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Dividend announcements suggest a move to more conventional capital spending policy
71 companies have raised their dividends and ten firms have initiated payouts YTD,
a 50% increase vs. 1Q 2009. The average boost was 13%. Two firms cut dividends.
We forecast S&P 500 dividends will rise by 2% in 2010. We expect dividend tax rates
will reach 29% by 2013 (including 3.8% Medicare surcharge). Dividend swap prices
do not reflect concern that higher taxes will discourage future dividend growth.
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that
could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other
important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in
the U.S.
The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research
March 26, 2010 United States: Portfolio Strategy
The conversations we are having with clients: Market outlook and dividend policy
The S&P 500 touched 1180 this week, up nearly 6% since the start of 2010, (SUN), the only other S&P 500 company in the subsector, announced a 50%
before retreating to about 1165 at week’s end. We expect the S&P 500 to cut to its 2010 dividend late last year.
trade towards 1300 (roughly 12% above current levels) before retreating to
Tax increases are inevitable with US debt/GDP ratio forecast to rise from
1250 at year-end. Within US equities, we forecast globally-exposed cyclical
84% in 2009 to 94% in 2010 and annual budget deficits projected for at least
sectors (Information Technology, Energy, and Materials) will lead the market
the next decade. Current proposals would increase the capital gains and
higher as investors focus on sales, earnings, and valuation.
dividend tax rate to 20% from 15% at the start of 2011. Our economics team
Positive micro data points continue to accumulate in support of our assumes this rate will likely end up closer to 25% for budgetary reasons and
market outlook for the US equity market. We highlight two below: will approach 29% including the 3.8% Medicare surcharge (see Exhibit 1).
(See US Economics Daily, “Tax Increases on the Horizon” March 24, 2010).
1. QUALCOMM (QCOM, Buy) pre-announced that during fiscal 2Q it
would ship about 2.5 million (3%) more handsets, generate revenues We expect a 2.0% dividend yield and a 1.7% tax-adjusted dividend yield
roughly $100 million (4%) higher, and post GAAP EPS 16% above previous for the S&P 500 in 2010. Assuming the dividend yield on the market remains
guidance levels. The share price jumped 6% on the news. constant (i.e., equity appreciation matches dividend growth) then the after-
tax dividend yield on S&P 500 would equal 1.5% in 2011 and 2012 and fall to
2. US RevPAR growth turned from negative to positive over the past
1.4% in 2013 and beyond (see Exhibit 2). Dividend yields would be lower if
three weeks. Our Hotels & Lodging analyst Steve Kent notes that the recent
stock prices rise faster than dividend growth but yields would be higher if
move to positive RevPAR (Revenue per Available Room) has been driven
EPS growth accelerates and/or payout ratios increase from current levels.
mostly by increasing occupancy, especially in the upscale and above
segments. The overall domestic hotel industry has experienced occupancy We forecast S&P 500 operating EPS of $76 and DPS of $22.94 for 2010.
gains and we expect year/year growth in ADR (average daily rate) will occur Our operating EPS estimate represents a 33% increase from 2009E EPS of
during the next two quarters. $57. Adjusting for the provisions and write-downs for Financials, our
earnings estimates are $72 and $81, reflecting annual growth of 13%. Our
Dividends moved to the center of client conversations after the passage
S&P 500 dividend per share estimate of $22.94 represents a 2% increase
of the Health Care legislation. US non-Financial corporations sit on record
from the 2009 DPS of $22.41 (see Exhibit 3). On an operating basis, the
amounts of cash ($950 billion) and questions abound about how firms will
dividend payout ratio equals 39% in 2009 and 30% in 2010.
allocate funds among capital spending, M&A, buybacks, and dividends.
