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Goldman On Why Things Will Get Worse Before They Get Better And Gives An S&P Target If The Eurozone Breaks Up

Tyler Durden's picture





 

In his latest weekly chartology, Goldman's David Kostin takes a different route to recapping the week's events and instead of merely summarizing the market action, explains what the views of Goldman's clients are, especially the bulls among them ("Bullish investors hold more positive outlooks for margins and Europe, and argue that our target is too low. Some investors generally agree with our muted outlook for the economy and corporate earnings, but feel that an agreement to end Europe’s debt crisis will inevitably be reached next year. They argue that the stabilization of sovereign balance sheets, recapitalization of European banks, and clarity in the region’s future will cause a surge in investor confidence. Investors commonly quote 1400 as a target S&P 500 price level in this “risk-on” scenario of multiple-expansion.") and then juxtaposes to its why Goldman continues to be bearish: "We expect the situation to worsen before it gets better with market pressure necessary for progress. EU Summit demonstrates progress but lacked “regime change.” Overall, policymakers are making progress and signaled a commitment to address the twin sovereign and banking system crises. However, lack of clarity on the IMF’s role and no clear change in the ECB’s activities in sovereign debt markets will likely leave some investors disappointed." Which is precisely what we have been claiming for weeks - that unlike the other banks who are preaching rosy outlooks out of sheer terror for what a European crash would mean for them, Goldman is hoping it comes quickly, so that ostensibly several big banks can blow up, and the ECB steps in forceefully but not before Goldman's extended web of control in political Europe allows it to step into the void and become a major market presence on the continent.

Two other points of observation: Goldman highlights where the core difference between its forecast and that of the rest of the street is: " we expect margins to contract to 8.7% in 2012 from 8.9% in 2011 while consensus expects them to grow to 9.4%. Each 50 bp shift in margins equals about $4 in S&P 500 EPS." and also presents an outlook on the eurozone's collapse that does not share the self-serving view of UBS which calls for people to hoard dry food and weapons: "Fear of euro collapse frames more bearish views. A small minority of investors expects a euro breakup and a deep recession in Europe. In this case our uncertainty-based P/E model suggests the S&P 500 could fall by roughly 25% to 900. Even if collapse is avoided, the continuation of “passive containment” and delay of resolution continues to raise the costs in both financial and economic terms, creating a poor condition for equity markets."

Full note highlights:

This week we met with a wide range of investors to discuss the outlook for US equities in 2012. Roughly two thirds of the clients we met with agree with our base case view that the S&P 500 will deliver lackluster returns next year. Among those that do not, Europe is the key factor with bulls outnumbering bears. Investors with global or cross-asset mandates broadly see US equities as attractive in relative terms. Our outlook is based on three central points: 

 

1. Stagnant economy. Our US economics team expects a fifth straight year of sub-trend economic growth with 1.6% GDP growth forecast in 2012 and the environment persisting in 2013 with 2.2%. They expect unemployment to remain elevated at 9%, fiscal drag from a divided Congress, and restrained capex in the face of political and economic uncertainty. 

 

2. Modest earnings growth. We expect margins to peak in 2011 and fall slightly in 2012. Combined with weak sales growth, this means S&P 500 earnings should grow only 3% to $100 in 2012. Consensus expects $108. 

 

3. Stable valuation. P/E multiples tended to remain flat during 17 “stagnation” periods of prolonged weak but positive economic growth in OECD countries since 1980. A flat P/E of roughly 12x is supported by our dividend discount model and uncertainty-based P/E model, although other approaches such as the Fed model and the historical ROE vs. price/book relationship suggest significant upside to fair value. Flat valuation along with modest earnings growth translates into our S&P 500 year-end 2012 target of 1250, roughly unchanged from the current level. 

 

For clients who agree with our outlook, we recommend three strategies involving our thematic baskets. Buy: (1) High Quality Stocks (Bloomberg ticker: <GSTHQUAL>) with safe balance sheets and a history of stable growth; (2) Dividend Growth and Yield (<GSTHDIVG>) as investors navigate an environment of weak price returns and low yields; (3) stocks with high US sales exposure vs. firms with high international revenues (<GSTHAINT> vs. <GSTHINTL>). These strategies have generally outperformed in 2011 and should continue to work in 2012 given our outlook. Stocks that appear in at least two of these baskets include ACN, OXY, WAG, CTL, JPM, and WFC. 

