Tale of Two Senior Analysts At Goldman Sachs

No one can accuse Goldman Sachs of not catering to every possible investor with its latest advice about the U.S. stock market outlook in 2014.

If you are bullish on the U.S. stock market, the switchboard at Goldman will connect you with Senior Investment Strategist Abby Joseph Cohen who is "constructive" for 2014. If you are bearish, the switchboard will connect you with Chief Strategist David Kostin, who says the market is overvalued.

In an interview with Barron's Magazine for this weekend's edition (as published Saturday, January 25th), Ms. Cohen said the following:

1. We (her team at Goldman Sachs) are constructive for 2014, with earnings growth for companies in the S&P 500 Index expected to rise in the high single digits, or about 8%.

2. We expect full-year earnings for the S&P 500 to total $116 in 2014.

3. Given continued low interest rates and low inflation (<2%), "we" could see a price/earnings expansion from the current 16x to between 18x and 20x. 

4. Based upon these forecasts, Ms. Cohen sees the S&P 500 reaching 2088, or +16.65% from Friday's close (January 24th) at 1790.

On January 11th, almost two weeks ago, Goldman's Chief Strategist David Kostin issued the following (timely) research note to customers:

"The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x): (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings."

"We believe the S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x [Abbey Joseph Cohen, perhaps?]. We explore valuation using various approaches. We (Goldman Sachs) conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history."

Ms. Abby Joseph Cohen and Mr. David Kostin both use "We" when communicating their team's view of the market. Since their views seem to be at opposite ends of the spectrum, We (the reader) can only conclude that they both have completely different teams and/or they don't communicate with each other and/or they don't believe that a consensus forecast might better serve their clients.

So who is right?

While Mr. Kostin doesn't make a forecast in his latest bearish research note, the implication of his commentary is that his team at Goldman Sachs expects a significant correction in the S&P 500 Index in 2014, and maybe even a sustained bear trend.

Bottom line: My analysis strongly suggests that the plunge in U.S. and global equity prices on Thursday and Friday of last week marked the very beginning of the first stage in a major new bear market. Weekly chart sell signals were triggered by my computer trading program in the following benchmark indices last week: DJIA, DJTA, NYA (NY Comp), RUT (Russell 2000), XAL, BKX XBD, DIA, DVY, IYT, IWM, and IWN. And weekly chart sell signals were triggered in the following widely held market leaders: AMZN, BA, DIS, FB, GOOG, HON, MMM, TXN, TOL, and UTX, among many others.

Please see the attached Weekly Bar Charts for the Dow Jones Transportation Average and the New York Composite Index with all computer-generated signals clearly marked.

It is my strong belief that U.S. equity prices will continue to decline over the coming week (this last week of January) and that Monthly Chart Sell Signals will then be triggered by my computer trading program in most major stock indices. In the S&P 500 Index, the last time a monthly chart sell signal was triggered was in July 2007 at SPX 1455. This was followed by a 54% correction to a low of 667 in March 2009 where a monthly chart Buy Signal was then triggered. Prior to the July 2007, you have to go back all the way to September 2000 to witness another Sell Signal, and that signal was followed by a 46% correction. Given the extraordinary track record of this computer trading program going back more than 20 years, if a monthly chart sell signal is triggered next week, it should definitely be respected. In the interest of full disclosure, I am short the S&P 500 Index using the ProShares Double-short ETF (symbol SDS) and I am long selected Gold/Silver mining shares (AG, EXK, GG, and PPP) in client accounts under my management.

Dow Jones Transportation Average with Computer-generated Buy & Sell Signals

New York Composite Weekly Bar Chart with Computer-generated Buy & Sell Signals
 

Is the U.S. Dollar Vulnerable?

Just a short note here today.

I am wondering why the U.S. Dollar Index isn't stronger lately. Federal Reserve Governors seem to be going out of their way recently to reaffirm the Fed's "Tapering" plan as laid out in the last FOMC meeting. In fact, some Fed Governors are actually calling for tapering at twice the expected $10 billion per month pace, which should be extremely bullish for the U.S. Dollar.

If foreign exchange traders really believed this hawkish rhetoric, then the U.S. Dollar would be powering ahead in a major bull market advance.

So why has my proprietary computer trading program generated a daily chart sell signal today?

Bottom Line: The mighty U.S. Dollar looks vulnerable to me. I suspect that sellers are poised to act and that a major bear trend is about to get underway here.

U.S. Dollar Index Daily Bart Chart with Computer-generated Buy & Sell Signals

U.S. Dollar Index Weekly Bar Chart with Computer-generated Buy & Sell Signals

U.S. Dollar Index Monthly Bar Chart with Computer-generated Buy & Sell Signals

Are Black Swans Extinct?

The New Zealand Black Swan was hunted to extinction in New Zealand in the early 1800's, but in 1864 the Australian Black Swan was introduced to New Zealand and is thriving there now along with its Australian cousins. In fact, the Black Swan species has a large range and the current global population is estimated to be up to 500,000 individuals. No threat of extinction, or significant decline in population has been identified with this numerous and widespread bird.

Of course, the title of this blog was not meant to lead a discussion about this relatively common bird, but instead refers to a metaphor that describes unexpected large scale events that can have an extraordinary impact on financial markets. The Black Swan Theory is mostly identified with Nassim Nicholas Taleb, a prominent scholar and statistician (and hedge fund manager), who wrote the 2007 book appropriately entitled "The Black Swan". His book focuses mostly on problems of randomness, probability, and uncertainty as they apply to the financial markets.