Dividend swap prices do not reflect concern that higher taxes will
Dividend announcements suggest a move to more conventional capital
discourage future dividend growth. While dividend growth expectations
spending policy. During the first three months of 2009, many firms left
for both 2011 and 2012 rose by more than 1% during the six weeks following
dividends unchanged and 46 firms cut or discontinued dividends. During the
4Q earnings season, the long-term growth priced into the dividend swap
same three-month period in 2010, 71 stocks increased dividends and ten
market was unchanged. We forecast dividend growth of 5.3% per year after
stocks initiated dividends. This represents almost a 50% increase in the
2012, above the dividend swap market’s current expectation of 3.6% annual
number of raises relative to the first three months of 2009 (81 versus 55).
growth (see Exhibit 4).
The average stock increased its dividend by 13% in 2010 versus 8% in 2009.
Ten firms announced share repurchase programs in conjunction with their Our dividend growth basket (Bloomberg ticker <GSTHDIVG>) consists of
dividend increases. 40 stocks that we forecast will have cash return on cash invested in 2011
roughly 2x the S&P 500 (4% vs. 2%) from a combination of both high
Only two stocks have cut dividends year-to-date. Valero Energy (VLO)
dividend yields and high dividend growth in 2010 and 2011 (see Exhibit 50).
slashed its dividend by 67% and Tesoro Corp. (TSO) discontinued dividend
YTD, 11 basket constituents increased their dividends by an average of 6%.
payments. Both are Energy stocks in the Oil & Gas Refining & Marketing
These stocks should outperform during the second-half of 2010 when we
subsector where refining margins have collapsed over the past year. Sunoco
expect the impact of fiscal stimulus fades and US economic activity slows.
The charts we are watching: A look back and look ahead at dividend policy and growth
Exhibit 1: Top dividend tax rate expected to rise to 28.8% in 2013 Exhibit 2: Effective dividend yield declines as tax rate increases
as of March 25, 2010 as of March 25, 2010
100 6%
GS Estimate
90 (includes 3.8%
Medicare surcharge) 5%
80
Top
70 Dividend 4% Dividend Yield
Tax Rate
60
50 Long-Term 3%
Capital Gains 2.0%
40 Tax Rate 2.0%
2%
30 29%
20 1% 1.7% 1.4%
Effective Dividend Yield
10 15% (tax-adjusted)
0%
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Source: Treasury Department. Source: Treasury Department, Compustat, and Goldman Sachs Global ECS Research.
Exhibit 3: Goldman Sachs top-down earnings and dividend estimates Exhibit 4: Dividend swap market pricing in faster near-term growth
as of March 25, 2010 as of March 24, 2010
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2024E
Industrials 7 7 6 2.88 2.67 (7)
Source: Compustat and Goldman Sachs Global ECS Research. Source: Compustat and Goldman Sachs Global ECS Research.
25-Sep-08
