Back on March 21, Goldman's Peter Oppenheimer released the "Long Good Buy, The Case For Equities", which was Goldman's subversive attempt to rally equity into buying all the stocks that Goldman had to offload, as well as buy all TSYs that GS clients had to sell. Needless to say, Goldman top ticked the market and stocks have tumbled ever since, even as the 10 Year soared from 2.5% to the current ~1.75%. So what? Well, this morning the same analyst, precisely two months on the anniversary of his "once in in a lifetime" stock buying opportunity, has released a new report with the paradoxical header: "Near-term risks are to the downside." But, but... Anyway, that's all the market needed to grasp that Goldman's prop desk is now buying every piece of risk not nailed down hand over fist as the June FOMC meeting is now the D-Day. Futures have soared ever since.
Some of the reverse psychology findings in the note:
Equity markets around the world have now mainly reversed the short-lived optimism of the first quarter and the MSCI World index is flat on the year. The brief but powerful rally was triggered by an improvement in sentiment as concerns that troubled investors through 2H 2011 appeared to moderate. A rebound in the global leading indicators and positive data surprises, particularly in the US, eased fears of contagion from the European sovereign crisis into the rest of the world. Meanwhile the LTRO, and some progress in discussions over the fiscal compact in Europe, dampened the perception of systemic risks in the European banking system. Central banks also played a part by introducing a number of measures that both helped to bolster confidence as well as ease financial conditions.
Taken together it is understandable that equity markets have weakened and, once again, the few bond markets that are still perceived to offer ‘risk free’ returns have seen yields fall to new lows. We also have concerns about equity markets in each of the major regions that we cover in the near term but, at the same time, recognize that valuations are generally attractive and reflect a great deal of distress already. In most regions our 3m forecasts imply relatively flat or slightly higher markets from current levels. However, little visibility is likely to emerge any time soon and we worry that markets move to price in more risks in the short term before any recovery can take place.
In the US, David Kostin and team have argued that the near-term prospects for the market are poor given the combination of very weak profit growth this year and next (3% and 6% respectively), a peak in profit margins, and a sustained period of below-trend economic growth. Our Economists expect 2Q GDP to slow to around 2%. On top of this David and team have argued that investors will increasingly focus on the impact of the fiscal cliff. Our Economists estimate that if Congress fails to address these issues at year-end, fiscal policy will weigh on growth by nearly 4 percentage points in the first half of 2013. While our base case assumes that fiscal restraint will reduce growth by 1 percentage point next year, it is still likely to present a reasonable headwind to growth and therefore earnings. It is unlikely in this environment that US equities will enjoy any multiple expansion.
In Europe our concerns over the economies are more structural than cyclical. Nonetheless the aggregate Eurozone economy, which continues to stagnate (and is likely to continue to do so through to the end of 2013) masks a pattern of growing underlying divergence. German activity continues to surprise on the upside while growth in the periphery continues to weaken by and large. These differences are somewhat inevitable and, when we benchmark the market against activity indicators, are largely discounted. In Europe, for example, we estimate that equities are pricing Euro area PMIs to now stabilize at the mid 40s and for GDP to contract by around 0.5% this year, in line with our Economists’ forecasts.
But it is the political tensions in the near term in Europe that we think present the greatest risk relative to what is being discounted in equity markets. The forthcoming Greek election, now scheduled for June 17, is an obvious possible flash point. While the majority of parties and, according to polls, the vast majority of Greek people, want to stay in the Euro, the risk is high that the election results in a government that wants to renegotiate the new Memorandum of Understanding reached earlier this year with the ‘Troika’. With the rest of Europe holding a firm ground against re-negotiation, investors are increasingly worried about the impact of a possible Greek withdrawal.
Ultimately, many of the risks to the downside from here, whether in Europe or the US, are largely dependent on political developments and possible policy responses which are inherently difficult to forecast with any high degree of conviction. While our feeling is that the risks in the short term are to the downside, we have higher conviction in relative thematic views than directional ones over the next three months. Similarly, the valuation arguments make us more positive over a 6-12m horizon, particularly in Asia and Europe.
We all know the drill: reverse reading Goldman means short term spike as expectations of more imminent easing from the Fed or ECB spike, and then a gradual downdraft as the realization that the 4th time is not different dawns on everyone yet again. Rinse. Repeat. And always do the opposite of what Goldman says.