Thursday, December 2, 2010

Goldman's Jan Hatzius Turns Quite Bullish, Helps Drive Rally - Financials Also Surge on Goldman Note

An interesting day today - a lot of the go to 'momo' plays are doing little or reversing while there is a rotation into some laggard groups - most notably financials and housing.  Goldman's Jan Hatzius (a very followed man on Wall Street) has made what appears to be a complete 180... or least 90 degree turn from his views from just two months ago. [Oct 6, 2010: Goldman Sachs - 2 Scenarios for U.S. Economy in Next 6-9 Months (a) Bad or (b) Very Bad]  This was released yesterday so either it was late in the day, or there had to be an excuse to drive up stocks today, and this was a convenient one.   Last bear left, turn off the lights.

Target for S&P 500 end of 2011 = 1450.

Via Business Insider:
  • “The most significant shift in 2011 and 2012 is likely to be stronger growth in the US. Five years ago, our US economic outlook was very pessimistic….Even one year ago, we still had a below-consensus view and predicted a slowdown in GDP growth to a below trend pace in 2010. The reason for this was that the improvement in GDP growth in late 2009 had been due to temporary factors, namely the inventory cycle and the impulse from the 2009 fiscal stimulus package.
  • With underlying final demand still stagnant, we thought that growth would slow through 2010, as indeed it has.  That was then. Now, however, we expect a substantial acceleration in real GDP growth over the next two years to a 4% pace by early/mid-2012.  What has changed? Most strikingly, the performance of underlying final demand, or ‘‘organic growth.’
  • Why such a sharp acceleration? Our best explanation is that the pace of private-sector deleveraging is slowing in an environment of somewhat lower debt/income ratios, improving credit quality and moderating lending standards.
  • Goldman's economists now forecast 2011 GDP growth of 2.7%, up from a prior 2% view. They see 2012 GDP growth of 3.6%

That said, it will remain feeling like a recession for many of the citizenry:

  • “It is important to emphasise what we are not saying. We are not saying that the US economy will now embark on a V-shaped recovery. We believe that the drag from inventories and fiscal policy will still keep real GDP growth at a moderate pace of 2½% in the next couple of quarters.  And even the 4% growth pace that we expect for much of 2012 is still quite moderate relative to typical post-war recoveries. 
  • We are also not saying that deleveraging is over. Indeed, private-sector debt/income ratios are still likely to decline further. But it is the pace of deleveraging——which corresponds to the level of the private-sector balance——that matters for GDP. As the pace of deleveraging slows, the private-sector balance falls, and this implies a positive impulse to GDP growth.
  • Finally, we are not saying that the economy will feel good from a ‘‘Main Street’’ perspective. We only expect a gradual decline in unemployment as growth moves above trend, to 9¼% by the end of 2011 and 8½% by the end of 2012.

As for the financials, a lot of strength as the higher 10 year yields go (mentioned this AM) the better the spread banks can make by simply turning on the lights.  Bernanke keeps short term rates at 0% so savers are destroyed banks can borrow 'nearly free', and then go buy 10 year US bonds for 3% (and rising), and we they all win. [Mar 31, 2010: Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]  Of course the other side of the equation is the non stop losses incurred on past loans will slow down as the greater economy improves. 

  • Goldman’s U.S. portfolio strategy team lifted financials to overweight, the first time it has been positive on the sector since the credit crisis shook global markets in 2008. “Stronger economic growth, higher equity prices, and a more supportive interest-rate environment are positive for many subsectors of financials,” they wrote.
  • Goldman Sachs cited four reasons to be positive on the sector heading into next year: (1) Loan demand should start to show signs of improvement amid a better macro backdrop; (2) Pressure on long-term rates should subside, benefitting banks and insurance companies; (3) Capital clarity (and hence redeployment) should improve in a positive growth environment as tail risks subside; (4) Higher equity prices should drive higher capital markets activity.

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