25-Nov-08
25-Sep-09
25-Nov-09
25-Jan-09
25-Jan-10
25-Jul-08
25-Jul-09
25-May-08
25-May-09
25-Mar-08
25-Mar-09
25-Mar-10
Energy (3.0)
(4.0) (3.0) (2.0) (1.0) 0.0 1.0 2.0
1-week Total Return (%)
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Exhibit 7: S&P 500 sector performance over time Exhibit 8: BEST and WORST performing S&P 500 STOCKS BY SECTOR
as of March 25, 2010 as of March 25, 2010
Total Return Percentage Change (%) BEST STOCKS WORST STOCKS
1-Week 1-Month 3-Month 6-Month YTD 12-Month Return (%) Return (%)
Industrials 0% 8% 11 % 19 % 12 % 70 % Sector Ticker 1-week YTD Ticker 1-week YTD
Cons Discr LEN 9% 42 % DTV (4)% 0%
Financials 1 10 10 10 11 73
Consumer Staples WAG 4 (1) KR (4) 4
Cons Discretionary 1 8 9 23 11 69
Energy PXD 1 11 CNX (9) (14)
Consumer Staples 0 3 5 12 6 32
Financials HST 6 25 MS (4) (2)
Health Care (0) 3 2 14 3 35
Health Care AET 5 10 GENZ (11) 4
Information Tech 1 7 2 14 2 59
Industrials CAT 4 10 MMM (3) (1)
Materials (1) 6 0 11 1 51 NVLS JBL
Info Tech 8 8 (7) (5)
Energy (3) 1 (3) 4 (2) 20 Materials TIE 12 27 NEM (6) 2
Telecom Services 0 6 (5) 3 (4) 9 Telecom Services Q 5 27 AMT (4) (2)
Utilities (2) 1 (6) 3 (5) 19 Utilities SCG (0) 1 NRG (8) (14)
S&P 500 0% 6% 4% 13 % 5% 46 % S&P 500 TIE 12 % 27 % GENZ (11)% 4%
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Exhibit 11: TOP 10 performing S&P 500 STOCKS over the last week Exhibit 12: BOTTOM 10 performing S&P 500 STOCKS over the last week
as of March 25, 2010 as of March 25, 2010
Return (%) Return (%)
Company Name Ticker Sector 1-week YTD Company Name Ticker Sector 1-week YTD
Titanium Metals TIE Materials 12 27 Genzyme Corp. GENZ Health Care (11) 4
Lennar Corp LEN Cons Discr 9 42 Consol Energy Inc. CNX Energy (9) (14)
Novellus Systems NVLS Info Tech 8 8 Baker Hughes BHI Energy (9) 11
Cliffs Natural CLF Materials 7 50 Nabors Industries Ltd. NBR Energy (9) (14)
Host Hotels & Resorts Inc. HST Financials 6 25 NRG Energy NRG Utilities (8) (14)
Citigroup Inc. C Financials 6 29 Jabil Circuit JBL Info Tech (7) (5)
Starwood Hotels & Resorts HOT Cons Discr 6 23 Range Resources Corp RRC Energy (7) (8)
KLA-Tencor Corp. KLAC Info Tech 6 (14) Smith International Inc. SII Energy (7) 51
Wyndham Worldwide WYN Cons Discr 6 27 AES Corp. AES Utilities (7) (19)
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Exhibit 15: TOP-DOWN vs. BOTTOM-UP: Goldman Sachs vs. Consensus Exhibit 16: REVISIONS: S&P 500 consensus EPS revisions
as of March 25, 2010 as of March 25, 2010
Contribution to EPS Annual earnings growth rates 80
GS Top-Down EPS Bottom-up GS Top-Down Bottom-Up S&P 500 2010E EPS
2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E
79
Energy $10 $15 $10 $13 93 % 45 % 88 % 28 % Consensus
Materials 2 3 2 3 69 15 68 30 Bottom-Up
Telecom Services 3 3 2 2 32 1 (1) 9 78
$79
Consumer Discretionary 5 5 7 8 5 5 44 18
Utilities 3 4 3 4 15 1 10 5
Information Technology 11 12 14 16 7 10 39 13 77
