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Chartology: When The Kool Aid Runs Low, Pour Some More

Courtesy of Tyler Durden

As the market tumbles, what does Goldman do? “We are raising our 2010 and 2011 operating EPS estimates to $78 and $93 (from $76 and $90) to reflect strong 1Q results and better net margins than we had expected. Our pre-provision and pre-writedown estimates are $83 and $93 reflecting growth of 15% and 12%. Our 3-month, 6-month, and 12-month S&P 500 forecasts equal 1160, 1250, and 1300, respectively, corresponding to 5%, 13%, and 18% returns.” In the meantime clients continue to lose money both on Goldman’s recommended longs and shorts: “Our recommended sector weightings have generated -14 bp of alpha YTD. Our overweight recommendations (Energy, Materials, Info Tech) have generated -33 bp of alpha while our underweight positions (Health Care, Consumer Staples, Utilities, Telecom) have generated +18 bp of alpha.” But, David Kostin will be right about the S&P dammit. Also, here is how Goldman will lose clients even more money: a whole new set of unhittable targets: “Our 3-month, 6-month, and 12-month S&P 500 forecasts equal 1160, 1250, and 1300, respectively, corresponding to 5%, 13%, and 18% returns.”

Some more amusement. We read:

Our 2010 Outlook report (published Dec 7, 2009) was sub-titled Cyclical start, defensive finish. We forecast the S&P 500 would start strongly and fade later in the year. Specifically, we anticipated the S&P 500 would trade towards 1300 as sustained low interest rates benefitted risk assets and strong growth in the BRICs economies persisted as a dominant macroeconomic theme. We anticipated during the second-half of 2010 investors would increasingly focus on the timing and path of the Fed’s tightening cycle. We viewed the prospect of higher rates would retard further advances in the equity market and anchor the S&P 500 near our year-end target of 1250.

Although the market touched a high of 1217 in late April, it has declined to a level where reaching 1300 by mid-year 2010 would require the S&P 500 to surge nearly 20% in five weeks, a prospect that seems remote at this time.

Several developments have caught us by surprise so far in 2010. We certainly did not anticipate that developed market sovereign credit risk would rank ahead of China economic growth as the critical global economic issue of the year. We also miscalculated the impact of politics on the markets. If “all politics is local,” as former Speaker of the US House of Representatives Tip O’Neill famously observed, then in the global village of the 21st century, politics – like capital – has no borders. Decisions made in one jurisdiction have immediate (and often unintended and undesired) consequences for others. This is the true lesson we learned in 1H 2010. [you only learned this now?????]

We introduce 3-month and 6-month interim price targets for the S&P 500 to provide our view of the likely path towards our 12-month DDMbased estimate of fair value. Our near-term forecast for the stock market mirrors those made by our colleagues in Global ECS Research (Economics, Commodities, and Strategy) for FX, commodities, interest rates, and the other major global stock indices. Forecasting short-term equity market returns is difficult, particularly given recent high volatility. Our interim price targets incorporate recent trends in financial conditions, earnings revisions, market trading patterns, historical conditional return distributions, forwardlooking views from the options market, and our gauge of investor positioning and sentiment based on our client conversations.

Our 3-month, 6-month, and 12-month S&P 500 forecasts equal 1160, 1250, and 1300, respectively, corresponding to 5%, 13%, and 18% returns. Options currently imply a 40% probability the S&P 500 will reach our 3-month target, suggesting we are more bullish about a  recovery than market expectations. A 3-month return of 5% would rank in the 64th percentile of 3-month returns since 1950, conditional on a trailing 1-month return in the -5% to -10% range that we have just experienced.

As for the realists out there:

Client forecasts: Goldman Sachs hosted its 13th annual hedge fund conference this week in New York (May 26th). We polled participants on their expected equity market returns for 2010. 48% of hedge  fund clients expect the S&P 500 will return between 1% and 10%. Just 3% of clients forecast equity returns greater than 10%. An additional 15% of participants forecast flat returns (between -1% and +1%), 23% estimate returns of -1% to – 10%, and 11% believe losses will be greater than -10%.

In other words 97% of the smart money thinks the market will not generate more than a 10% return.

 


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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!