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Two Weeks After Upgrading Stocks, Goldman Downgrades Stocks

Tyler Durden's picture




 

Just two short weeks ago, when Goldman's head strategist David Kostin announced that on one hand the market's "stellar return borrowed heavily from the future" and "is now 30%-45% overvalued compared with the average since 1928", which "logically" led to Kostin's conclusion that "we lift our year-end 2014 S&P 500 price target to 2050 (from 1900) and 12-month target to 2075, reflecting prospective returns of 4% and 6%, respectively" we said "one can almost feel Kostin's humiliation at having to pen such moronic drivel."

Yesterday, in what was probably a case of moronic drivel penner's remorse, the same firm which just upgraded its S&P price target by 150 points two weeks ago, decided to... downgrade stocks. But only kinda, sorta and only for the next 3 months: Kostin is unwilling to go so far as to tell the whole truth so while he did downgrade stocks to Neutral through October, he is still Overweight equities over the next 12 months. In other words, sell in July but don't go away, and keep on buying over the next 12 months, or something.

To wit: "We downgrade to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities. This makes the near-term risk/ reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight."

Curiously, his reported release moments after our latest warning on High Yield debt was far more harsh on an asset class that has already been beaten down since the most recent round of Fed warnings that there is a corporate bond bubble brewing. As a result, Goldman also downgraded corporate credit "to underweight over both 3 and 12 months. We think spreads will narrow slightly, but given already tight levels, rising government bond yields are likely to dominate the returns, especially for US IG credit where spreads are the lowest."

Uh, rising government bond yields where? Oh yes, he must be referring to the plunge in the 10 Year from 3% on January 1 to just shy of 2014 lows at under 2.5% today.

Maybe instead of being wrong for all the wrong reasons again (Goldman expected a tiny increase in the S&P 500 to 1900 at the beginning of the year on 3% GDP growth in Q1 - it got the opposite) Goldman can just tell us what its prop trading group is doing. Because while it was clear that GS is selling if it is advising its clients to buy, now that Goldman is both bullish and bearish at the same time, nobody has any idea how to fade the 200 West firm.

Here are the punchlines from the Goldman report:

We downgrade corporate credit to underweight over both 3 and 12 months. We continue to have a benign outlook for spreads and expect a slight further tightening over the coming year as monetary policy remains very accommodative and inflation and macro risks remain relatively low leading to a strong search for yield. However, spreads are now so tight that carry and further spread compression offer a relatively low offset against the rise we expect in the underlying government bond yield, especially for US investment grade credits. This tension between total return and spread return expectations have existed  for a while, but the latest developments have shifted the balance between these two forces far enough for us to prefer a credit underweight, given that our credit portfolio puts 60% weight on US investment grade.

And stocks:

We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then. At the same time, on our forecasts the acceleration of economic growth is now largely behind us, with any further expansion being very  small compared to what we have seen. We see an environment where growth is sustained around current levels as being positive for equities over the longer term, but would expect the pace of returns to slow down relative to the strong performance we have seen over the last couple of years. This suggests that the forgone return by lowering the equity exposure temporarily if equities continue their grind higher is likely to be lower than it has been. This is particularly true in the US where earnings and valuations are at high levels, and where data surprises are already very positive. Our MAP index of data surprises here is close to its highest levels over the last couple of years (Exhibit 2). Over the longer term we still see equities as the best positioned asset class, and remain overweight over 12 months. We would see any sell-off over the next few months as an opportunity to increase exposure again also on a short-term basis.

 

Whereas absolute valuations are on the high side, relative valuations remain attractive. The gap between dividend yields and bond yields is still high and our estimates of equity risk premia ranges from 5.2% in the US to 8.5% in Asia ex-Japan. We expect continued compression of these high premia to offset the rise in bond yields over the longer term and therefore think valuations should be relatively steady even as bond yields rise. This leaves earnings as the key driver of returns in our view. Whereas earnings were revised down across all markets except Japan at the beginning of the year, they have now stabilised in all regions except Europe, where the downward revisions have continued. This stabilization is supportive of our forecasts for earnings growth which are roughly in line with consensus in all regions except for Japan where we are more optimistic. We are concerned about the continued downward revisions in Europe and see this as a key risk to our overweight here. But, we expect both a slight improvement in European economic growth for the rest of the year as well as the currency depreciation to lead to a stabilisation of earnings.

In short: yet another person who applies some logic and fundamentals to predict the future of a market that is so broken and centrally-planned that only the NY Fed trading desk at Liberty 33 has any idea what is going on any more. The same trading desk which on one hand sells VIX courtesy of Citadel and on the other accuses the market of complacency.