Industrials 7 8 7 8 6 16 4 19
Health Care 12 13 12 13 9 4 5 10
76 Goldman
Consumer Staples 9 9 9 10 4 3 6 9 Sachs
S&P 500 ex-Financials 63 71 67 77 18 13 25 15 $76
Financials Operating EPS 12 19 12 17 251 54 238 47 75
S&P 500 Operating EPS $76 $90 $79 $95 32 % 20 % 38 % 20 %
31-Jan
31-Dec
28-Feb
31-Mar
30-Apr
+ Provisions & Writedowns 5 1 NA NA (63) (82) NA NA
S&P 500 EPS ex-P&W 81 91 NA NA 13 13 NA NA
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Revisions
Exhibit 17: EARNINGS and SALES REVISIONS Exhibit 18: Stocks with the most POSITIVE and NEGATIVE EPS REVISIONS
Aggregate dollars % change, as of March 25, 2010 as of March 25, 2010
EPS REVISIONS SALES REVISIONS POSITIVE EPS REVISIONS NEGATIVE EPS REVISIONS
1 month 3 month 1 month 3 month 1 month 3 month 1 month 3 month
10E 11E 10E 11E 10E 11E 10E 11E Ticker Revis. Return Revis. Return Ticker Revis. Return Revis. Return
Materials 0.8 % (0.3)% 4.9 % 4.2 % 0.4 % 0.5 % 4.1 % 3.2 % X 613 % 17 % (63)% 10 % TSO (47)% 14 % (89)% 2%
Consumer Discretionary 0.6 0.3 6.9 4.3 0.2 0.5 1.8 1.4 TIE 51 36 24 24 MWW (40) 20 NM (3)
Information Technology 0.4 0.5 8.4 7.2 0.5 0.6 5.5 6.0
DHI 29 5 NM 17 GT (37) 4 (60) (10)
Industrials 0.2 0.6 2.7 3.1 0.2 0.1 1.0 1.5
LEN 23 11 55 35 AIG (31) 25 (13) 15
Health Care (0.0) 0.1 (0.4) (0.2) 0.1 (0.1) 1.0 0.9
ODP 18 16 63 14 DFS (26) 14 (28) 3
Consumer Staples (0.0) 0.1 0.1 (0.2) 0.0 (0.2) 0.8 1.1
MU 18 14 41 2 PHM (19) 9 13 14
S&P 500 (0.1) 0.1 2.1 1.3 0.2 0.3 1.7 0.2
AMD 17 14 64 (9) FHN (19) 10 NM 3
Energy (0.4) (0.1) 1.3 (0.8) 0.5 0.7 1.2 (6.1)
Utilities (0.5) (0.6) (1.5) (2.2) NM NM NM NM CMA 17 7 54 27 SUN (17) 10 (36) 12
Telecommunication Services (0.9) (0.6) (5.0) (5.9) 0.0 0.1 0.1 (0.0) WY 14 7 23 0 HIG (17) 14 (11) 18
Financials (0.9) 0.0 (1.3) (1.3) NM NM NM NM SNDK 12 23 92 16 STT (14) 2 (13) 2
S&P 500 (0)% 6% 2% 4% (0)% 6% 2% 4%
Source: FirstCall, I/B/E/S, FactSet, and Goldman Sachs Global ECS Research. Source: FirstCall, I/B/E/S, FactSet, and Goldman Sachs Global ECS Research.
Exhibit 19: S&P 500 1-Month Earnings Revisions Sentiment Exhibit 20: 1-Month Earnings Revision Sentiment by SECTOR
as of March 25, 2010 as of March 25, 2010
25 %
60% 30 %
20 %
S&P 500 1-Month 2010 EPS Revision Sentiment (lhs) 1-Month Earnings Revision Sentiment by Sector
40% [(# pos. revisions - # neg. revisions)/ total revisions] 20 % 15 % [(# pos. revisions - # neg. revisions)/ total revisions]
1-Month Revision Sentiment
10 %
Earnings Sentiment
20% 10 %
5%
0% 0% 0%
(5)%
(20)% (10)%
(10)%
Price Performance (rhs)
(15)%
(40)% (20)%
S&P 500
Materials
Info Tech
Energy
Telecom Services
Health Care
Utilities
Consumer Discr
Industrials
Consumer Staples
Financials
(60)% (30)%
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Source: FirstCall, I/B/E/S, FactSet, and Goldman Sachs Global ECS Research. Source: FirstCall, I/B/E/S, FactSet, and Goldman Sachs Global ECS Research.
