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The Top Three Questions Goldman Clients Ask

Tyler Durden's picture




 

If on December 31, 2013 someone were to opine that halfway into the second quarter of 2014 the S&P would be largely unchanged on the year, most would laugh at such a statement, expecting either the continued relentless ramp in the S&P (since the global central bank QE still goes on), or the long overdue crash (as it is a question of when not if the Fed finally loses control). Which is why both Goldman and its clients are finally starting to get exasperated:

S&P 500 moved sideways for yet another week, ending virtually unchanged at 1878. Realized volatility has remained low since the start of the year. One-month and three-month S&P 500 return dispersions stand at the 5th and 1st percentile relative to the past 30 years. Individual sector return dispersion also remains extremely low. Simply put, 2014 has been a difficult equity investment environment at both the macro and micro levels.

So in this difficult market, and confusing - for traders, and everyone else - environment, what are the three main questions posed by Goldman's clients had? According to David Kostin, "Three questions dominated our investor dialogue this week given the lack of meaningful data releases.

  1. Interest rates: The recent decline in ten-year US Treasury yields to 2.6%, the forward path of interest rates, and implications for equity valuation;
  2. Capex: the outlook for corporate capital spending in 2014; and
  3. Rotation: The potential for the momentum drawdown of the past two months to reverse and vault high expected sales  growth companies back into a market leadership position.

Here are the details from Goldman:

There is no precise answer to why ten-year US Treasury yields have declined by 40 bp since the start of the year to 2.6%. Goldman Sachs interest rate strategy believes the recent yield curve re-shaping is consistent with the downward revision in the US growth and inflation outlook. Realized US GDP growth in 1Q was just 0.1%, well below consensus expectations of nearly 3% at the start of the year. Demand for long-term Treasuries by private pensions may also have been a factor.

Our ‘Sudoku’ bond model suggests ten-year US Treasuries are fairly valued relative to the expected level of short-rates, growth and inflation. Looking ahead, our economists forecast US GDP growth will climb to 3.0% beginning in the current quarter (2Q) while inflation will remain low. Furthermore, growth is anticipated to remain above 3% for the balance of 2014 and throughout 2015, 2016 and 2017. Goldman Sachs forecasts ten-year Treasury yields will rise by 65 bp to 3.25% at the end of 2014 and climb by another 50 bp to 3.75% by end-2015. We expect fed funds will remain unchanged until early 2016. Consensus expects hikes will begin in early 2015.

While the curve flattening, yield compression in long-term rates, and positive 5% YTD return for ten-year notes have certainly surprised most market participants, equities continue to trade around fair value and inline with the path of our forecast. Applying our interest rate estimate to the Fed Model suggests a year-end 2014 S&P 500 target of 1900. With a 16.3% ROE, the index trades at 2.7x price/book value, in-line with the trailing ten-year average and historically consistent with today’s level of profitability. Our 12-month target of 1950 reflects 4% upside from the current level.

Accelerating growth in corporate capital spending is a key component in both our economic forecast and portfolio strategy use of cash analysis. Goldman Sachs Economics expects business fixed investment, which encompasses domestic spending only, to grow by nearly 7% in 2014. Our use of cash analysis suggests S&P 500 capex – which includes domestic and non-US spending – will rise by 9% after slim 2% growth in 2013.

Company guidance on 2014 capital spending plans is consistent with our regression model and forecast. Last year S&P 500 firms spent $649 billion on capex (plus an additional $231 billion in R&D). Nearly 250 firms have provided explicit guidance on their budgeted 2014 capex plans. These stocks accounted for 80% of last year’s aggregate S&P 500 capex. Guidance points to year/year growth of 7%. Capex typically skews towards 4Q. We believe several quarters of 3% GDP growth and 5% year/year sales growth will lead managements to boost spending slightly above current guidance.

‘Indiscriminate selling’ is the phrase that most accurately captures the view of many investors regarding the momentum drawdown since early March. Fund managers argue that the broad sell-off in high expected growth stocks affected some firms that in their view did not merit a de-rating. However, once significant momentum drawdown occurs, the momentum factor is typically not associated with subsequent market leadership although the S&P 500 gains an average of 5% during the next six months. Instead, low momentum, low valuation, and low growth are usually winning factors.

* * *

It may be indiscriminate. But looking at both the post-momentum peak drawdown on both an average and 25%-ile basis, shows that there is still a lot of room for momentum stocks to tumble.

