"Shadows Of March 2000" - Goldman On The Great Momo Crash Of 2014
The force of gravity is an inverse square law. This means that, if you double the distance between two large masses, the gravitational force between them
"Shadows Of March 2000" - Goldman On The Great Momo Crash Of 2014
Behold the great momo basket which after being the source of so much joy for
momentum chasers over the past year, has mutated into the source of so much
sorrow over the past two weeks.
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
Behold the (not so) great Momo crash of 2014:
First the bad news: according to Goldman not only will the momo stocks not rebound to previous highs and resume their leadership role, but clients increasingly are wondering if this is the second coming of the dot com bubble burst.
So what are the good news? Well, Goldman is bullish on the non-MOMO stocks, which it sees as rising during the next 6 months by, if history is any precedent, 5%. Of course, the market merely regaining its all time highs by October will hardly please the investor community which is used to 20%+ return year after year. After all someone must benefit from the Fed's ludicrous actions.
But most interesting is Goldman's attempt to deny that this is the second coming of March 2000:
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
Behold the (not so) great Momo crash of 2014:
First the bad news: according to Goldman not only will the momo stocks not rebound to previous highs and resume their leadership role, but clients increasingly are wondering if this is the second coming of the dot com bubble burst.
Conversations we are having with clients: Momentum reversal and the shadow of 2000
Our client discussions this week focused on two topics: Momentum reversal and comparisons between today and March 2000. Two questions dominated: “When will the reversal end?” and “Will the sell-off in momentum stocks drive a market-wide price decline as occurred in 2000?”
During the past month, momentum has plunged by 7%, a 10th percentile ranking of all monthly momentum returns since 1980. We define “momentum” as the relative performance of the best vs. worst performing S&P 500 stocks during the prior 12 months. We identified 46 similar distinct 10th percentile “drawdowns” with an average one-month return of -8% and a cumulative -10% return during six months.
Historical experience suggests the S&P 500, but not momentum, will likely recover during the next few months. Following the drawdowns, S&P 500 posted a 6-month return averaging +5% and delivered a positive return 70% of the time. Momentum declined by a further 4% on average, and 60% of the time the stocks posted a negative return.
Analysis of historical trading patterns around momentum drawdowns shows: (a) roughly 70% of the reversal is behind us following a 7% unwind during the last month; (b) an additional 3% downside exists to the momentum reversal during the next three months if the current episode follows the average historical experience; (c) if the pattern followed the path of a 25th percentile event a further 7% momentum downside would occur, or about double the reversal that has taken place so far; and (d) whenever the drawdown ends, momentum typically does NOT resume leadership. The best performing stocks during the 12 months leading up to the start of the drawdown do not subsequently outperform (see Exhibit 2).
So what are the good news? Well, Goldman is bullish on the non-MOMO stocks, which it sees as rising during the next 6 months by, if history is any precedent, 5%. Of course, the market merely regaining its all time highs by October will hardly please the investor community which is used to 20%+ return year after year. After all someone must benefit from the Fed's ludicrous actions.
S&P 500 Index performance during 46 momentum reversals since 1980 suggests the broad market will likely rise steadily during the next six months by an average of 5%. Based on a current S&P 500 index level of 1815, a 5% rise would lift the index to just above 1900 which is our year-end 2014 forecast. A 25th percentile trajectory implies a flat equity market during the next six months while tracking at the 75th percentile would see S&P 500 climb by 15% to 2090 by the end of 3Q (see Exhibit 3).
But most interesting is Goldman's attempt to deny that this is the second coming of March 2000:
All great points, yet one thing is conspicuously missing and perhaps Goldman can clarify:One historical momentum drawdown has come up repeatedly in recent conversations with clients: March 2000. The current sell-off in high growth and high valuation stocks, with a concentration in technology subsectors, has some similarities to the popping of the tech bubble in 2000.
Veteran investors will recall S&P 500 and tech-heavy Nasdaq peaked in March 2000. The indices eventually fell by 50% and 75%, respectively. It took the S&P 500 seven years to recover and establish a new high but Nasdaq still remains 25% below its all-time peak reached 14 years ago.
We believe the differences between 2000 and today are more important than the similarities and the recent momentum drawdown is unlikely to
precipitate a more extensive fall in share prices:
- Recent returns are less dramatic. Although the trailing 12-month returns are similar (22% today versus 18% in 2000), the trailing 3-year and 5-year returns are much lower (51% vs. 107% and 161% vs. 227%, respectively).
- Valuation is not nearly as stretched. S&P 500 currently trades at a forward P/E of 16x compared with 25x at the peak in 2000. The price/book ratio is 2.7x versus 6.Xx. The EV/sales is currently 1.8x compared with 2.7x in 2000.