 

Bullish investors hold more positive outlooks for margins and Europe, and argue that our target is too low. Some investors generally agree with our muted outlook for the economy and corporate earnings, but feel that an agreement to end Europe’s debt crisis will inevitably be reached next year.

 

They argue that the stabilization of sovereign balance sheets, recapitalization of European banks, and clarity in the region’s future will cause a surge in investor confidence. Investors commonly quote 1400 as a target S&P 500 price level in this “risk-on” scenario of multiple-expansion.

 

The divergence between this view and our own is the path to resolution. Bulls expect clarity in the near term that will reassure investors. We expect the situation to worsen before it gets better with market pressure necessary for progress. Our global equity forecasts point to 3- and 6-month downside in Europe, Asia and the US before recovery in 2H 2012. Clients with global or cross-asset mandates broadly see equities as attractive relative to low bond yields and the US as appealing globally due to recent growth momentum.

 

EU Summit demonstrates progress but lacked “regime change.” Overall, policymakers are making progress and signaled a commitment to address the twin sovereign and banking system crises. However, lack of clarity on the IMF’s role and no clear change in the ECB’s activities in sovereign debt markets will likely leave some investors disappointed.

 

Others who disagree with our forecast argue that margins will continue to expand as sales grow, even in a sub-trend economic environment.

 

However, history shows that margins don’t always expand when sales grow. During the last 40 years S&P 500 margins have hit cycle peaks and contracted six times, and in each period sales continued to grow. Rather, margins tend to contract in periods of positive but decelerating sales growth.

 

We expect significantly slower sales growth in 2012 than the 11% rate in 2011, as does consensus. 

 

Margins are the key difference between our earnings forecast and the consensus view for 2012. We have similar expectations for sales growth in 2012 at 3.7% vs. 5.1% for consensus (ex-Financials and Utilities). However, we expect margins to contract to 8.7% in 2012 from 8.9% in 2011 while consensus expects them to grow to 9.4%. Each 50 bp shift in margins equals about $4 in S&P 500 EPS. The 70 bp gap between our margin forecast and consensus explains 75% of the $8 difference in 2012 EPS estimates.

 

Fear of euro collapse frames more bearish views. A small minority of investors expects a euro breakup and a deep recession in Europe. In this case our uncertainty-based P/E model suggests the S&P 500 could fall by roughly 25% to 900. Even if collapse is avoided, the continuation of “passive containment” and delay of resolution continues to raise the costs in both financial and economic terms, creating a poor condition for equity markets.

And full report:

Weekly Kickstart

 


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Sat, 12/10/2011 - 13:41 | Link to Comment Rainman
Rainman's picture

The squid declares math and logic to be bearish. Very insightful.

Sat, 12/10/2011 - 14:15 | Link to Comment jdelano
jdelano's picture

tylers--goldman wants to become a major market presence in Europe?  They toppled two governments in a month without eliciting a whisper of dissent.   I'd say the tentacles already reach to europe.  I think it is bigger than that.   they are goal-seeking the united states of europe.  

Sat, 12/10/2011 - 15:59 | Link to Comment Everybodys All ...
Everybodys All American's picture

they are goal-seeking the united states of europe. Wrong GS ... it's really a George Soros goal

Sun, 12/11/2011 - 11:10 | Link to Comment falak pema
falak pema's picture

well as long as it isn't a George Smiley 'Circus' goal, there is still hope.

Sat, 12/10/2011 - 13:42 | Link to Comment GMadScientist
GMadScientist's picture

They still don't get it; stagflation means uglier margins AND sales.

Sat, 12/10/2011 - 14:33 | Link to Comment GiantVampireSqu...
GiantVampireSquid vs OWS UFC 2012's picture

<===Biflation

<===Stagflation

Sat, 12/10/2011 - 16:52 | Link to Comment DormRoom
DormRoom's picture

Everything is interconnected--If Europe failes China implodes. If China implodes, BRICS implodes. If BRICS implode, US implodes.  If US implodes, Japan Implodes.

 

globalization is a daisy chain  feedback loop for prosperity or ruin.  Unfortunately for us, prosperity was based on unsustainable debt

Most analysis assumes equilibrium, but the feedback loop predicts otherwise.  Expect  ruin in the near term.

 

 

Cut out the cancer, so the host may live.

Sat, 12/10/2011 - 13:47 | Link to Comment dick cheneys ghost
dick cheneys ghost's picture

Things can only get BETTER when Goldman Sacks is DEAD..........