 

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Sat, 07/26/2014 - 14:33 | 5007590 Cosworth
Cosworth's picture

Fuck off goldman. Bunch of pricks

Sat, 07/26/2014 - 14:42 | 5007611 FinalEvent
FinalEvent's picture

Liberty 33, nice combo

Sat, 07/26/2014 - 16:04 | 5007813 pauhana
pauhana's picture

Remember when there was an inverse relationship between the stock and bond markets?  What a joke things have become!

Sat, 07/26/2014 - 16:15 | 5007844 wallstreetapost...
wallstreetaposteriori's picture

SO if Goldman thinks bonds are going to sell off, does that mean we should buy them... since they obviously plan on doing the same.

Sat, 07/26/2014 - 16:19 | 5007852 max2205
max2205's picture

Buy safe shit like Z at all time highs...no pe no earnings

 

Makes cents to me

Sat, 07/26/2014 - 20:06 | 5008344 philipat
philipat's picture

Translation for muppets: Goldman is buying short-term and selling longer-term......always do the opposite of what Goldman says in any public (Muppet) material. Goldman gives nothing of any value away fro free and its purpose is always to make muppets act to favour Goldman.....

Sat, 07/26/2014 - 14:38 | 5007599 TabakLover
TabakLover's picture

SP 2200 here we come!

Sat, 07/26/2014 - 14:40 | 5007604 tomlamon
tomlamon's picture

There is no such thing "future temporary selloff" only in  retrospective. The market never sells of on  the notion so it will definetely bounce back tomorrow. 

Sat, 07/26/2014 - 14:40 | 5007605 tomlamon
tomlamon's picture

There is no such thing "future temporary selloff" only in  retrospective. The market never sells of on  the notion so it will definetely  bounce back tomorrow. 

Sat, 07/26/2014 - 14:40 | 5007606 fonzannoon
fonzannoon's picture

goldman is downgrading stawks because they are concerned yields on bawnds are going to go up. hilarity.

Sat, 07/26/2014 - 14:56 | 5007648 buzzsaw99
buzzsaw99's picture

...ironically this is not far from the truth. [/morpheus]

Sat, 07/26/2014 - 14:41 | 5007608 Atomizer
Atomizer's picture

BTFD bitchez, Yellen is debasing USD. Dow projection 20k.

/sarc

Sat, 07/26/2014 - 19:05 | 5008215 syntaxterror
syntaxterror's picture

As dollar goes to ZERO, DOW goes to 100,000.

Sat, 07/26/2014 - 14:46 | 5007622 SemperFudge
SemperFudge's picture

I'm bullish on global instability, inflation, price controls, welfare, state propaganda and the military-industrial complex. It must be working -- the stock market has never been better!  Capitalism never really needed that "democracy" hogwash anyway.

Sat, 07/26/2014 - 14:52 | 5007627 buzzsaw99
buzzsaw99's picture

allow me to translate if i may be so bold: they expect a temporary dip in ig bond prices causing a catastrophic selloff in stocks which will then lead to ig bonds going to the moon bitchez. zirp 4evah, beware the unholy qe untaper (time frame december 2014 give or take a few months).

Sat, 07/26/2014 - 14:52 | 5007634 Ban KKiller
Ban KKiller's picture

As long as the muppets like pricks? Seems so.

Sat, 07/26/2014 - 14:54 | 5007644 q99x2
q99x2's picture

F Goldman Sachs. Arrest Loyd Blankfein for financial terrorism.

Sat, 07/26/2014 - 20:39 | 5008405 lotsoffun
lotsoffun's picture

if it was not for the 80 billion dollar bail out from the fed to aig to goldman thanks to hank paulson - well, those masters of the universe would be asking you if you wanted mustard on that pastrami sandwich right not.

so - you got to give lloyd credit.  (didn't mean it that way, at zero percent).  goldman gets it right. 

Sat, 07/26/2014 - 15:05 | 5007679 adonisdemilo
adonisdemilo's picture

Memo to Muppets;

We recommend you sell "abc ", WE WILL BUY IT ALL. 

We recommend you buy "xyz " WE WILL SELL YOU AS MUCH AS YOU LIKE.

Sat, 07/26/2014 - 15:05 | 5007680 disabledvet
disabledvet's picture

"We're Goldman and we're short everything!

And now we're dead!"

Move along.

Sat, 07/26/2014 - 15:08 | 5007685 Keltner Channel Surf
Keltner Channel Surf's picture

Makes perfect sense -- instead of “Sell in May, and Go Away” it’s “Dump in July, Come Back & Re-Buy !”

