One has to give it to Goldman Sachs: the bank which until a few years ago just couldn't lose a penny, is about to report earnings which will, even if they beat Wall Street's estimate, be an embarrassment to the bank that openly used to run the world until very recently. The reason, aside from the moribund economy, is that trading volumes have plummeted at an unprecedented pace as i) nobody trusts the centrally-planned capital markets any more and ii) valuations are, despite what permbulls can say on TV stations with record low viewership, so ridiculous few if any would actually go long here.
But the one area what Goldman has retained its swagger is its muppet-crushing talents. Because while Tom Stolper may have left the bank, much to the sorrow of FX traders everywhere, the bank is still second to none when it comes up to fabricating ridiculous narratives that are simply meant to baffle with bullshit what few clients Goldman has remaining, and hopefully, Corzine their money in the process.
Case in point: while Jan Hatzius once again declared the arrival of the above-trend growth for the US economy just as everyone else slashed their GDP forecasts for the year (it won't be the first time - he did the same just after Tim Geithner's idiotic "Welcome to the Recovery" oped, which lasted all of 3 months before Goldman recanted), Goldman lowered its year-end yield forecast by 25 bps to 3.0%. So.... a stronger economy that is getting weaker on a terminal basis? Brilliant.
But that's nothing. One has to read today's piece from Goldman's David Kostin to realize just how ridiculous Goldman's attempts to spin what has become a total farcial fraud of a market (just one word here: CYNK), and a completely broken economy (remember the business cycle and recessions in the day before ZIRP and QE? good times...) to realize just how far beyond the pale everything is.
Recall that it was David Kostin who in January admitted that "The S&P500 Is Now Overvalued By Almost Any Measure [15]." It was then when the Goldman chief strategist admitted there was only 3% upside to the bank's year end target of 1900. Well, that hasn't changed. In his latest note Kostin says that "S&P 500 now trades at 16.1x forward 12-month consensus EPS and 16.5x our top-down forecast... the only time S&P 500 traded at a higher multiple than today was during the 1997-2000 Tech bubble when margins were 25% (250 bp) lower than today. S&P 500 also trades at high EV/sales and EV/EBITDA multiples relative to history. The cyclically-adjusted P/E ratio suggests S&P 500 is now 30%-45% overvalued compared with the average since 1928."
In other words, rarely has the market been more overvalued. So at least that much of the Goldman plotline is still valid.
Furthermore, as Kostin says, "Goldman Sachs fixed-income strategists recently lowered their year-end 2014 bond yield forecast by 25 bp to 3.0%." One doesn't have to be a rocket scientist to know that yield forecasts don't go down when the economic forecast is improving. Quite the contrary. And here is where the first break in logic appears: "The improving macro data prompted our US economists to pull forward their projection for the first hike in the federal funds rate to 3Q 2015 from 1Q 2016." Yes, apparently it also prompted them to cut their 10 Year yield forecasts.
But where everything just goes full retard is here: "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."
Wait, what???
So Goldman admits the market is up to 45% overvalued and that the economy is slowing down, thus cutting its yield expectations, and this leads to a... 150 boost in the firm's S&P500 year end target?
Clearly, this is idiocy. What's worse, is that this is merely goalseeked idiocy as Goldman realizes none of its valuation metrivs matter in a broken, centrally-planned market and all that matters is the endless liquidity infusion from the central bank cartel. But what is worst, is that Goldman is fully aware this kind of "forecast" will merely lead to riotous laughter with any of the "smart money." Thus the fact that Goldman Sachs no longer cares about that reaction, and thus, its reputation, is the most troubling of all...
Here is the weekend humor from David Kostin. First, the summary:
US equities soared 42% during the past 18 months but the stellar return borrowed heavily from the future. History shows S&P 500 rallies and the P/E multiple expands during the year prior to the start of a tightening cycle. But after tightening begins, the multiple contracts and the index typically delivers only modest returns. Incorporating our lower 10-year US Treasury yield forecast with other valuation approaches, 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. Our year-end 2015 and 2016 targets remain unchanged at 2100 and 2200.
And the full breakdown in which one can almost feel Kostin's humiliation at having to pen such moronic drivel.
The bulk of the 7% S&P 500 YTD return stems from earnings growth. Multiple expansion has contributed only a small share of the 2014 return. In contrast, P/E expansion powered nearly three-quarters of the full-year 2013 return of 32% while EPS growth generated a small share of the price gain.
Looking ahead, our top-down EPS estimates of $116 in 2014 and $125 in 2015 represent annual growth of 8%. Bottom-up consensus EPS growth is exactly in-line with our 2014 forecast. However, analysts expect 12% growth in 2015, which is 400 bp above our expectation.
