A report released earlier by Goldman thinkers Krag Gregory and John Marshall discussing volatility and options strategy, is recommending loading up the boat on S&P puts. The GS "portfolio strategy" team (we assume this is not the guys on the prop side who usually execute the opposite of whatever the sellside guys preach) expects the market to retest the 750 low in Q1, pretty much what Lehman said over the weekend. Reasons cited include: 1) dismal Q4 08 earnings results, 2) reduced, and in many cases withdrawn, corporate guidance for 2009 (ed. cause guidance has been so reliable lately), and 3) a realization that, although fiscal stimulus should be positive for growth, it may not be the cure-all the market seems to anticipate.
Additionally, GS is expecting Q1 GDP of -4.5%, which seems a little better than Merrill's expectation of -6.3%. While not presenting anything substantially new, here are Goldman's reasons:
• 4Q GDP was better than expected. 1Q2009 is expected to be worse. While the 3.8% advance figure for last quarter’s annualized drop in real GDP was much smaller than expected, our US Economics team sees little evidence that the downward spiral is abating. An impressive array of indicators- payrolls, retail sales, industrial output, housing starts, and new home salesposted ongoing sharp declines in December. As a result, our US Economics team estimates that nonfarm payrolls will register another sharp loss of 525,000 jobs in January (25,000 below consensus) and that the unemployment rate rose to 7.5%. They also revised down their estimate of first-quarter real GDP to an annualized decline of 4.5% from -3%.
• The 3.8% advance figure for last quarter’s annualized drop in real GDP was the largest since 1982, and it was especially remarkable given how sharply energy prices fell. Underscoring the unusual combination of weakness in both prices and volumes, the 4.1% drop reported for nominal GDP was the largest in 48 years. Private domestic demand led the retreat, falling 6.3% in real terms and a post World War II record 10.6% in nominal terms.
• Households did not spend despite the collapse in energy costs: For the first time since World War II, real consumer spending fell in the face of a drop in consumer prices as nominal outlays posted the largest quarterly decline of the post war era (-8.9%). Initial claims for jobless benefits have returned to the quarter-century highs seen last month while continuing claims have hit a new record, albeit in a much larger labor market. If consumers are determined to boost savings as lay-offs continue then, (1) What will induce them to borrow? (2) What will cause businesses to halt the slide in capital spending? The vicious cycle could continue and earnings should provide a view into how the sharp drop in spending has flowed through to the corporate bottom line as over 60% of the consumer sectors, by number and by size, still have yet to report.
• Looking forward. Fiscal Stimulus: Is this just a down payment? This week the House approved a bill authorizing $825 billion (bn) in spending increases and tax cuts over the next ten fiscal years. The Senate is expected to pass a $900bn package next week. If all goes according to plan, President Obama should be able to sign the final bill by mid-February. Our Economists estimate the package should help short circuit the downward trend this year adding 3 percentage points to real GDP growth in the second and third quarters of this year but provides little staying power through 2010.
• Our US Portfolio Strategy team expects the market to retest the 750 low during 1Q citing: (1) dismal 4Q 2008 earnings results (below the bearish consensus); (2) reduced – and in many instances withdrawn – corporate guidance for 2009; (3) the mid-February notification deadline for hedge fund redemptions (their conversations with several pension funds and endowments suggest that further hedge fund redemptions are coming); and (4) a realization that, although fiscal stimulus should be positive for growth, it may not be the cure-all the market seems to anticipate.
• Catalysts ahead: This week contains a slew of macro catalysts including: the Senate vote on the stimulus package; the ISM Manufacturing Index on Monday; Motor vehicle sales on Tuesday; ISM Nonmanufacturing on Wednesday; and Unemployment and Nonfarm payrolls on Friday February 6. On the micro front 60% of the consumer sectors, by number and by size, still have yet to report.
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