Valuation
Exhibit 21: Aggregate valuation metrics for S&P 500 and sectors Exhibit 22: Standard deviation vs. 10-year history (Z-Score)
bottom-up consensus valuation, as of March 25, 2010 bottom-up consensus, as of March 25, 2010
EV/ EV/ Price/ FCF PEG NTM EV/ EV/ Price/ FCF PEG Median
Sales EBITDA Book Yield Ratio P/E Sales EBITDA Book Yield P/E Ratio Z-Score
S&P 500 1.4x 8.7x 2.4x 6.3 % 1.4x 14.8x S&P 500 (0.8) (0.9) (0.8) (1.3) (0.7) 0.7 (0.8)
Industrials 1.9 11.6 2.9 7.2 1.7 17.4 Health Care (1.7) (1.6) (1.1) (0.7) (1.7) (0.5) (1.3)
Materials 1.5 10.1 2.9 5.0 1.7 17.1 Consumer Staples 1.0 (0.3) (0.7) (0.1) (0.8) (1.1) (0.5)
Consumer Discretionary 1.3 8.3 2.8 8.3 1.2 16.6 Telecommunication Services (1.2) (0.8) (0.1) (0.8) (0.1) 1.4 (0.5)
Financials NM NM 1.4 NM 2.0 16.1 Information Technology 0.1 (0.9) 0.9 (0.0) (1.3) (1.2) (0.4)
Information Technology 2.3 10.4 4.2 6.3 1.1 15.5 Utilities NM (0.5) (0.1) NM 0.1 1.3 (0.0)
Telecommunication Services 1.8 5.4 1.7 13.3 3.1 14.8 Consumer Discretionary 2.3 0.4 2.6 (1.4) (0.2) (0.7) 0.1
Consumer Staples 1.2 9.2 3.7 6.4 1.6 14.7 Energy (0.3) 1.6 (0.4) 1.3 1.2 (0.5) 0.4
Energy 1.0 7.4 2.0 1.2 1.0 12.5 Materials 1.1 0.8 1.5 0.6 0.7 0.1 0.8
Health Care 1.2 8.2 2.9 7.6 1.4 12.2 Industrials 0.8 1.2 1.5 0.7 2.1 2.1 1.3
Utilities NM 6.9 1.5 2.8 2.7 11.8 Financials NM NM (1.0) NM 1.3 2.2 1.3
Source: Compustat, FirstCall via FactSet, and Goldman Sachs Global ECS Research. Source: Compustat, FirstCall via FactSet, and Goldman Sachs Global ECS Research.
Exhibit 23: Historical NTM P/E and LTM P/B values for the S&P 500 Exhibit 24: Top stocks by fastest 2010 earnings growth and lowest NTM P/E
aggregate bottom-up consensus valuation, as of March 25, 2010 by sector, as of March 25, 2010
GROWTH VALUE
6
Fastest EPS Growth (%) Lowest P/E (x)
5 P/B 2.4 Sector Ticker 2010E 2011E Ticker NTM Rel to SPX
LTM P/B (x)
4
3 Cons Discr CBS 88 20 GCI 8.0 0.5
2
1 10-yr rolling avg Consumer Staples WFMI 63 13 SVU 8.5 0.6
0 Energy HES 88 31 CHK 7.6 0.5
1/76 1/79 1/82 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09
Financials HIG 75 22 AIG 7.5 0.5
30 Health Care THC 39 23 LLY 7.6 0.5
25 P/E
NTM P/E (x)
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research. Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Last Week Spread (%) Performance Spread of Top Quintile Less Bottom Quintile (%)
Last Last Five Trading Days Last Last
(3) (2) (1) 0 1 2
Growth Metrics(b) Week 19-Mar 22-Mar 23-Mar 24-Mar 25-Mar Month Quarter
EBITDA Growth (1.3) (0.5) (0.1) (0.0) 0.1 (0.8) 1.2 (0.5)
EPS Growth (1.5) (0.6) 0.1 (0.0) 0.2 (1.1) 1.5 1.8
GROWTH (1.6) (0.7) (0.1) (0.0) 0.2 (1.0) 0.1 (0.4)
Sales Growth (1.6) (0.5) (0.3) (0.3) 0.4 (0.9) (0.7) (2.5)
(b)
Value Metrics
P/B 1.5 0.2 0.9 (0.1) (0.3) 0.9 2.9 5.8
EV/DACF 1.0 0.5 0.1 (0.8) 0.1 1.2 4.2 5.4
EV/EBITDA 0.7 0.1 0.1 (0.6) 0.2 0.9 5.1 4.2
VALUATION 0.5 (0.1) 0.4 (0.7) 0.4 0.4 5.8 6.8
P/E 0.1 (0.4) 0.5 (0.3) 0.3 (0.1) 5.3 6.0
P/div (0.2) (0.5) 0.7 (0.2) 0.2 (0.3) 2.0 1.9
EV/FCF (1.9) (0.2) (0.7) (0.4) 0.3 (1.0) (0.3) (1.9)
Profitability Metrics(b)
ROCE 1.3 0.2 0.6 0.2 (0.6) 0.9 (0.9) 2.7
ROE 1.1 0.5 0.3 0.1 (0.5) 0.7 (3.0) (1.6)
CROCI 0.9 0.3 0.4 0.1 (0.5) 0.6 (0.8) (0.1)
PROFITABILITY 0.6 0.3 0.3 0.1 (0.7) 0.7 (2.1) 0.7
(c)
Other Metrics
Short Interest Level 0.5 (0.9) 1.0 0.6 (0.0) (0.2) 6.2 6.9
Equity Capitalization 0.4 0.5 (0.5) (0.4) 0.3 0.5 (2.1) (2.1)
(a) Factor return analysis uses S&P 500 companies included in the Goldman Sachs Americas coverage universe with stock prices greater than $5 at the time of publication.