What a magnanimous firm, this Gold Man-sacks, you have to admit.   If I had the smarts to precisely forecast a pullback, why, I’d short the crap out of it fully margined, then mortgage my entire life to buy it back in 90 days.  I surely wouldn’t tell anyone (except ZH-ers, they all hate stocks).  Damn, I feel, well … almost selfish, and a bit ashamed . . .

 

In fact, I’d issue an immediate flaming buy recommendation, then hit the stops of the new longs with my selling, then issue a “sell everything” alert just as October ends, to create ‘bargains’ before reloading.  Hey … ah, wait a minute . . .  you don’t suppose ? . . .

Sat, 07/26/2014 - 15:11 | 5007696 Zeptemberalevin
Zeptemberalevin's picture

BTDWWIII!!!

Sat, 07/26/2014 - 15:14 | 5007700 CheapBastard
CheapBastard's picture

Doing God's work ain't EZ.

Sat, 07/26/2014 - 15:14 | 5007702 world_debt_slave
world_debt_slave's picture

wax on, wax off

Sat, 07/26/2014 - 15:43 | 5007766 Duffy Duck
Duffy Duck's picture

Granting I lack the finance bg of many here, so please do correct me, but - Goldman's prognostications and explications seem to be based in little more than obscurantist rhetoric, resting on guesswork, resting on the back of a turtle, resting on an infinite number of turtles, all the way down to hell.

Sat, 07/26/2014 - 16:13 | 5007838 tradewithdave
tradewithdave's picture

Resting on a laptop found in a garbage room in New York. Fully functional with no password protection... of course. Febreze it.

Sat, 07/26/2014 - 15:54 | 5007795 Joebloinvestor
Joebloinvestor's picture

They make money if it goes either way, don't you understand that?

Sat, 07/26/2014 - 16:11 | 5007830 tradewithdave
tradewithdave's picture

Downgrades... they're the new Upgrade.

Altucher 20,000

Sat, 07/26/2014 - 17:38 | 5008010 Billy O'Naire
Billy O'Naire's picture

Two weeks? As Goldman calls it, 'buy and hold.'

Sat, 07/26/2014 - 19:31 | 5008279 Whatta
Whatta's picture

Goldpricks are contrarian indicators. Buy with both hands if they say the opposite - we are going higher.

Sat, 07/26/2014 - 19:41 | 5008294 Not Goldman Sachs
Not Goldman Sachs's picture

Need volume? Rinse. Repeat.

Sat, 07/26/2014 - 20:00 | 5008325 Yen Cross
Yen Cross's picture

  Hi 

       MDB  aka "Million Dollar Bonus" ...

    Seats> row K-N are still available on my "Doomsday sail" through the [picturisk*] Mediterranean Sea.

   Extra lifejackets and indigenous currency is provided. ( Your life jackets are stuffed with it....)

Sat, 07/26/2014 - 22:17 | 5008627 orangegeek
orangegeek's picture

It was an upgrade because GS could make money and fuck their clients.

 

It's now a downgrade because GS can make money and fuck their clients.

 

Get it??

Sat, 07/26/2014 - 23:06 | 5008732 lasvegaspersona
lasvegaspersona's picture

Sounds like Yellen was drunk when she told him what the Fed's plans were for the Fall.

Firz we goooona buy boooons   then then then we are...did I tell you firz we goooona buy boooons, I mean I mean ..what weere we sayingk?

Sat, 07/26/2014 - 23:15 | 5008752 lasvegaspersona
lasvegaspersona's picture

Really though, the system needs that good old liquidity, without it we get the royal flush, right down the drain. So the Fed will increase activity. I suspect they are looking for the least inflationary  way they can find to keep all indicators looking good. The days of being able to cleanse the system with a good quick recession have passed. Now it is all hands on deck and not one hair can be out of place. The 10 year above 2.5 but below 3. Gold above 1200 (or those crazy Easterners will suck up the physical again) but below 1400 (or we'll see inflation in all the commodities), The S&P must go generally up (but that can get expensive so the occasional dip is OK) but no more than 5% or we'll be back in QE. We'll do it with derivatives and keep the banks alive and the dollar be damned, it is any way. Call the Loo man and get his ESF guy on the line too.

Sun, 07/27/2014 - 13:25 | 5009867 SanfordandSon
SanfordandSon's picture

The 30+ years exposure to Goldman Sucks, has tought me at least one thing, I know I'm a slow learner:

GS's positive recommendation on stocks was designed to set it up so they could short into the lift. 

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