- More balanced market. The reason it is called the “Tech Bubble” is that 14% of the earnings of the S&P 500 came from Tech in 2000 but it accounted for 33% of the equity cap of the index. Today Tech contributes 19% of both earnings and market cap. Top five stocks in 2000 were 18% vs. 11% today.
- Earnings growth expectations are far less aggressive. Bottom-up 2014 consensus EPS growth currently equals 9%, close to our top-down forecast of 8%. In 2000, consensus expected EPS growth equaled 17%.
- Interest rates are dramatically lower. 3-month Treasury yields were 5.9% in 2000 vs. 0.05% today while ten-year yields were 6.0% vs. 2.7% today. The yield curve was inverted by 47 bp. Today the slope equals +229 bp.
- Less new issuance. During 1Q 2000, 115 IPOs were completed for proceeds of $18 billion. In 1Q 2014, 63 completed deals raised $11 billion.
- how much debt as a percentage of global GDP was held by the world's major central banks then and now, and
- how much consolidated global leverage, including shadow banking in both the US and China, as well as how many hundreds of trillions of derivatives notional outstanding existed then... and now
(3 votes)
»
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Behold the great momo basket which after being the source of so much joy for
momentum chasers over the past year, has mutated into the source of so much
sorrow over the past two weeks.
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
Behold the (not so) great Momo crash of 2014:
First the bad news: according to Goldman not only will the momo stocks not rebound to previous highs and resume their leadership role, but clients increasingly are wondering if this is the second coming of the dot com bubble burst.
So what are the good news? Well, Goldman is bullish on the non-MOMO stocks, which it sees as rising during the next 6 months by, if history is any precedent, 5%. Of course, the market merely regaining its all time highs by October will hardly please the investor community which is used to 20%+ return year after year. After all someone must benefit from the Fed's ludicrous actions.
But most interesting is Goldman's attempt to deny that this is the second coming of March 2000:
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
Behold the (not so) great Momo crash of 2014:
First the bad news: according to Goldman not only will the momo stocks not rebound to previous highs and resume their leadership role, but clients increasingly are wondering if this is the second coming of the dot com bubble burst.
Conversations we are having with clients: Momentum reversal and the shadow of 2000
Our client discussions this week focused on two topics: Momentum reversal and comparisons between today and March 2000. Two questions dominated: “When will the reversal end?” and “Will the sell-off in momentum stocks drive a market-wide price decline as occurred in 2000?”
During the past month, momentum has plunged by 7%, a 10th percentile ranking of all monthly momentum returns since 1980. We define “momentum” as the relative performance of the best vs. worst performing S&P 500 stocks during the prior 12 months. We identified 46 similar distinct 10th percentile “drawdowns” with an average one-month return of -8% and a cumulative -10% return during six months.
Historical experience suggests the S&P 500, but not momentum, will likely recover during the next few months. Following the drawdowns, S&P 500 posted a 6-month return averaging +5% and delivered a positive return 70% of the time. Momentum declined by a further 4% on average, and 60% of the time the stocks posted a negative return.
Analysis of historical trading patterns around momentum drawdowns shows: (a) roughly 70% of the reversal is behind us following a 7% unwind during the last month; (b) an additional 3% downside exists to the momentum reversal during the next three months if the current episode follows the average historical experience; (c) if the pattern followed the path of a 25th percentile event a further 7% momentum downside would occur, or about double the reversal that has taken place so far; and (d) whenever the drawdown ends, momentum typically does NOT resume leadership. The best performing stocks during the 12 months leading up to the start of the drawdown do not subsequently outperform (see Exhibit 2).
So what are the good news? Well, Goldman is bullish on the non-MOMO stocks, which it sees as rising during the next 6 months by, if history is any precedent, 5%. Of course, the market merely regaining its all time highs by October will hardly please the investor community which is used to 20%+ return year after year. After all someone must benefit from the Fed's ludicrous actions.
S&P 500 Index performance during 46 momentum reversals since 1980 suggests the broad market will likely rise steadily during the next six months by an average of 5%. Based on a current S&P 500 index level of 1815, a 5% rise would lift the index to just above 1900 which is our year-end 2014 forecast. A 25th percentile trajectory implies a flat equity market during the next six months while tracking at the 75th percentile would see S&P 500 climb by 15% to 2090 by the end of 3Q (see Exhibit 3).
But most interesting is Goldman's attempt to deny that this is the second coming of March 2000:
All great points, yet one thing is conspicuously missing and perhaps Goldman can clarify:One historical momentum drawdown has come up repeatedly in recent conversations with clients: March 2000. The current sell-off in high growth and high valuation stocks, with a concentration in technology subsectors, has some similarities to the popping of the tech bubble in 2000.