S&P 500 now trades at 16.1x forward 12-month consensus EPS and 16.5x our top-down forecast. Note the current high P/E multiple coincides with record high profit margins that have remained static near 8.9% since 2011. In fact, the only time S&P 500 traded at a higher multiple than today was during the 1997-2000 Tech bubble when margins were 25% (250 bp) lower than today. S&P 500 also trades at high EV/sales and EV/EBITDA multiples relative to history. The cyclically-adjusted P/E ratio suggests S&P 500 is now 30%-45% overvalued compared with the average since 1928.
However, viewed in relation to bond yields, the US equity market still appears attractively valued. The classic interpretation of the Fed model closes the gap between the forward earnings yield and bond yield to the long-term average spread. Goldman Sachs fixed-income strategists recently lowered their year-end 2014 bond yield forecast by 25 bp to 3.0%. If the yield gap converges from the current 370 bp to 300 bp by year-end 2014 (midpoint between the trailing 10- and 20-year averages) the Fed Model would imply a year-end 2014 S&P 500 fair-value of 2080, roughly 5% above the current level. It also implies a stable P/E multiple of 16.0x (see Exhibit 1).
[16]
Oh, the Fed model... Right. The same "model" which says that if there is a deflationary collapse, and 10 Years trade negative, then S&P should hit +infinity. No really. Look at the bottom left square: apparently all it takes for the S&P500 to hit 3,560 is for the 10 Year to trade at 2.0%. One can't make this up!
Incorporating our lower 10-year US Treasury yield forecast with other valuation approaches, we lift our year-end 2014 S&P 500 price target to 2050 (from 1900) and 12-month target to 2075 reflecting prospective price returns of 4% and 6%, respectively. Our year-end 2015 and 2016 targets remain unchanged at 2100 and 2200, respectively.
US equities soared 42% during the past 18 months but the stellar return borrowed heavily from the future. We expect the equity rally will continue, but the trajectory will be shallow. Domestic economic growth is accelerating, and earnings will continue to rise, but further P/E multiple expansion is unlikely given our and the market’s expectation for a Fed hike within 12 months. The improving macro data prompted our US economists to pull forward their projection for the first hike in the federal funds rate to 3Q 2015 from 1Q 2016 (see US Views: An Earlier Hike, July 6, 2014).
History shows the S&P 500 rallies and the P/E expands during the year prior to the start of a tightening cycle. But after tightening begins, the P/E multiple contracts and the index typically delivers only modest returns.
Our forecast S&P 500 next-12-month return of 6% is similar to the historical example leading up to previous “first hikes.” S&P 500 posted an average return of 17% during the 12 months prior to the three previous Fed hikes in 1994, 1999, and 2004. Excluding Tech, the average return was 12% and the median S&P 500 stock rose by 13% (see Exhibits 2 and 3).
Historical experience supports cyclical sector positioning. Information Technology is the only sector that outperformed the S&P 500 in advance of each of the three recent tightening cycles, although its historical average return is inflated because the second episode coincided with the Tech bubble. Materials and Industrials outperformed preceding two of the three examined hikes, while defensive Health Care, Consumer Staples and Utilities sectors underperformed in all three episodes. Consumer Discretionary historically has not posted strong returns prior to hikes but we expect the sector will outperform this time as the labor market continues to improve.
It wouldn't be Goldman, of course, if the firm's clients didn't lose money. So putting all of Kostin's brilliance to the P&L, led to this:
We close our recommendation to buy Russell 1000 Growth vs. Value. The trade returned 300 bp from initiation in November 2013 through February 2014, but suffered as investors fled high growth and momentum stocks in late 1Q. In total the trade returned -50 bp (11.6% vs. 12.1%). Growth stocks typically outperform when economic growth slows, which is contrary to our expectation in 2H 2014. Our Growth factor has also posted unremarkable returns prior to the start of previous rate hiking cycles.
So a loss. But don't Goldman has another reco. Buy crap. Seriously.
We expect “low valuation” stocks will outperform ahead of next year’s tightening. Exhibit 5 lists the 50 S&P 500 firms across all ten sectors with the lowest valuation. “Low quality” stocks should also outperform as the economy improves. Our Micro Equity Factors indicate stocks with weak balance sheets, low returns on capital, low margins, and high volatility have outpaced their “high quality” peers since early 2013. In 2H 2014, we recommend investors buy a portfolio of S&P 500 stocks with weak balance sheets (Bloomberg: GSTHWBAL Index) vs. strong balance sheet peers (GSTHSBAL). The long/short strategy generated a 50% return during the past 24 months. We recently rebalanced both of these sector-neutral 50-stock baskets (see US Weekly Kickstart, May 16, 2014).
Which is ironic, because that is precisely the trade we said to put on... about 24 months ago [17]when we said the only way to make money in this farce of a market was to go long the most worthless names. Thanks Goldman for finally catching up to us.
And to think people accuse us of being permabearish.
In sum, after reading such garbage, it is impossible not to feel bad for Wall Street's best paid "strategists" (and certainly those working for the bank that formerly controlled the world): if they have to resort to writing such bullshit, then the end must truly be nigh.
