stock selection process. Making this adjustment could also help mutual fund organizations stem the tide of cash into ETFs and other passive investment products by boosting the risk-adjusted return at the fund level versus benchmarks and versus competitors.

Our high “Sharpe Ratio” basket consists of a sector-neutral, equalweighted portfolio of 50 stocks with the best risk-adjusted prospective returns (Bloomberg ticker: <GSTHSHRP>). We define risk-adjusted return as the ratio of return to consensus target price divided by six-month implied volatility. The basket has outperformed the S&P 500 by 23 percentage points (47% vs. 24%) since inception in December 2009 and has outperformed the market by 10 percentage points (21% vs. 11%) since it was last rebalanced.

We continue to recommend investors buy this basket versus S&P 500. The median stock in our newly re-balanced “Sharpe ratio” basket offers more than two times the expected return of the median S&P 500 stock (29% vs. 11%) with similar risk (six-month implied volatility of 28% vs. 26%).

Simply put, portfolio managers should evaluate stock investments on a “Sharpe Ratio” basis rather than just looking at upside to target prices. Even though the two strategies tend to result in similar stock selection, a significant number of stocks that screen well on a Sharpe Ratio basis are often overlooked by portfolio managers. Incorporating implied volatility also helps exclude stocks with large expected returns but embedded uncertainty.

Our analysis suggests a “Sharpe Ratio” strategy may cause core mutual fund managers to rethink roughly 20% of their holdings. Specifically, we find roughly 80% “cross-over” between the top absolute and risk-adjusted return strategies. We believe incorporating Sharpe ratio analysis can make a meaningful difference to investment returns and managers would be more likely to outperform the benchmark and their peers on a multi-year basis.

Recent results: Our Sharpe basket outperformed the 200 largest Lipper large-cap core mutual funds by assets during the past six months on both a total return and a realized risk-adjusted return basis. Mutual fund absolute returns ranged from 1% to 16%. Our high “Sharpe ratio” basket returned 21.0% (100th percentile) versus 11.4% for the S&P 500 (65th percentile). Results were broad-based, with 37 of 50 stocks outperforming the S&P 500. Realized risk-adjusted returns (return/realized volatility) ranged from 0.0 to 1.3 for the 200 mutual funds. Our basket generated a riskadjusted return of 1.6 (100% percentile) versus 1.0 for the S&P 500 (73rd percentile). See Exhibit 50 for a list of current constituents.

Long-term results: Since 1999 the “Sharpe ratio” strategy has outpaced the S&P 500 by 421 bp on a semi-annual basis (not annualized returns) with an outperformance “hit-rate” of 72%. A basket of high “Sharpe Ratio” stocks generated a strong and consistent track record through the business cycle. The “hit rate” of outperformance historically averaged 59% in a down market and 81% in an up market (“up” and “down” periods measured over 6-month time horizon). Constituent turnover of the back-test portfolios averaged 72% on a six-month basis.

The objective of our back-test was to determine the incremental return that might be gained by incorporating a measure of risk-adjusted return potential into the stock selection process. Our Sharpe ratio strategy rebalanced semi-annually since 1999 has an information ratio in the 76th percentile compared with a universe of 118 funds (of the largest 200 largecap core funds at launch) that have performance track records since 1999. Our report Semi-annual rebalancing of our High Sharpe Ratio basket (June 1, 2011) ranks all S&P 500 stocks by Sharpe Ratio within each sector.

And complete chart porn:

Weekly Kickstart 6.4

 

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Sat, 06/04/2011 - 11:07 | 1339147 GetZeeGold
GetZeeGold's picture

 

Say oops......and rebalance.

 

 

Sat, 06/04/2011 - 12:32 | 1339268 richard in norway
richard in norway's picture

stfb

 

short the fucking bump

Sat, 06/04/2011 - 16:10 | 1339786 Massholio
Massholio's picture

sell the fucking bounce?

Sat, 06/04/2011 - 11:24 | 1339184 dcb
dcb's picture

stupid, make more money shorting cyclicals (crude, etc). then  wait for good time to go back into cyclicals. I like enegy because it has the "biggest" cycle.

Sat, 06/04/2011 - 11:58 | 1339208 Caviar Emptor
Caviar Emptor's picture

I'm taking a victory lap here bitchez as every data point confirms my theory about Biflation aka Inflationary Depression aka Not Your Father's Stagflation.

This week two very key data points confirmed that not only is there deflation in real incomes and net worth as reflected by Residential RE values, but that the extent of that deflation has now outstripped the 1930s: 

-IBD confirms that the over the preceding 10 years personal incomes slid more than during the 1929-1938 interval.  LINK

-And the decline in home values from their 2006 peak to present has exceeded the peak to trough decline in their value during the Great Depression (Capital Economics, Paul Dales)  LINK

And yet it's undeniable that there is inflation in the cost of living, the cost of working and the cost of doing business. It's confirmed every day in reports from businesses reporting that margins are getting squeezed and in the global ISMs. 