(b) Growth, Value and Profitability analysis is based on Goldman Sachs Investment Profile scores (“IP Scores”). Growth, value and profitability metrics are indexed based on composites of several methodologies to
determine the stocks percentile ranking within the region’s coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as
follows: Growth is a composite of next year’s estimate over current year’s estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book.
(c) “Other metric” analysis based on current market prices and data sourced from NASDAQ and NYSE via FactSet.
Source: NASDAQ and NYSE via FactSet, IDC, and Goldman Sachs Global ECS Research.
Total Return Percentage Change (%) Weight (%) 1-Week (% Return) YTD (% Return)
Sector SP500 R2000 SP500 R2000 ∆ (bps) SP500 R2000 ∆ (bps)
1-Week 1-Month 3-Month 6-Month YTD
Energy 11 5 (3) (5) 177 (2) 1 (280)
Large Cap vs. Small Cap Information Tech 19 18 1 (1) 173 2 7 (451)
S&P 500 0 6 4 13 5 Financials 17 21 1 0 92 11 12 (45)
Russell 2000 (0) 8 7 14 9 Materials 3 5 (1) (2) 88 1 5 (335)
Telecom Services 3 1 0 (1) 76 (4) (3) (121)
Large vs. Small (bps) 36 (201) (344) (139) (385)
Industrials 10 15 0 (0) 53 12 6 645
Cons Discretionary 10 14 1 1 44 11 18 (745)
Growth vs. Value Consumer Staples 11 3 0 0 (12) 6 8 (238)
Russell 1000 Growth (0) 5 3 14 4 Utilities 3 3 (2) (1) (79) (5) 2 (622)
Russell 1000 Value (0) 6 5 12 6 Health Care 12 14 (0) 1 (92) 3 9 (540)
Growth vs. Value (bps) 5 (86) (166) 192 (204) Index 100 100 0 (0) 36 5 9 (385)
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Exhibit 28: GROWTH vs. VALUE relative performance over time Exhibit 29: LARGE CAP vs. SMALL CAP relative performance over time
Russell 1000 Growth vs. Value, as of March 25, 2010 S&P 500 vs. Russell, as of March 25, 2010
105
110
Value outperforming 103 S&P 500 outperforming
101
105
99
100 97
95
95 93
91
90 89
87
Growth outperforming Russell 2000 outperforming
85 85
Jan-08
Jul-08
Sep-08
Nov-08
Jan-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-08
May-08
Mar-09
May-09
Mar-10
May-10
Mar-08
May-08
Mar-09
May-09
Mar-10
May-10
Jan-08
Jul-08
Nov-08
Jan-09
Jul-09
Nov-09
Jan-10
Sep-08
Sep-09
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
Source: FactSet and Goldman Sachs Global ECS Research. Source: Lipper, Factset, and Goldman Sachs Global ECS Research.