Several major U.S. stock market indices posted all-time record highs last week. These include the popular S&P 500 Index (1850.84), the Russell 2000 Index ( 1173.37) and the Dow Jones Transportation Average (7508.74). 

As more than a casual observer of the financial markets, it looks to me like most popular valuation metrics are now at extreme levels and that the overall U.S. stock market is therefore "priced to perfection". In this environment, "good news" (i.e. positive economic news) seems to have a bullish impact on stock prices most of the time as one would normally expect, but "bad news" (i.e. negative economic news) also seems to have a bullish impact on stock prices (presumably because investors then expect even more monetary accommodation from the Federal Reserve). I can only conclude from this price action that most investors now believe that "Black Swans Are Extinct"!

Unfortunately, for many investors, the hard lessons from the last great Black Swan event (the Lehman bankruptcy of September 2008) have been conveniently forgotten or never actually learned. Another Black Swan event is inevitable, and my strong feeling is that it will unfold sooner rather than later.

As of Friday's close January 17th, according to my proprietary valuation screen, here is the list of the 25 most overvalued U.S. stocks:

The average stock on this list trades at 149x Forward 12-month earnings estimates (F P/E), 12.06x Sales (P/S), and 16.63x Book Value (P/B). At one point in 2014, I believe that most of these stocks will be down as much as 50% or more. Biotech and drug-related companies have been purposely excluded from the above list given the need for special valuation metrics to analyze this particular sector.

In the interest of full disclosure, I am NOT short any of the stocks on this list, but I do currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts.

Shares of Gold/Silver mining stocks have rebounded sharply so far this year from the panic lows that were posted in the last week of December 2013. Major silver producer First Majestic (AG) has jumped 25% from its December low, major gold producer Barrick Gold (ABX) is up 23% from its recent low, and junior gold/silver miners Primero Gold (PPP) and Endeavour Silver (EXK) have surged 28% and 38%, respectively, from their recent lows. These astounding results have been closely correlated with a 5.66% rebound in the most popular Gold ETF (GLD) and a 6.85% rebound in the most popular Silver ETF (SLV).

Bottom line: I firmly believe that the recent extraordinary rebound in Gold/Silver mining stocks is just the beginning stage of a major bull market in this "out-of-favor" group. In the interest of full disclosure, I am long First Majestic (AG), Goldcorp (GG), Primero Gold (PPP), and Endeavour Silver (EXK) in one of my managed accounts. In all of my managed accounts, I have a large precious metals allocation using actual gold/silver mining stocks and/or precious metals sector mutual funds.

Gold ETF (GLD) with Proprietary Computer-generated Buy & Sell Signals

Today's Downgrade of Gold by BAML Sets the Stage For A Powerful Rally !

This morning's headline on MarketWatch.com was:

"Bank of America Merrill Lynch Slashes Gold Call to $1,150 and Warns It Could Get Even Uglier"

In order to gauge the strength or weakness of any market, you sometimes need a major brokerage firm to show you the way. Even after a 28% drop in the price of Gold in 2013, and a 38% correction from its 2011 record high, Gold still seems to have little appeal to research analysts or so-called experts on Wall Street despite mounting evidence that last week's panic lows marked a major turning point in this market.

BAML's Chief Metals Strategist Michael Widmer felt compelled today to join the herd of Gold bears with his own gloomy forecast for the yellow metal.

BAML's bearish forecast for Gold today is among the best contrary buy signals I have ever witnessed. For contrarians, it doesn't get any better than this !

The upside path for Gold prices is now clear !!

In the interest of full disclosure, I am long the following gold/silver mining stocks in my managed accounts: First Majestic Silver (AG), Endeavour Silver (EXK), Agnico Eagle Mines (AEM), Yamaha Gold (AUY), Primero Gold (PPP), and Goldcorp (GG).

Gold and Silver ETF's: Weekly Chart Buy Signals Now Posted

Weekly Chart Buy Signals were generated by my computer trading program for both the Gold and Silver ETF's at Friday's close, January 3rd. Please see the actual charts as attached below.

 

Here are Friday's closing prices in the most popular Gold and Silver ETF's as compared to the panic intra-day lows as posted on Tuesday, December 31st:

 

                                                                          Panic 

                                                                  Intra-day Low      Closing Price

                                                                      12/31/13            01/03/14          Change

Gold ETF  (Symbol GLD)                               114.46               119.29            +4.22%              

Silver ETF (Symbol SLV)                                 18.26                19.42             +6.35%            

 

And here is the latest available physical Gold/Silver coin sales data for the full year 2012 and 2013 from the U.S. Mint:

                                                                                      Gold

2013 Full Year sales of Gold coins                               856,500 oz.

2012 Full Year sales of Gold coins                               753,000 oz.

Year-over-year Sales Increase                                  +13.75%

                                                                                     Silver

2013 Full Year of Silver coins                                  42,675,000 oz

2012 Full Year of Silver coins                                  33,742,500 oz

Year-over-year Sales Increase                                  +26.47%

http://www.usmint.gov/mint_programs/american_eagles/?action=sales&year=2013

Connecting America through Coins

Bottom Line: Despite all the negative talk about gold and silver prices for most of 2013 and so far in early 2014, investor purchases of gold and silver coins from the U.S. Mint remains strong. China, of course, is the biggest wild card in any forecast for gold/silver prices ahead, but I remain convinced that the best trade in 2014 will be the long side for gold/silver mining stocks. 

Gold ETF (GLD) Weekly Bar Chart with Computer Generated Buy & Sell Signals

Silver ETF (SLV) Weekly Bar Chart with Computer Generated Buy & Sell Signals