In this climate, it won't be necessary to have hyperinflation for an economic collapse. THe threshold is lower. 

 

 

Sat, 06/04/2011 - 12:13 | 1339252 Ergo
Ergo's picture

Good points.  I'm amazed at the level of corruption and incompetence in our leaders, and complacency in the public.  The short term stock market gain is nothing compared to the long term damage done.

First, they've made any recovery all but impossible in order to do a massive transfer of wealth to bankers, multinational corp's, and military contractors. 

How is housing supposed to recover when salaries are lower, when inflation soaks up everyone's spare cash, when increasing regulations force you to buy more expensive items than you need, and when bankers gobble up our national treasure?  We sit on an even bigger bubble now - Which most people don't even want to think about.    

Sat, 06/04/2011 - 12:28 | 1339266 rocker
rocker's picture

I think the plan is two fold. Don't let housing recover while inflating the cost of housing as much as they can.

The sheeple who bought in will forfeit and comply to pay rent. All is with purpose. TBTP have their script.

Remember Charlie, "Now that we have bailed out civilization, the people must suck it up and cope".

Sat, 06/04/2011 - 12:58 | 1339313 Caviar Emptor
Caviar Emptor's picture

How is housing supposed to recover when salaries are lower, when inflation soaks up everyone's spare cash, when increasing regulations force you to buy more expensive items than you need, and when bankers gobble up our national treasure?

Exactly. 

Their solution? More of the same, more intensely. 

The priority is #1 save the banks (and Wall Street) and those living off the fat. That guides every decision. All else is irrelevant. The so-called Fed mandates are, well, disregarded (maybe trampled on in private, who knows?)

The Euro co-conspirators are playing out the next steps perfectly: bail Greece in return for ownership. Of course they know there's no chance that even those loans can ever be repaid, so they'll be back asking for more....the women maybe? 

Sat, 06/04/2011 - 12:02 | 1339231 Oh regional Indian
Oh regional Indian's picture

Goldmean Sucks, what a name, what a time.
But how come they make all these winning trades and all those losing recommendations?

Must be the inversion effect. Somewhere.
What a ponzi.
I want to launch a iznop scheme.

ORI

http://aadivaahan.wordpress.com/2011/05/26/the-video-trailer/

Sat, 06/04/2011 - 13:03 | 1339328 Caviar Emptor
Caviar Emptor's picture

It all started the day that one monkey asked the other monkey which coconut shell the banana was under. The rest is a matter of record. But they're still playin the same game. I'll consult on your iznop scheme :-)

Sat, 06/04/2011 - 12:19 | 1339253 gianakt
gianakt's picture

Can we put all the Goldman analysts on the Go To Jail List from the New York States Attorney.

Sat, 06/04/2011 - 13:14 | 1339373 slewie the pi-rat
slewie the pi-rat's picture

"Utilities and Consumer Staples as the long le(g) in a compression trade, while shorting Industrials and Consumer Discretionary."

ok, but some of the retail SSS (same.store.summary) [The Consumer Contraction Begins: May Same Store Sale Summary - 12 Misses, 5 Beats]  showed weakness, for the month, in middle-of-the-road retail with stregth in the high end stuff.   and here, the G/Sachs.kostin S&P bottom 10 sub-performing sub-sectors for the week looked pretty consumer staple-y to moi.  and the utilities took a 1.4% stumble, too.  however, with the DJI and S&P each -2.4%;  MS Cyclicals -4%. 

did i miss the chartporn where the DJI = + 5% and the dollar = - 6.6%?

gold inched upward on the week and is +8.5% for 2011;  silver is + 17%.

silver took a 4% weekly hit during and after a most sorry-assed, pathetic try @ the 50 dma.  is our little darlin planning a Summer of play til it's time to make hay? 

"...she's mighty tall and handsome, yet she's known quite well by all/ she made a modern combination on that Wabash Cannonball..."  @ 0:17 here:  YouTube - Wabash Cannonball - Blind Willie McTell 

Sat, 06/04/2011 - 13:25 | 1339390 ziggy59
ziggy59's picture

whatya do? you avoid the crap crap table and go to phyzzz...

Sat, 06/04/2011 - 13:29 | 1339399 chartcruzer
chartcruzer's picture

Regarding the section on ETFs in the report.   Amatures.

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3225058&cmd=show&disp=p

 interesting that they dont mention anything about shorts or even short hedges.   Keep the sheeple at the trough.

Sat, 06/04/2011 - 13:56 | 1339466 zaknick
zaknick's picture

These banksters are making plans to be in Afghanistan beyond 2014. How is that going to be possible?

WWI and 2 where launched with the People brathung down the banksters necks. They will do the same again.

Sat, 06/04/2011 - 19:25 | 1340124 prophet
prophet's picture

I wonder if GSAM sees this as actionable.

Sun, 06/05/2011 - 05:35 | 1340765 Grand Supercycle
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