The Muppets Are Confused How Goldman Is Both Bullish And Bearish On Stocks At The Same Time

Tyler Durden's picture

Ten days ago, Goldman's Peter Oppenheimer published the "Long Good Buy, The Case For Equities", a big research piece, full of pretty charts and witty bullets, which actively urged the rotation out of bonds and into stocks, yet not only marked the peak of the market so far, but drew ridicule even from the likes of CNBC. More importantly, it has generated a plethora of questions from the muppets (aka Goldman clients) themselves, who are wondering how Goldman can be both uber bullish, and yet still have a 1250 S&P 2012 YE price target, as per the other strategist, David Kostin ("We expect the S&P 500 will trade at 1325 by mid-year (-5.6%) and 1250 in 12 months (-10.9%)."), or said otherwise, just how is it that Goldman is having its cake and eating it too? Below is David Kostin's attempt to justify how the firm can pull a Dennis Gartman (and virtually any other newsletter and book seller - after all what better way to say one was right than to have all bases covered) be both bearish and bullish at the same time.

From Goldman's US Weekly Kickstart

Last week, Peter Oppenheimer and our European Portfolio Strategy team published "The Long Good Buy; the Case for Equities" in which they conclude equities are attractive for three reasons: (1) Periods of poor real returns in equities tend to be followed by periods of significantly higher returns; (2) equity valuation appears low versus bonds; and (3) an elevated equity risk premium (ERP) supports a long-term positive view for stocks.

We agree with the long-term thesis. Investors willing to position for a normalized growth and risk environment over the next decade should interpret high ERP and low implied growth as an investment opportunity.

However, path matters and our price targets reflect short-term tactical risks. We believe equity valuation will remain below average over the next year due to stagnant economic growth and high uncertainty. Both views can comfortably co-exist in the context of different investment horizons.

S&P 500 currently trades above fair value on a variety of metrics although the index is attractively valued relative to bond yields given the low interest rate environment. Equity investors fall into many categories and we believe views are currently most differentiated between equity-focused vs. cross-asset investors and short- vs. long-term investment horizons. Investors that actively invest in multiple asset classes and/or can look past near-term risks are generally more positive on US equities.

Last week we published three US Equity Views reports on valuation of equities vs. bonds, dividends, and S&P 500 today vs. 2007 peak. We address below questions clients raised most frequently:

Q: How do global markets currently trade relative to their previous peaks?

A: S&P 500 trades 10% below its 2007 peak, Asia-Pacific ex-Japan is 26% below, Europe is 35% below and Japan is 53% below. TOPIX is 70%  below its 1989 level. The level of earnings has recovered and stands at new highs in both US and Asia-Pacific ex-Japan. However, earnings are well below 2007 peaks in Europe (15%) and Japan (50%).

In contrast, the expected earnings growth rates increased in Japan (13% to 50%) and are unchanged in Europe at 8%. Forward EPS growth rates have declined in US (13% to 9%) and Asia-Pacific ex-Japan (17% to 13%). Every region has de-rated and remains below 2007 peak levels. Asia  Pacific ex-Japan has experienced the largest P/E de-rating despite having the largest forward EPS growth. Earnings grew by 18% but the forward multiple fell by 34% to 11.4x from 17.3x. MXAPJ is 26% below its 2007 peak.

In Europe, the Stoxx 600 is 35% below its 2007 peak. Performance can be attributed to both multiple contraction and lower earnings given the expected forward earnings growth has remained unchanged.

In Japan, TOPIX sits 53% below the 2007 high. The collapse in earnings, which are 50% below the 2007 “peak,” and multiple contraction of 28% are negative impacts to the Japan market level. Relative to the 1989 peak, earnings are flat, but the multiple has compressed by 73%.

Q: Do buybacks and issuance affect 2007 and 2012 EPS comparisons?

A: S&P 500 EPS is the sum of all constituent earnings divided by the index divisor. Company-level earnings are calculated as the EPS of the firm multiplied by the company’s float-adjusted share count. The earnings contribution of a firm earning $2 per share with 50 shares is the same as a company earning $1 per share with 100 shares. The divisor is also adjusted on share changes, and this can affect index-level EPS. We can remove this by calculating earnings growth rather than EPS growth. S&P 500 LTM earnings are 9% above the 2007 level while EPS grew 6%.

Q: Earnings and margins recovered. Where are sales relative to peak?