 

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Sun, 05/11/2014 - 10:54 | 4747993 FieldingMellish
FieldingMellish's picture

#1. Question... what the fuck happened to my money?

Sun, 05/11/2014 - 11:10 | 4748027 maskone909
maskone909's picture

And.......

Its gone.

Sun, 05/11/2014 - 11:31 | 4748069 philipat
philipat's picture

We only give accurate advice to Muppets if they pay us and we can fleece them in private. All other publicly issued statements should be seen as being expressions of our intention to scew you, so you should trade on the opposite side of such Muppetology-baiting statements..??

Sun, 05/11/2014 - 13:06 | 4748238 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

4.  "Thankyou sir, may I have another !"

Sun, 05/11/2014 - 23:17 | 4749751 Carpenter1
Carpenter1's picture

The squid relies on the greed of "investors" to support its activities.  If investors didnt jump on board the paper train, risk billions loaning it to highly suspect companies/nations, and trust every word out of Blankfeins mouth, this jig would be up.

 

Even us. Every time you long the market, buy bonds, or in any way profit from the game being played, you lend them your power. Wanna know when it ends? Never, so long as investors keep giving the system their power and money. 

Sun, 05/11/2014 - 11:14 | 4748040 waterhorse
waterhorse's picture

It went into doing "God's work."

Sun, 05/11/2014 - 11:28 | 4748073 I am Jobe
I am Jobe's picture

Spent it on Hookers and Cocaine. Stress in Captial markets caused to do some crazy shit. O By the way we also got servers full of Porn. 

Mon, 05/12/2014 - 09:36 | 4750489 icanhasbailout
icanhasbailout's picture

#4: Why does it feel like someone's got their hand jammed up my ass?

Sun, 05/11/2014 - 11:00 | 4748007 NoDebt
NoDebt's picture

#4.  I read on ZeroHedge that Goldman is almost always taking the other side of the trade against their own client recommendations.  Should I expect that to continue with your next recommendation to me?

Sun, 05/11/2014 - 11:02 | 4748012 stinkhammer
stinkhammer's picture

do you think i am a muppet?

Sun, 05/11/2014 - 11:09 | 4748025 Winston Churchill
Winston Churchill's picture

If you have to ask ......

Sun, 05/11/2014 - 11:09 | 4748026 Yen Cross
Yen Cross's picture

 

  I stopped reading at; "Looking ahead, our economists forecast US GDP growth will climb to 3.0% beginning in the current quarter (2Q) while inflation will remain low. Furthermore, growth is anticipated to remain above 3% for the balance of 2014 and throughout 2015, 2016 and 2017".

Sun, 05/11/2014 - 11:13 | 4748038 maskone909
maskone909's picture

Talking heads are screaming 4%!!!!

Makes me wonder if they are using Ouiji boards to conjure their economic out looks

Sun, 05/11/2014 - 11:30 | 4748080 intotheblack
intotheblack's picture

Groundless predictions were effective in the last election cycle, 2012. After November it was revealed that unemployment, other indicators, were wrong and wrong in a way that error, because error tends to be random, would not predict. I have no doubt that until November 2 we claims of RECOVERY! supported by false data will be trumpeted everywhere. Until November. Then the story will be that the economy has tanked because inequality or climate change or something. The solution? Taxes.

Sun, 05/11/2014 - 11:32 | 4748088 FieldingMellish
FieldingMellish's picture

At this point nothing would surprise me. Why stop at 4%? If the US is to beat China we need at least 7%. Any number will do as it is "adjusted" by "experts" anyhow.

Sun, 05/11/2014 - 18:13 | 4749003 Ghostdog
Ghostdog's picture

Ouiji Boards are out and penis pumps are in

Sun, 05/11/2014 - 12:56 | 4748200 AccreditedEYE
AccreditedEYE's picture

TheSquid's research goal here has 1 objective... If they can help confuse, stall for time and keep equity prices moving sideways for another 2 quarters, they can come back in October and say market has worked off an overbought condition and is ready to move higher. They're just trying to contain selling at this point.

ProTip: if you think they will fail, you are incorrect.

Sun, 05/11/2014 - 11:12 | 4748036 waterhorse
waterhorse's picture

Am I going to get a "shitty deal" like your Timberwolf scheme?