Exhibit 32: GLOBAL EQUITY MARKET performance over time Exhibit 33: International and other MUTUAL FUND performance
as of March 25, 2010 as of March 25, 2010
Price Return (%) USD Avg. Total Return (%) Stdev No. of AUM
1-Week 1-Month 3-Month 2010 YTD 2009
Lipper Indices 1-week YTD 1-week YTD Funds $ bil
Mexico (Bolsa) 0 8 5 8 52 International Equity
U.S. (S&P 500) (0) 6 3 5 23 Global Funds (1) 2 0.5 2.0 30 181
Japan (Nikkei) (2) 3 2 3 16
International Funds (1) 0 0.4 2.3 30 378
Korea (KOSPI) 0 8 3 2 62
European Funds (1) (1) 0.6 2.9 10 18
Australia (ASX 200) (0) 10 5 2 69
Emerging Market Funds (1) 1 0.5 1.4 29 NA
UK (FTSE 100) (1) 6 (1) (2) 37
Europe (DJ Stoxx 600) (1) 7 (2) (3) 32 Real Estate and Natural Resources
Brazil (Bovespa) (3) 5 (1) (4) 144 Real Estate 1 11 0.3 1.3 30 37
China (MSCI China) (2) 4 (2) (4) 63 Natural Resource (4) (3) 0.7 1.2 9 NA
Germany (Dax) 0 9 (4) (4) 28 Fixed Income
France (CAC 40) (0) 8 (5) (5) 26 General U.S. Government Funds Index (1) 1 0.8 0.5 30 NA
Spain (IBEX 35) (2) 8 (14) (14) 34
A Rated Bond Funds Index (1) 2 0.4 0.8 29 NA
BBB Rated Funds Index (1) 2 0.8 1.4 30 NA
Average (1) 7 (1) (1) 49
Source: FactSet, and Goldman Sachs Global ECS Research. Source: Lipper, FactSet, and Goldman Sachs Global ECS Research.
Source: Compustat, First Call, Lionshare via Factset, IDC, and Goldman Sachs Global ECS Research. See our Goldman Sachs ETF Bloomberg page <GETFG> or contact the desk at 1-888-ETF-DESK for more information.
Fund Flows
Exhibit 35: Domestic equity mutual fund flows, 4-week moving average Exhibit 36: Weekly mutual fund flows and assets tracked by AMG
week ended March 24, 2010 Week ended March 24, 2010; excluding ETFs
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Govt Treasury 18 0.4 0.1 0.8 24
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research. Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Exhibit 37: Average daily TRADING TURNOVER over the last week Exhibit 38: Top ten S&P 500 STOCKS by daily average trading turnover
by sector, as of March 25, 2010 as of March 25, 2010
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research. Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
400
90
81
300 All time high on 20-Nov-08
75
Risk Aversion
200 Increasing
60
100
45
0
(100) 30
Risk Aversion 18
(200) Decreasing
15
25-Mar-10
(300) 25-Mar-10
0
Dec-94
Nov-95
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Note: Metrics included are implied option volatility (S&P 500 and NASDAQ 100), normalized skew, high
yield credit spreads, credit derivative swap spreads, mutual fund net flows, and cash levels.
Source: Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.
Exhibit 41: S&P 500 stock and sector average correlation Exhibit 42: Credit Default Swaps, 5-Year On-the-run Spreads
as of March 25, 2010 as of March 25, 2010
300 1,800
1.0
1,600
0.9 Average sector correlation 250 CDX (HY) (rhs)
0.7
1,000
0.6
150 800
0.5 600
0.38
0.4 100
400
0.3 200
50
0.2 CDX (IG) (lhs) 0
0.1 0 (200)
Average stock correlation
Dec-07
Jun-08
Aug-08
Dec-08
Jun-09
Aug-09
Dec-09
Oct-07
Apr-08
Feb-08
Oct-08
Apr-09
Apr-10
Feb-09
Oct-09
Feb-10
0.0
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Source: Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.
