When Goldman Talks, Investors Listen

For the past two months, I have made the argument that above consensus macro economic data would lead to above consensus earnings results and that investors would see the evidence of this as 2Q09 earnings season got underway. Based on the reports issued thus far, this argument has won the day as above consensus earnings results have matched the above consensus macro economic reports preceding them. Accordingly, stocks responded.

The second part of my argument was that such positive data would eventually encourage bottom up analysts (along with many investment strategists and top down economists) to reassess their more cautionary views and begin to raise their full year earnings expectations for this and next year. This, too, has begun to occur – none more significantly than from the investment strategy folks over at Goldman.

In a research report published yesterday, the Goldman strategists raised their estimates of S&P 500 operating earnings for this and next year - from $40 to $52 and from $63 to $75, for 2009 and 2010, respectively. In the process, the group estimated the target fair value for the S&P 500 at 1060 – ten points above my best guesstimate for the year (as reported in the Wall Street Journal on December 30, 2008) and my more evolved view of the same number based on the simple math of the historical average P/E of 15 times a mid 2010 estimate of $70 = 1050. As John McLane (“Die Hard”) might say, “Welcome to the party, pal”.

With Goldman in tow and many fence-sitting traditional money managers and individual investors being forced to reconsider the wisdom of leaving $3.5 trillion in money market funds earning 0.1%, the more meaningful investment strategy question is “Where are we in the stock market cycle?”

Investment Strategy Implications

As expressed in this week’s research report to subscribers, stocks are clearly in extreme overbought territory at the top end of the range. A completed bottom has not occurred. Therefore, stagnation (at best) or a pullback (most likely) appears to be in the very short-term offing for stocks.

That said, each week provides more evidence that the global economy has moved further away from the economic abyss of early March. Now that monetary stimulus and creative governmental action has done its work, the bulk of the fiscal stimulus package (conveniently timed for the 2010 election cycle) will provide the needed power to move the economic needle from stabilization to growth.

Aided by the global growth story (from emerging economies) as well as the likely positive forces of the wealth effect (from higher financial asset values), corporations, having demonstrated their ability to manage solid results in times deep economic distress, should be able to generate very satisfactory earnings results in an overall improving global economic climate - including a modest contribution from the US consumer.

So, where are we in the stock market cycle?

Stocks appear to be well into a transitional phase – one in which sector (style, country, and regional) rotation will (must?) produce the new leadership necessary for a new bull market to sustain itself to 1050 and beyond. The rotation to new leadership coupled with a completed bottom are the stock market signs most worthy of investor attention.

Comments

[Henry Buttal:]

Vinny,

Interesting thoughts, and with a strong set of posts over the last couple fo months to support it
While I am a fence straddler right now, and would like to see the S&P break and hold 960 to make me a believer, I think this projection is not unreasonable by the end of the year.

Unfortunately, I also look to see one more test of the 890/900 level before we get there.

Jul 21 06:39 PM

[Warm_Paw:]

No Way
No Jobs.
If the consumer has been living off the home equity loan, there's no savings to use to purchase those big ticket items which stimulate the economy.
Next, things are about to inflate in a big way...EXCEPT WAGES.
Competing with globalization has wages going the other way. A person is fortunate enough to have employment.
The weird twist is that real estate will devalue to a more reasonable price value in relation to wages even while consumer purchases inflate.
The combination of the two effects means all that debt everyone owes will seem smaller in relation to the increase in the price everything will cost. Therefore they'll be able to max out their credit again and live on further borrowed time.
I doubt the toxic assets will be unwound within the next five years and will be relegated to the back burner for quite some time. Japanese style.
The real issue is jobs. Time to bring back manufacturing and textiles. Globalization has made China wealthy and America poor.
I think George Bush jr has punished us for not giving his father a second term.
Watching Congress and the Fed, I can see nothing happening over the next decade and more charades of ass covering and responsibility juggling while the country falls apart.
Maybe the communists will put together their own lobby group and socialize health care and banking.
All this true capitalism amongst the existing back room boys is finally being dealt with in criminal courts. A little govt itervention is just what we need, as long as the govt officials don't become the new back room boys.

Jul 22 02:47 AM

[ex- bond tr...:]

Goldman predicted





























GS predicted $200 oil ... then oil spilled... just a reminder of the snake oil salesmen covered in Gold Man.

Jul 22 04:52 AM

[Mad Hedge F...:]

Especially the government. It looks like Goldman Sacs is going to leg over the Treasury once again. It is buying back the warrants it issued the Feds as part of its TARP dole out for a mere $1.1 billion, giving a 23% annualized return on the investment. Why is the government selling? Do you think GS knows something about its future earnings the government doesn’t? Could this be the greatest example of insider trading of all time? Has anyone at the Treasury considered keeping free calls on GS to maturity, as Warren Buffet is with his paper? Then they might be worth $10 billion, or even $100 billion. I know that if hedge funds could get these warrants at the same terms as the Treasury, they’d be loading the boat. Safe to say that when GS shakes your hand, you want to count all of your fingers afterward.

Jul 22 01:50 PM