A: S&P 500 trailing four quarter EPS and margins peaked in 2Q 2007 but sales, both including and excluding Financials and Utilities, peaked 15 months later in 3Q 2008. Full-year 2011 sales excluding Financials and Utilities are 16% above 2Q 2007 levels but 1% below 2008 peak levels.

Q: Isn’t EPS growth just the result of higher margins from cost cutting?

A: Comparison of full-year 2011 earnings, sales, and margins versus 2007 peak suggests higher sales, not margin expansion, drove the majority  of EPS growth. This is because sales and earnings (excluding Financials and Utilities) peaked together in 3Q 2008. Full-year 2011 sales remain just below 2008 levels, but earnings reached new highs, driven by margin expansion.

Q: Despite the valuation-driven rally, the S&P 500 trades below the 10-year average P/E. How is the market valued using other metrics?

A: With a forward P/E of 13.2x, S&P 500 trades one standard deviation below its 10-year average. S&P 500 trades between 0.5 and 1 standard deviations attractive using most valuation metrics we track (see Exhibit 4). Historical average valuation would imply a rise in S&P 500 of about 14% to 1600.

However, we don’t view mean reversion as appropriate given margins have started to fall from record levels and US GDP is growing below trend.

And now you know why one can be both bullish and bearish, while soaking up million in soft-dollars.

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ZeroChance's picture

Send in the Muppets!


Turn those machines back on, sell, sell ... er .... BUY, BUY, BUY!  You idiots...

prains's picture

When the Algos take over the polling stations in November everything will be fixed /s/

nope-1004's picture

Confusion Muppitchez!

HFT churn is being thrust upon retail.  Goldman meant to say "buy and then sell in a nanosecond", then rinse and repeat.


knukles's picture

Muppets confused?
If you're confused, you deserve to be called a muppet.
And in the wrong fucking business.
Maybe get a job in Gullible.


Sathington Willougby's picture

Gullible is hiring these days, it's a bubble that may never burst.

The Alarmist's picture

I'm sure our GS account exec was calling us muppets right up to the day we fired them. I will say, however, that aside from an incredible talent for losing its institutional clients a lot of money, their back office and reporting were great.

Fred Hayek's picture

Other than that, how was the play, Mrs. Lincoln?

Seasmoke's picture

this is how the 1-900 sports touts used to do it......promise inside information and a lock winner......then give half the suckers Kentucky and other half of suckers Louisville....guaranteed to bring back half the group back paying again for more inside information.....and if they were really lucky someone would win at the buzzer and they could sell the hardluck losers again next game

1C3-N1N3's picture

So GS actually can halve their (muppets') cake and eat it, too.

The Alarmist's picture

Green arrow because that is splendid word play!

Yen Cross's picture

As long as the " Muppets" stay on the sidelines, The Vampire Squid leaks 'Inc.'

alexwest's picture

thats easy...



AssFire's picture

Muppet?.."Yep, a muppet with a dick this long!" (arms outstretched)

l1b3rty's picture

who wouldn't be confused at this mess of a system unless they knew it was a NEO-soviet

BrokeDayTrader's picture

Goldman is full of stinking rats.  I don't trust any of them, all their calls are bullshit designed to obfuscate and confuse daytraders like me.

Yen Cross's picture

I really like : Exhibit #4 Tyler ( Trailing P/E's).  Lower Right corner.

 I'm sure CNBS is on that one? /sarc

Clayton Bigsby's picture

On a long enough timeline, the muppet rate for everyone approaches 1.

Caviar Emptor's picture

As a former muppet myself, I find that Goldman being both bullish and bearish is totally understandable. 

See, I've come to expect my financial advisers to be like the mafiosi down the street used to be for my grand-father: a one-stop shop for all your financial needs: loan sharking, book making and a little extortion on the side. Making bets on stocks, and borrowing on margin at loan-sharking rates (free money for them in a ZIRP environment) plus paying "tribute" as you get in and out of stocks is all part of playing the game. 

As we all know, the real way to play this game is to be the bookmaker/loan-shark/extortionist. All the rest of the muppets are just happy to have their heads still frmly connected to their shoulders. 

DormRoom's picture

Whatever direction AAPL goes, so will the markets, since everyone is on that Titanic.


As an aside, not many phenomena in the universe can sustain exponential growth, like AAPL share price.
Dont' know when the momentum will turn, but turn it must, unless we really do live in a bizarro world.


I wonder how many investors bought AAPL on margin, or using AAPL gains to support other margin plays.  So if AAPL goes the other way, margins will be called, and a chance of widespread market selling.

Yen Cross's picture

  I thought  [ Saturdays]  were  SACROSANCT!