Sun, 05/11/2014 - 11:22 | 4748058 MrButtoMcFarty
MrButtoMcFarty's picture

#4)  Why does my ass hurt??

Sun, 05/11/2014 - 12:58 | 4748078 813kml
813kml's picture

Doctors recommend extensive quantitative easing before investing with Goldman Sachs, it relaxes the sphincter muscles for a tighter fit.

Sun, 05/11/2014 - 11:38 | 4748104 remain calm
remain calm's picture

Not much longer, Blankfein is almost done.

Sun, 05/11/2014 - 11:54 | 4748134 scraping_by
scraping_by's picture

Then it will be meet the new Blankfien, same as the old Blankfein.

Sun, 05/11/2014 - 11:25 | 4748066 Bioscale
Bioscale's picture

Who the fuck are the typical clients of GS? I can't image any sane individual to give his money into GS care.

Sun, 05/11/2014 - 11:29 | 4748077 I am Jobe
I am Jobe's picture

Many countries such as Singapore, Malaysia , HK and many more. Ah the looting in Asia by GS since Europe was already bled dry. 

Sun, 05/11/2014 - 11:29 | 4748075 Debugas
Debugas's picture

interest rates will stay low

capital investment will stay low

the depresion will continue for at least a decade unless we fall into WW3

Sun, 05/11/2014 - 11:30 | 4748082 I am Jobe
I am Jobe's picture

Whatttttttttttt , decade, more like 2 or 3 decades. Hunker down bithchezz. Ah Greatest minds and the models

Sun, 05/11/2014 - 11:30 | 4748083 Seize Mars
Seize Mars's picture

My Top Three Questions for Goldman Sachs would be, in reverse order:

#3 - Do you think all this bullshit (waving my hand at all the papers) is going to last?

#2 - For you to profit, some person who produces value (i.e. a factory worker or small contractor) has to lose money. Are you aware of that?

#1 - You have worked very hard to hurt my country. Why? What exactly did America do to you, that you see the need to utterly destroy it?

Sun, 05/11/2014 - 11:33 | 4748094 williambanzai7
williambanzai7's picture

#4 Do you use condoms?

Sun, 05/11/2014 - 11:38 | 4748102 riley martini
riley martini's picture

 Are you going to steal fron us again like the Abacus fraud .

Sun, 05/11/2014 - 11:50 | 4748127 riley martini
riley martini's picture

Q#2 Are you still targeting widows and orphans when you steal money for bonuses.

Sun, 05/11/2014 - 11:57 | 4748145 riley martini
riley martini's picture

Q#3 Are you still using foreign banks to defraud the American people ; municipal governments , school districts ect. like the Abacus fraud.

Sun, 05/11/2014 - 12:45 | 4748212 disabledvet
disabledvet's picture

Umm "is the moon big and why does the Sun exist" are the other two big ones you forgot.

Ummm. Let's start with "will New York City default on its debt" and go from there.

JP Morgan had to bail out that thing too a bunch of times.

And of course the even the Treasury Department.

Treasury looks good here...I'd remain long that one.

Sun, 05/11/2014 - 12:51 | 4748219 ptoemmes
ptoemmes's picture

It's the weather's fault - no matter what the weather is.

Sun, 05/11/2014 - 13:21 | 4748282 moneybots
moneybots's picture

"The Top Three Questions Goldman Clients Ask"

 

 Why do you treat us as Muppets?

Sun, 05/11/2014 - 13:25 | 4748289 Jack Sheet
Jack Sheet's picture

Answer to No 1: Hundreds of $Trillions in interest rate derivatives. Just read any of Rob Kirby's work.

Sun, 05/11/2014 - 13:35 | 4748314 Seasmoke
Seasmoke's picture

1. Hank Paulson or Jon Corzine?

2. USA or Israel ? 

3. Less Filling or Great Taste. 

Sun, 05/11/2014 - 14:46 | 4748492 I Write Code
I Write Code's picture

"Can I be your muppet?"

and

"What is it like being green?"

Sun, 05/11/2014 - 14:58 | 4748512 Kirk2NCC1701
Kirk2NCC1701's picture

When you do "God's work" and have that kind of power at the Fed and the WH, you have the ability to go way beyond 1 Std.Dev. from the Moving Average.  2 SDs should be a cakewalk for the Squid.  /sarc

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