By Tyler Durden At Zero Hedge
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.
….. 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 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.
All great points, yet one thing is conspicuously missing and perhaps Goldman can clarify:
- 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
Because one can just as easily make the case that as the global financial house of cards, teetering since the great financial crisis of 2008, and upright only thanks to the explicit “wealth effect” support of the final backstop – the world’s money printers – any protracted downward move which implicitly crushes the faith in the monetary religion, and crushes the uber-leveraged smart money community, will make the “drawdown” in both momo and S&P500 stocks in March 2000 seem like a pleasant walk in the part compared to what may be coming.