Caviar Emptor's picture

oops: Donald Trump sons under investigation for illegal African hunting...(money talks)

AN0NYM0US's picture

Donald Trump sons under investigation for illegal African hunting...(monkey talks)

The Alarmist's picture

They were hunting Africans? That's just not right, dude.

Atomizer's picture

We have live network stream coming from Lloyd ‘Jambi the Genie‘ Blankfein Playhouse in 3,2,1.. Beep…  


Listen here you fucking worthless muppets, repeat after me.


meka leka hi meka hiney ho!

Atomizer's picture

The old trick. Funding two sides and make money off the bets. The fraud is plain as day.

no life's picture

They have to crash the market in order to herald in QE blah-blah.

non_anon's picture

who will win, the Muppets or the BSD's?


Metallica/Master of Puppets

cosmictrainwreck's picture

In Goldman's "explanation", para 2:

"agree with the long term thesis......investors...over the next decade..." You gotta be SHITTIN' me. WTF a decade? What about the intervening 9 years, let alone the next 6-18 months. Imbeciles.

Yen Cross's picture

 As much as I hate to ( explain)  Commodities are priced - In Global Fiat-  Yes I submitted/ after loading my " Shot Gun"...

Tsar Pointless's picture



Yen Cross's picture

 For Christs Sake! I just spent 17 hours in a ( cigar tube)!  Can't you all see the writing on the wall?

   Singapore is slowing! Look at the carry trade!

       Japan suddenly comes on line? South Korea?

Paramount leader's picture

how you gonna get bulls to trade if your bearish

how you gonna get bears to trade if your bullish

how you gonna get sheeps to trade.. oh wait

Yen Cross's picture

  I have been a [ BEAR] from day1!  Look at my past posts!

bingaling's picture

what a game everyone will lose in the end

maxw3st's picture

How is Goldman bullish and bearish at the same time? Easy, you want to buy something they'll be happy to sell it to you - short.


Yen Cross's picture

 A great tune.  Don't Fear the Reaper <> Blue Oyster Cult

donsluck's picture

Sorry to dock you one point, but it's "Don't fear the REEFER", true story.

Yen Cross's picture

  Thanks for looking out for me     I'm not into pot


Yen Cross's picture

 The Huff and Puff is ( Full Retard-ed) 

I should be working's picture

Goldman is smart enough to know that P/E has no correlation at all with forward returns. If you want plot P/E vs. forward one year return in Excel, R2 = 0.05 or something like that. PEG is probably even more meaningless. The market goes up or down based on earnings increasing or decreasing, not the absolute level. Ben Grahm figured that out long ago, I suppose Goldman is still catching up. No one can predict where the market will be at the end of the year. Based on 10 year cape we are overpriced. Based on government money printing we are very overpriced. Sell before twist is over, then wait for the other shoe to drop.

I should also note that an operation twist was run by the Federal reserve before.  It began in late 1961 (after a market crash) and ended in 1965.  After the program ended the market declined significantly.  Look at a chart from 61-65, any resemblance?  1200-1250 sounds about right to me.

Dr_Lucid's picture

If Tyler doesn't do it I will.  Someone needs to make a T-shirt with the ZH logo on front, and then on the back in large block letters :




Then get a picture of Statler and Waldorf on one side, the Goldman tower in the backdrop and maybe Beaker and Kermit running for their fucking lives.

Yen Cross's picture

 Everything was born of my ( GARAGE)!   Stacked matresses/ and c/Kool girls that gave me Great Ideas!

   Women rule! I love them! I get along with them!

                                                     IRON MAN 3

Sathington Willougby's picture

If I ever get this hand outta my why I'm gonna...


optiondude's picture

The problem is people have been saying that for years now. And, by all means the miners should outperform physical at some point. But specualting on when that might happen has been a rough gig for miners bulls. I used to be in that camp but I gave up on that play. I've always been one to enjoy playing both ups and downs on any asset anyway. Especially down one of those bitter libertarian types :p (not really, just making fun though I am libertarian I guess...or anarcho capitalist more likely).

Have you tried binary options? Frankly most don't do so well because they treat it like gambling but if you treat them with the respect any financial instrument deserves you can do quite well. I've trading them since they got listed around mid 2008 and am decidedly an enthusiast. Of course, institutional investors and investment banks have been trading them for decades but it's only recently available to us mere mortals lol

You can find some more information here and of course through the all-seeing all knowing google.


rsnoble's picture

Week or 2 ago GS says markets are only going to go up from here and stocks are cheap.