%)
Consumer Staples 6 11 0 0 3.5 3.5
Industrials 12 Neutral 10 0 0 1.5 % 3.0
2.5 2.5
Financials 11 17 0 0 1.0 % 2.0
(100)
1.5 1.5
Telecom Services (4) 3 9
0.5 %
Consumer Discretionary 11 10 (200) (11)
Underweight
Utilities (5) 3 (200) 18 0.0 %
Health Care 3 12 (300) 5 Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E
S&P 500 5% 100 % 0 bp (13)bp
(a) Sector weightings last rebalanced December 7, 2009. 2010 2011
Source: Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.
Exhibit 45: Goldman Sachs COMMODITY and CURRENCY forecasts Exhibit 46: Goldman Sachs US Economics forecasts
as of March 25, 2010 as of March 25, 2010
Forecasts % Annual Change
units Current 3m 6m 12m 2009E 2010E 2011E
Real GDP (2.4)% 2.6% 2.4%
Energy
Consumer Spending (0.6) 1.9 1.4
WTI Crude Oil $/bbl 80.53 92.00 97.00 96.50
Total Fixed Investment (18.3) (2.4) 4.2
NYMEX Nat. Gas $/mmBtu 3.98 5.50 5.50 6.00
Business Fixed Investment (17.7) (3.2) 2.3
RBOB Gasoline $/gal 2.20 2.44 2.50 2.39 Residential Investment (20.4) 0.7 10.9
Metals Federal Government Spending 5.2 3.9 4.0
LME Copper $/mt 7435 7850 8045 7825 Exports of Goods and Services (9.6) 12.1 7.5
London Gold $/troy oz 1093 1260 1315 1390 Imports of Goods and Services (13.9) 7.8 2.5
London Silver $/troy oz 16.79 21.00 21.90 23.20 Core CPI 1.7 0.8 0.1
Currencies Unemployment Rate 9.3 9.8 10.1
Euro / US Dollar EUR/$ 1.33 1.45 1.45 1.35 Fed Funds Rate 0.1 0.2 0.2
2-year Treasury Rate 0.9 0.9 2.0
US Dollar / Yen $/¥ 92.7 92.0 94.0 98.0
10-year Treasury Rate 3.8 3.3 4.0
Sterling / US Dollar £/$ 1.49 1.67 1.73 1.61
Source: Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.
Low HF Concentration GSTHHFSL (0) 4 5 14 3.1 3.5 Source: FactSet, and Goldman Sachs Global ECS Research.
Hedge Fund VIP GSTHHVIP 0 6 7 19 4.3 0.9
Exhibit 49: US Portfolio Strategy thematic trade recommendations
Valuation Baskets as of March 25, 2010
GARP GSTHGARP (0)% 7% 5% 17x 4.5x 1.0 % Thematic Trade Recommendations
High Sharpe Ratio GSTHSHRP (0) 5 4 16 3.4 1.2 Initiation
Date Return
Use of Cash Baskets BUY High Sharpe Ratio Basket (GSTHSHRP); SELL S&P 500
Dividend Growth GSTHDIVG (1)% 5% 5% 14x 5.2x 3.5 % See 2010 Outlook: Cyclical start; defensive finish (7-Dec-09). 8-Dec-09 2.8 %
Invest for Growth GSTHINVG (1) 4 4 16 4.5 1.6 BUY High Oper. Leverage (GSTHOPHI); SELL Low Oper. Leverage (GSTHOPLO)
See Macro to Micro Shift Part II: 2H 2009 Update (20-Jul-09). 20-Jul-09 9.9 %
S&P 500 0% 6% 5% 15x 2.4x 1.9 %
S&P 500 Average 17 3.5 1.7 BUY BRICs Sales Basket (GSTHBRIC); SELL S&P 500
See Portfolio Passport: Coming to America (5-Nov-08). 4-May-09 12.3 %
S&P 500 Median 15 2.5 1.3
Source: FactSet, and Goldman Sachs Global ECS Research. Source: FactSet, and Goldman Sachs Global ECS Research.
1
The ability to trade these baskets will depend upon market conditions, including liquidity and borrow constraints at the time of the trade.
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