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The "Dash-For-Trash" Is Over, Goldman Flip-Flops
Just a month ago, Goldman Sachs' head progonsticator David Kostin went full bulltard, telling clients to buy high-beta, high-momentum stocks because (paraphrasing) "hedge funds suck" and will need to play catch-up. Today, his tune has changed. The "dash-for-trash" meme has outperformed dramatically in the last few years as Fed experimentation breathed life into the zombie-est weak-balance-sheet companies and traders rode that artificial wave. However,as Kostin notes, tightening financial conditions have the greatest impact on firms with high leverage and weak balance sheets; and thus, with the Fed more biased towards tightening than loosening (and the market discounting that), the "dash-for-trash" is over (as we noted in July).
The "Dash-for-Trash" trade has worked well.. until recently
Via Goldman Sachs' David Kostin,
The slip in S&P 500 coincided with a further tightening in the Goldman Sachs financial conditions index (FCI). FCI started tightening in mid-July from a post-financial crisis low. FCI provides an aggregated view of the financial environment in which US firms operate. The index incorporates eight variables: the federal funds rate, 5- and 10-year Treasury yields, the TED spread, nonfinancial BBB credit spreads, equity levels normalized to earnings, the house price-to-rent ratio, and the trade-weighted US dollar.
Financial conditions usually tighten for one of two opposing reasons: (1) financial market frictions make credit more costly, or (2) improving economic growth drives interest rates higher. In the first scenario the FCI tightens while Treasury rates decline amid slowing growth and flight to quality, as was the case this past week. In the second scenario the FCI tightens and Treasury rates rise amid positive growth impulses.
Our macro forecasts suggest financial conditions will tighten during the coming year as the Fed hikes rates and the dollar strengthens. By yearend 2015, we expect 5-year Treasury rates will rise to 2.8% (from 1.7%), tenyear yields will climb to 3.5% (from 2.5%), and fed funds will increase to 75 bp following a first Fed rate hike in 3Q 2015. We forecast the trade-weighted dollar will strengthen by 4.5% during the same time period.
Tightening financial conditions particularly affect firms with weak and highly levered balance sheets given these firms have less capacity to withstand rising capital costs.
Exhibit 2 shows the tight correlation between the FCI and a long/short trade of our weak versus strong balance sheet baskets. All but one firm in our 50-constituent strong balance sheet thematic portfolio are rated investment grade or have no long-term debt. The median credit rating is AA-. In contrast, about one-third of the firms in our weak balance sheet basket have high yield ratings. The portfolio’s median credit rating equals BBB.
Weak balance sheet stocks have lagged strong balance sheet firms by 380 bp since mid-July, consistent with FCI’s tightening since that time. The reversal ended a stunning, nearly uninterrupted 48 percentage point outperformance trend of weak vs. strong balance sheet stocks during the prior two years (93% vs. 45%, respectively, compared with 52% for S&P 500).
Given our view that US financial conditions will gradually tighten over the coming years, we close our long weak vs. short strong balance sheet trade recommendation. Historical analysis shows that during periods when the FCI tightens concurrently with rising 10-year yields, strong balance sheet stocks slightly outpace weak balance sheet firms.
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Of course, this is no surprise since in July we warned the "dash for trash" trade was over...
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Never go full bulltard.
He will be Kostin his clients lots of money
Scumbag-Sachs
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what is that twerp dennis kneale up to now?
TD you were off by a quarter. Enough to wipe anyone out....timing is everything
In Spain they have now just reported that the dog of the nurse with Ebola also has Ebola.
This proces that animals can also spread the virus.
And for people with lower genetic knowledge: humans and does don't share a common DNA string which shows how complex this virus is and how fast it might spread to birds and lifestock.
I'm thinking this will actually become the perfect black swan event.
Dogs are the preferred method of transmission in West Africa. They feast on the corpses and it doesn't cost Monsanto a dime.
Must be time to Buy The F-ing Dip.
You first
After you see the same f-ing movie replayed a couple thousand times, you start to realize it really isn't as scary as you imply it is. Fool me 50,000 times, shame on me.
"Time" being the essential consideration.