Sat, 12/10/2011 - 15:33 | Link to Comment OttoMBMP
OttoMBMP's picture

"BETTER" for the squid means successful bubble blowing.

Sat, 12/10/2011 - 13:49 | Link to Comment stopcpdotcom
stopcpdotcom's picture

Does this make sense?

"JP Morgan Crashed MF Global to Avert COMEX Failure, European Derivatives Implosion"

http://www.investorvillage.com/smbd.asp?mb=144&mn=87693&pt=msg&mid=11236893

Sat, 12/10/2011 - 17:04 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yes.  It buys the bank (with a lot of Physical Silver and Gold) time to keep their "holdingd" and any holdings that are actually owed to clients at MF Global and or use that physical to keep meeting orders for physical.  They will hide behind the forth coming ligation that will follow and take years to resolve.  Now is the time a "buy silver, crash JP Morgan" campaign might actually work  I simply don't know how much dry powder people have left.

Sat, 12/10/2011 - 13:54 | Link to Comment vegas
vegas's picture

How much would world GDP rise if Vampire Squid stopped making predictions for clients? I mean, if they stopped fading their clients so partners paychecks weren't linked to how many customers were fucked? Everybody pretty much knows the prop desks pay the bonuses.

 

http://vegasxau.blogspot.com

Sat, 12/10/2011 - 14:37 | Link to Comment GiantVampireSqu...
GiantVampireSquid vs OWS UFC 2012's picture

On that note, this article is extremely Bullish for 2012

Sat, 12/10/2011 - 13:57 | Link to Comment Yellowhoard
Yellowhoard's picture

Better watch out.

A collapse of the Euro could cause a "recession".

Sat, 12/10/2011 - 13:59 | Link to Comment no life
no life's picture

But say the ECB finally does print, wouldn't that send the Euro lower and the Dollar higher, causing the equity market to drop like a brick in the process. I mean, the ECB keeps saying it can't print due to the treaty, which is probally just code for something else.. that they don't want to print and have no intention to because it wouldn't be beneficial in the way everyone assumes.  It would probably drive up the market for one day.. but we'd have to be down huge to get that one day pop. They just let the market drop, and then 'guess who' steps in with the printing press.

Sat, 12/10/2011 - 14:15 | Link to Comment macholatte
macholatte's picture

wouldn't that send the Euro lower and the Dollar higher,

 

That would be the way of the world circa 20th century. However, since it is now the 21st century, robots control all trading, the rule of law is a fantacy and it is illegal for the USD to gain value, all scenarios are bullish for the EUR, the future reserve currency, because it is a model of stability.

 Collapse of PIGGS, Euro goes up.

Civil unrest, Euro goes up.

Total insanity, Swiss intervene and the Euro goes up.

Chaos, MSM publishes lies and Euro goes up.

War, Euro goes up.

There is no such thing as gravity. That is an illusion.

 WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH

Sat, 12/10/2011 - 14:20 | Link to Comment no life
no life's picture

They ain't gonna let us have the satisfaction of shorting the stinkin' Euro..

Sat, 12/10/2011 - 16:52 | Link to Comment LawsofPhysics
LawsofPhysics's picture

I would also add that another reason that the Equities might not go down is because many companies, especially financial paper-pushing fucknut companies, can book their revenues in euros or dollars and play the EUR/USD to their advantage no matter what.

It really is a club folks, and 99.9 % of us are NOT in it.

Sun, 12/11/2011 - 08:03 | Link to Comment Ghordius
Ghordius's picture

Gravity? It's at 1.425...
Just wait and you'll see

Sat, 12/10/2011 - 13:58 | Link to Comment non_anon
non_anon's picture

squid just frontrunning what we already knew

Sat, 12/10/2011 - 14:00 | Link to Comment vipmoneymachine
vipmoneymachine's picture

market pressure necessary for progress...

Is Goldman giving a hint to Ben Shalom Bernacke ? Stock market is the only proxy for Federal Reserve.

Sat, 12/10/2011 - 16:13 | Link to Comment gs_runsthiscountry
gs_runsthiscountry's picture

Goldman or Jamie Dimon or Larry Fink or Robert Rubin don't give hints. They simply pick up the phone and call Ben directly. The guys that run the joint don't F around by dropping hints or subtleties.