Veteran investors will recall S&P 500 and tech-heavy Nasdaq peaked in March 2000. The indices eventually fell by 50% and 75%, respectively. It took the S&P 500 seven years to recover and establish a new high but Nasdaq still remains 25% below its all-time peak reached 14 years ago.
We believe the differences between 2000 and today are more important than the similarities and the recent momentum drawdown is unlikely to
precipitate a more extensive fall in share prices:
- Recent returns are less dramatic. Although the trailing 12-month returns are similar (22% today versus 18% in 2000), the trailing 3-year and 5-year returns are much lower (51% vs. 107% and 161% vs. 227%, respectively).
- Valuation is not nearly as stretched. S&P 500 currently trades at a forward P/E of 16x compared with 25x at the peak in 2000. The price/book ratio is 2.7x versus 6.Xx. The EV/sales is currently 1.8x compared with 2.7x in 2000.
- More balanced market. The reason it is called the “Tech Bubble” is that 14% of the earnings of the S&P 500 came from Tech in 2000 but it accounted for 33% of the equity cap of the index. Today Tech contributes 19% of both earnings and market cap. Top five stocks in 2000 were 18% vs. 11% today.
- Earnings growth expectations are far less aggressive. Bottom-up 2014 consensus EPS growth currently equals 9%, close to our top-down forecast of 8%. In 2000, consensus expected EPS growth equaled 17%.
- Interest rates are dramatically lower. 3-month Treasury yields were 5.9% in 2000 vs. 0.05% today while ten-year yields were 6.0% vs. 2.7% today. The yield curve was inverted by 47 bp. Today the slope equals +229 bp.
- Less new issuance. During 1Q 2000, 115 IPOs were completed for proceeds of $18 billion. In 1Q 2014, 63 completed deals raised $11 billion.
- how much debt as a percentage of global GDP was held by the world's major central banks then and now, and
- how much consolidated global leverage, including shadow banking in both the US and China, as well as how many hundreds of trillions of derivatives notional outstanding existed then... and now
(3 votes)
»
- Login or register to post comments
- 9642 reads
- Printer-friendly version
- Send to friend
- advertisements -
Advertisement
Trending Articles and Offers
Sat, 04/12/2014 - 14:46 |
4651537
SmilinJoeFizzion
Sat, 04/12/2014 - 15:00 |
4651566
TruthInSunshine
Get ready for the real crash.
Sat, 04/12/2014 - 15:29 |
4651616
Oracle 911
Sat, 04/12/2014 - 14:51 |
4651547
Oh regional
Indian
Sank like a stone there-after....$300 to >$2
Interestingly enough, things went sideways and up for a bit and it was everyone, riding on Dubya's CEOship bump....it's after that everything went hard down. Feb 2001 onwards and in real terms has been downward since, with inflation eating away these paper gains.
Most of post March 2000 was a lot of loss offsetting and derivative trading and of course insider nirvana.
ori
Sat, 04/12/2014 - 15:04 |
4651573
Unknown
Poster
Sat, 04/12/2014 - 15:07 |
4651575
SmilinJoeFizzion
Sat, 04/12/2014 - 15:19 |
4651592
Unknown
Poster
Sat, 04/12/2014 - 15:49 |
4651674
NeedleDickTheBu...
YOU say "momentum", I say "beta" more often than not (or simply levered to WWIII when it comes MIC stocks).
MU - 1.84
FRX - 0.92
ACT - 0.34
FB - 1.77
HAR - 2.41
NFLX - 2.02
DAL - 0.98
FSLR - 2.12
TRIP - 1.49
WYNN - 1.57
ETFC - 2.39
GT - 2.10
BIIB - 1.34
ALXN - 0.51
PBI - 1.53
REGN - 0.81
PCLN - 1.59
GILD - 0.93
LUV - 0.91
LMT - 0.64
NOC - 0.95
MYL - 1.19
WDC - 1.56
RTN - 0.69
STZ - 1.16
GNW - 2.16
YHOO - 1.13
GHC - NA
ADS - 1.12
CMG - 0.81
BSX - 1.05
TSN - 0.28
ADBE - 1.42
MHFI - 0.92
VRTX - (0.25)???
LNC - 2.39
BA - 1.05
TMO - 1.06
WAG - 1.20
STX - 3.15
MCK - 0.89
STJ - 1.51
HUM - 0.98
MCO - 1.57
BWA - 1.67
TWC - 0.86
BBY - 2.19
GD - 0.92
AKAM - 1.93
KORS - 1.88
I'm guessing that a great number of investors are either clueless or engage in willful blindness when it comes to "risk-adjusted returns". It makes it all good for the fund managers.
