GOLDMAN’S TOP TRADES FOR 2010
Goldman Sachs recently issued their 2010 investment outlook. In addition to being bullish into year-end, they are quite bullish heading into the new year as we transition from “hope” to “growth”. They see many similarities between the current market environment and 2004 when investors were still doubtful of a recovery, but strong earnings growth powered markets to further gains.
Based on this bullish outlook their top trades are built around three primary macro themes:
1. Accommodative global central bank policies.
2. The expansionary setting of economic policies.
3. The growing gap between emerging economies and developed nations.
Trade #1: Short volatility – With the VIX trading in the low to mid 20′s Goldman sees an opportunity for more downside as the economy continues to normalize and investors become less skittish. The VIX has historically traded in the 15-17 range and Goldman sees a return to this level.
Top trade #2: Long Russia - Despite robust growth Russin equity markets have lagged returns in the region. They see 25% upside in 2010 as investors reallocate into Russian equities and growth remains robust.
Top trade #3: Short NZD/Long GBP - Growth in Europe will continue to surprise to the upside which should support Sterling. In addition, they see the New Zealand government pressuring their currency as well as slower rate increases than the consensus expects. They see 13% upside in this trade.
Top trade #4: Pay 2-yr UK Rates vs. Australia 1-yr Forward at -268.5bp, target -150bp – Goldman believes the rates are likely to rise faster in the UK when compared to Australia, than the market is currently pricing in.
Top trade #5: CDS convergence between Spain and Ireland - The real estate busts in Ireland and Spain have been devastating. Despite a much more proactive government response, better prospects for paying down debt and higher potential economic growth, Ireland’s 5y CDS remain substantially higher than Spain’s. Goldman sees further room for narrowing.
Top trade #6: buy the currency growth basket - Goldman shows that currencies are sensitive to the rate at which the output gap closes. At this early stage in recovery growth differentiation strategies thrive. The FX Growth Current currently contains long positions in INR, IDR, CNY, AUD, PLN, PHP and short positions in MXN, RUB, TRY, TWD, HUF, MYR.
Top trade #7: Long PLN/short JPY - The Polish currency is 14% undervalued compared to the Euro and robust economic growth should provide room for upside. The Yen on the other hand is significantly overvalued. Goldman sees the poor fiscal condition in Japan and government intervention capping upside on the Yen.
I’ve been saying for a while that I think the top with be around 12,500 DOW, which means we still have around 20% to rise minus any pull backs. I thought we would have a pull back, but the market has been range bound for over a month. I don’t see anything ‘overbought’ or ‘oversold’ right now, but I do see a lot of individual stocks that are extremely overbought (like U.S. Steel and Ford) as well as some commodities like GLD [though they still have room to run but if they do I will put all my money to shorting them]. I think we are seeing the indecision in the index charts because financials and oil are kind of wishy washy. It’s really confusing.
I wouldn’t try to short gold just to prove a point. I understand not wanting to be long gold, or even having the opinion that it’s due to fall, but be careful shorting a market that small and that thin.
That guy Santolli who writes for Barron’s recommended double shorting gold with GLL earlier this year, and he’s pretty much gotten his nuts ripped off with that one.
If you do short it, and get some instant gratification, I wouldn’t stick around very long.
A lot about Europe. However I think they are wrong about it.
To be long in GBP would be very a risky move I think. It cannot be good when the gowernment is selling off its property. On the other hand they have sold off its property in other recessions and done allright. I think its was Magret Thatcher who started doing this.
can someone explain what the effect of irelands 5yr cds lowering actually means to the country?
Im in ireland and dont understand what this means at all? thanks
I think the plausible explanations are
1) Ireland’s intermediate term outlook is much better than the short term ( based on current information and economic growth expectations)
2) Market is convinced that the basic fundamentals are still in place as it emerges from this turbulent period
3) May be market’s expectations changed about the probability of EU assistance after the recent effects pertaining to Dubai and Greece.
There could be other reasons, if we can look at how the CDS with different time frames have moved over the last year, relative to other EU countries.
It would represent an improving economy.
TPC and others,
Kind of off topic: Would you buy any banks here? If the Fed does raise rates, wouldn’t that dampen some earnings?
Hi James and anyone, ideas on why financials and oil lag since Nov?
Honestly, my opinion is that financials have room to run while resource stocks/materials do not. With that being said, financials represent a much larger percentage than resource stocks do of the S&P. So the S&P could remain strong into the year even though some sectors that remain a smaller percentage can correct. To answer your question directly I am not really sure as to WHY those sectors remained stagnant though.
With that being said I have no idea why I received 1 star because I was 100% right in my analysis for today (gold correcting over 4%, resource stocks were extremely weak, financials were strong). And I usually am. But whatever.
Hi James, oil looks like a bull flag since Nov high. Financials were talked down by Meredith in Nov. GS, JPM, and etc correcting since. They need to make a move and I think they will if there is going to be another breakout near term.
I couldnt find ‘buy GS’ stock among their top ideas…
Also they are doing some hedging in their forecasts:
#2 Long Russia vs #6 Short RUB – one of those should work out fine.