 

Sat, 12/10/2011 - 14:03 | Link to Comment Zero Govt
Zero Govt's picture

Goldman Sucks is bankrupt

taking guidence from these walking dead zombies is beyond stupid

Sat, 12/10/2011 - 14:05 | Link to Comment Snakeeyes
Snakeeyes's picture

Progress? Look at the various proposals to raid Fannie Mae and Freddie Mac for tax/favors. F&F are the NEW Social Security.  And look at the Isakson proposal - merge Fannie Mae and Freddie Mac into Ginnie Mae! Too Big To Privatize!!!!!!!!!!

Cash Cows on The Potomac – The Further Adventures of Fannie Mae and Freddie Mac

http://confoundedinterest.wordpress.com/2011/12/10/cash-cows-on-the-potomac-the-further-adventures-of-fannie-mae-and-freddie-mac/

Sat, 12/10/2011 - 14:09 | Link to Comment Atomizer
Atomizer's picture

Standard & Poor's Announces Changes in the S&P/TSX Canadian Indices

 

We must entice our clients to buy at the bottom, they will never see these prices again. Pump & Dump.

Sat, 12/10/2011 - 14:10 | Link to Comment A Man without Q...
A Man without Qualities's picture

Right - a break-up of the world's largest economic block (which WILL BE disorderly as there is no mechanism for exit) is only going reduce the S&P by 25%.  These guys are idiots....

Sat, 12/10/2011 - 15:24 | Link to Comment Right-on Left-off
Right-on Left-off's picture

Does the majority here still see Goldman as letting this catastrophe go to waste?

I don't and I think I detect Goldman egging it on.

If you are not part of the solution then you are part of the ..........

Sat, 12/10/2011 - 16:54 | Link to Comment LawsofPhysics
LawsofPhysics's picture

............0.1 %.  It really is a fucking club folks and 99.9 % of us are not in it.

Sat, 12/10/2011 - 17:24 | Link to Comment Boop
Boop's picture

Precipitate?

Sat, 12/10/2011 - 14:13 | Link to Comment Mark123
Mark123's picture

blah blah blah....was this written by a co-op student at GS?  This is written as if we are in a period of incredible stability.

 

I love their forecast of $100 for S&P earnings, versus consensus of $108 based on some variation in margins....wow, that is sooooo bold!  Sort of like the chief engineer on the Titanic focusing on the drag coefficient of the hull design as they plow into a massive iceberg that rips the hull to smithereens.....

Sat, 12/10/2011 - 14:17 | Link to Comment Stagflationary
Stagflationary's picture

I think GS have a special team that's largely made up of lower primates writing this stuff. 

 

Let's see.

You have two scenarios for S&P goes to 900 or 1250. 

Go and sell a crap load of 1255 calls. Make $130 or so on every one by the end of next year (or much sooner if the 900 scenario materializes), committing about $130 in margin. Since there's no upside scenario there's no risk!

That's 100% riskless return - why would anyone bother with "high quality stocks"?

Sat, 12/10/2011 - 14:27 | Link to Comment max2205
max2205's picture

GS won't go all in short until every last Bear is blow torched. Which I guess is the way we should all trade....

Sat, 12/10/2011 - 15:02 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

what, no bazooka, BiCheZ?

guard yer testicles from the squid's grasping tentacles!

was the squid resposible for THIS???

the annual Cannabis Cup was raided and shut down by amsterdam's finest (paste):

It seems that this year’s exhibition hall, Borchland, a new sports facility on the outskirts of town, accepted the High Times event without understanding it is an unabashed cannabis exposition.

Hager couldn’t say who had alerted the authorities, but some suspect it was the proprietor himself who was evidently freaked out by the massive consumption of cannabis on his premises and, fearful of being cited for smoking violations and other possible improprieties, called in the police to shut the thing down. [Crackdown at the Cannabis Cup » Counterpunch: Tells the Facts, Names the Names] (my emphasis on the freak)

L0L!!!  must.blame.squid:  are the banksters and their technocrappers anti-THC?  stay tooned...

and, TEPCO was also featured @ alex and jeffrey's: TEPCO: Fukushima Radiation Isn’t Our Problem » Counterpunch: Tells the Facts, Names the Names  in court, making the "legal argument" that since the radioactivity fell on your property, it's your problem(!) and...losing!

there are a few decent hits about #OWS there, also...

Sat, 12/10/2011 - 15:12 | Link to Comment Right-on Left-off
Right-on Left-off's picture

I said it several days ago in a post.  The sure thang is a Euro dis-association of sovereigns.  (that is already a foregone conclusion if not a conclusion already)   Repairing the Euro and Europe has a very high probability of failure.  Which side of the coin would you put your money on?  Euro Si or Euro No.