Sat, 04/12/2014 - 15:58 |
4651692
disabledvet
As Uncle Joe Stalin famously said "how many divisions have you?"
I guess we're all gonna find out now.
Eeeee haw and yippee ki-aye.
All Federal Reserve Banks - Total Assets, Eliminations from Consolidation
$4.4 trillion
Sat, 04/12/2014 - 18:00 |
4652105
Unknown
Poster
Sat, 04/12/2014 - 17:11 |
4651974
Quinvarius
"...Analysis of historical trading patterns around momentum drawdowns shows..."
That's bullshit. Who gives a damn about "historical trading patterns"?
There must be like fivehundredbillion different things influencing the markets nowadays and not a single one of the factors is comparable to anything in 2000 or 2008 (except stupid investor behaviour maybe). All of the factors combined are CERNTAINLY NOT THE SAME. It's not the same "investors"/bankers/politicians/company leadership, it's not the same economic situation it's not the same trading systems, not the same rules, it's not the same companies, the internet is different, the means of communication are different, the people's attention span is ever shorter and so on and so forth...
But still of course at one point this "market" is gonna crash like hell (maybe next week?). And much faster much more crazy than we could have ever imagined. And I'm looking forward to watching Goldman and CNBC explaining all of this in "historical context".
Sat, 04/12/2014 - 18:37 |
4652200
southerncomfort
Call me when this ponzi crashes 3-4 % "day after day" for 2 weeks!
Sat, 04/12/2014 - 18:55 |
4652268
Goldilocks
Sat, 04/12/2014 - 19:05 |
4652300
naughtius
maximus
Bull dicks to the moon!
Sat, 04/12/2014 - 19:11 |
4652327
naughtius
maximus
Get ready for the real crash.
Sank like a stone there-after....$300 to >$2
Interestingly enough, things went sideways and up for a bit and it was everyone, riding on Dubya's CEOship bump....it's after that everything went hard down. Feb 2001 onwards and in real terms has been downward since, with inflation eating away these paper gains.
Most of post March 2000 was a lot of loss offsetting and derivative trading and of course insider nirvana.
ori
YOU say "momentum", I say "beta" more often than not (or simply levered to WWIII when it comes MIC stocks).
MU - 1.84
FRX - 0.92
ACT - 0.34
FB - 1.77
HAR - 2.41
NFLX - 2.02
DAL - 0.98
FSLR - 2.12
TRIP - 1.49
WYNN - 1.57
ETFC - 2.39
GT - 2.10
BIIB - 1.34
ALXN - 0.51
PBI - 1.53
REGN - 0.81
PCLN - 1.59
GILD - 0.93
LUV - 0.91
LMT - 0.64
NOC - 0.95
MYL - 1.19
WDC - 1.56
RTN - 0.69
STZ - 1.16
GNW - 2.16
YHOO - 1.13
GHC - NA
ADS - 1.12
CMG - 0.81
BSX - 1.05
TSN - 0.28
ADBE - 1.42
MHFI - 0.92
VRTX - (0.25)???
LNC - 2.39
BA - 1.05
TMO - 1.06
WAG - 1.20
STX - 3.15
MCK - 0.89
STJ - 1.51
HUM - 0.98
MCO - 1.57
BWA - 1.67
TWC - 0.86
BBY - 2.19
GD - 0.92
AKAM - 1.93
KORS - 1.88
I'm guessing that a great number of investors are either clueless or engage in willful blindness when it comes to "risk-adjusted returns". It makes it all good for the fund managers.
As Uncle Joe Stalin famously said "how many divisions have you?"
I guess we're all gonna find out now.
Eeeee haw and yippee ki-aye.
All Federal Reserve Banks - Total Assets, Eliminations from Consolidation
$4.4 trillion
"...Analysis of historical trading patterns around momentum drawdowns shows..."
That's bullshit. Who gives a damn about "historical trading patterns"?
There must be like fivehundredbillion different things influencing the markets nowadays and not a single one of the factors is comparable to anything in 2000 or 2008 (except stupid investor behaviour maybe). All of the factors combined are CERNTAINLY NOT THE SAME. It's not the same "investors"/bankers/politicians/company leadership, it's not the same economic situation it's not the same trading systems, not the same rules, it's not the same companies, the internet is different, the means of communication are different, the people's attention span is ever shorter and so on and so forth...
But still of course at one point this "market" is gonna crash like hell (maybe next week?). And much faster much more crazy than we could have ever imagined. And I'm looking forward to watching Goldman and CNBC explaining all of this in "historical context".
Call me when this ponzi crashes 3-4 % "day after day" for 2 weeks!
http://www.youtube.com/watch?v=SsYIiY2wnyU (2:48)
Bull dicks to the moon!
Famous last words. It is confined to momo. It is confined to subprime.