BTFD, after all, is just a new name for market timing.
"By yearend 2015, we expect 5-year Treasury rates will rise to 2.8% (from 1.7%), tenyear yields will climb to 3.5% (from 2.5%)"
and you can put gold at $800 if those numbers are remotely close.
Dash for trash - Trashed dashed
http://finance.yahoo.com/tumblr/photoset-sometimes-stocks-go-to-zero-gt-advanced-011807363.html
This could get ugly...
Gpro hit ath but closed at 90....ath and its trashy
tightening financial conditions have the greatest impact on firms with high leverage and weak balance sheets
goodbye ... so long ... high yield (buyback fuel)
"tenyear yields will climb to 3.5% (from 2.5%)"
now that "all cash" exiting the housing field of battle ... 10yr @ 3.5% would leave housing a smoldering wreck
and refinance market would (further) crater
How so? The first time buyer is dead and the 1% pay cash. The fed has given up on low rates helping housing or the economy in any material way.
are you serious?
people buy "the payment" (monthly PITI)
if interest rates go up ... taxes and insurance certainly aren't going down ... means the price of houses have to come ... a lot ... wrecking balance sheets everywhere that are holding mbs
Im dead serious. Housing is toast. The fed knows it. Most sales are done all cash. Maybe still a few boomers left giving johnny 100k for down payment but that's few and far between. Millenials rent or live in the basement. The impact of rising rates at this point is worth the tradeoff of whatever impact it has on housing.
i agree housing is toast no matter what
but raising rates will mean toasting by thermonuclear bomb
lower rates - THEY WILL GO LOWER ... MUCH LOWER - will alleviate some of pain
and lower prices means underwater homeowners
Can't sell
Can't refinance
Will go delinquent ... just like last time ... by the MILLIONS
Uncle Warren said people are nuts not to buy a house.....nuts
I agree they can't sell (i'm one of em). No need to refi. Either they locked in to a lower rate by now or it was never gonna happen. So I don't think massive delinquincies will be a major issue. I think we just drag along the bottom for anyone that is not in the 1%.
It is so funny watching blowhorn cnbc etc trying to pusg the fed narrative that they have to raise rates due to growth. But these crazy assholes are going for it.
Strongly disagree
for most their house still far and away biggest asset. If they lose their equity (savings) consumer spending will retrench big time as households forced to save.
As far as delinquencies - you have to be kidding. Last go round, slap on the credit wrist if you went delinquent. In some cases, people able live for YEARS free before evicted. They'll expect more of the same.
Anyways, why pay on underwater mortgage when you can rent for much cheaper?
I'm stunned you think housing going down no big deal
I don't think it's going down. I think it's done. It's a 1% economy now. That part of housing is fine and will continue to be fine. For everyone else it's already over. No one outside the very high end has been tapping any equity to support consumer spending, nor do they have any equity to tap if they wanted to.
As far as delinquincies go, I think there will continue to be delinquincies whether rates go higher or not, if only because the middle class continues to die off.
As far as paying an underwater mortgage vs renting for cheaper, that must be a geographical thing. I would have to punt on that one. I can tell you in the northeast renting is freaking expensive. Not much of a break from having a mortgage, if there is one at all, and you ain't renting anything decent if you just bombed your credit by leaving the keys in the mailbox.
I don't think we actually disagree much about where housing is and where it's going, outside of some minor details. I think where we disagree is how much the damage the fed believes it will inflict on housing if it raises rates, and is willing to still go ahead. I believe they will. Clearly you don't think so. I am not totally resolute on this one. If I had to handicap it id be going with 60/40 they go for it.
http://www.youtube.com/watch?v=8N_tupPBtWQ&spfreload=1
I pooped today!
so buy the russell and bonds, too?
When the tightly coiled derivatives unwind things will happen fast.
"It is contained" to "oh shit" almost overnight.
Remember 2008? Like that.
sub print_money {
foreach (@stocks){
++$_;
}
--$economy;
}
while ($economy) {
print_money();
}
As tight as LagArde's thighs.
Cant wait to see gpro getting creamed. Piece of shit on a stick.
rubbish. pure tripe.
W/E
Bitchez