Goldman is in control with its x-goldmanites PM's in Europe and I dare say its shorts on anything Euro.

They will be there to cover and pick up the cheap-on-cheap pieces once the debacle is over.

Sat, 12/10/2011 - 15:37 | Link to Comment Stagflationary
Stagflationary's picture

Can you explain why it's a foregone conclusion that the Euro has a "very high" probability of failure? 

If that's true, why is it trading at more or less its long term average vs USD? Doesn't that mean the USD has exactly as high a probability of "failure"? 

Sun, 12/11/2011 - 08:15 | Link to Comment Ghordius
Ghordius's picture

Forgone conclusion in USUK, yes
Nof forgone in the EZ. Who usues the EUR more? You all talk about 325m people as if they would not exist, not produce, not export, not invest, etc.

Sat, 12/10/2011 - 15:26 | Link to Comment Schmuck Raker
Schmuck Raker's picture

OT: BIS Working paper of interest 12/9/2011

Perceptions and misperceptions of fiscal inflation

"It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations."

Others available here:

http://www.bis.org/index.htm

Sat, 12/10/2011 - 16:19 | Link to Comment onarga74
onarga74's picture

"We expect the situation to worsen before it gets better with market pressure necessary for progress

Scarecrow

 

Here's a fresh dose of reality from our friends across the pond...people yanking their money out of banks may be the next headline

http://www.telegraph.co.uk/finance/financialcrisis/8947470/Eurozone-bank...

Sat, 12/10/2011 - 16:55 | Link to Comment YesWeKahn
YesWeKahn's picture

Last time they were expecting a sell off, the s&p ran up from 1200 to 1350. I don't believe their bs.

Sat, 12/10/2011 - 17:20 | Link to Comment riley martini
riley martini's picture

" Stocks that continue tro work " JPM down 20% YTD , WFC down 12% YTD. Works when it's other peoples money and you collect a fee .

Sat, 12/10/2011 - 18:01 | Link to Comment bugs_
bugs_'s picture

"We expect the situation to worsen before it gets better"

Could Goldman be right this time?

Sat, 12/10/2011 - 22:16 | Link to Comment RiverRoad
RiverRoad's picture

Whoa!  So now we here at ZH are serving Goldman's purpose????  Ugh....Barf.

Sun, 12/11/2011 - 12:19 | Link to Comment ejmoosa
ejmoosa's picture

Quarterly year over year profit growth is already at it's lowest point since this "recovery" began.  One year ago, year over year quareterly profits were up more than 44%.  Today we are at less than 6%.   What do we keep hearing?  Things are good because we have record profits in the latest GDP report.  I am calling BS on that.  Just wait for the reveisions...down.

 

We are already below the threshold for adding jobs in the private sector in twelve months.

 

The last people to acknowledge we are in a recession are the same ones that will tell us they have the methods to get us out of it.  

Sun, 12/11/2011 - 19:23 | Link to Comment automato
automato's picture

The market outperformance of the 80's, 90's and beyond is DONE! Put a fork in it. Only the wealthy will continue to invest in the Market. Everyone that I know who works a regular job and has a 401K has forever given up on equities after having lost so much and intends to get as much out as they can as early as they can. Fool me once, shame on you! The tsunami in exits from equities and Mcmansions is just begining and won't peak for 2-5 years on the outside to 6 months to 2 years on the inside depending on whether the panic sales cascade or dribble. In the Pacific Northwest home owners are terrified to try and sell their homes and all the real estate mags are only a few pages in length. It's the calm before the avalanche as sellers are afraid that they will get low-balled into bankruptcy. If you check Zillow you will see houses of every price on the market where the seller lowers the price 10, 15, even 25 percent only to take the home off the market and start all over again at the original no-sale price! Let's face it, ALL MARKETS are virtual PONZI schemes in that they require demand/inflows to exceed outflows. The markets may eventually stabilize but it will be like the 50's and 60's when it is done. Only the well-off will be trading with each other which will result in very slow growth and the rest of us will be renters living as larger family units inc. several generations under one roof. At least kids will get to really know their grandparents as they will be living and raised by them as any one old enough to find a job will be working/looking. Maybe I will finally be able to get someone to cut my grass or shovel the snow from my sidewalk without it costing a fortune!

Do NOT follow this link or you will be banned from the site!