Abby Joseph Cohen

Goldman Sachs: Abby Joseph Cohen

Top 46. Jan 6, 2001 10:27 AM

» JenL_2 - Abby on 2000/2001

Abby's year-end review and predictions the new year from 1/2 WSJ:

The following is the text of a research report released by Abby Joseph Cohen, chief U.S. strategist at Goldman Sachs and chairwoman of the U.S. Investment Policy Committee. Ms. Cohen presents an overview of the markets for 2001

2001: Better Balance

Three imbalances impeded stock price performance during much of 2000. These are now largely corrected, setting the stage for a more favorable market environment in 2001.

- First, economic growth has slowed to a more sustainable rate, easing pressures on inflation and interest rates.

- Second, aggregate equity valuation now suggests that the S&P 500 is roughly 15% undervalued, compared to moderate overvaluation last winter.

- Third, the wide valuation disparities between different groups of stocks have dramatically narrowed, suggesting more thoughtful allocation of capital.

The Macro Imbalances: Rapid Economic and Profit Growth

One year ago, the U.S. economy was growing at an inflation-adjusted annual rate of 8.3%. S&P 500 operating earnings per share were growing at more than 20%. These blistering rates were not considered sustainable even by those analysts who believe (as we do) that secular productivity growth has risen notably in recent years to 3% or more. Our Portfolio Strategy team has long assumed that economic and profit growth would decelerate sharply, and have forecasted a move to approximately trend rates by the fourth quarter of 2000. These are 3% real GDP and 7% S&P 500 operating profit growth.

<img src="/files/mysites/Jen/abby.gif" width=160 height=210>
Abby Joseph Cohen

Several factors were behind the vigorous growth. Identifying them may also be helpful in understanding the subsequent deceleration. The long list includes many items such as (1) last winter's unusually pleasant weather; (2) consumer demand for several large ticket items, linked to rising household incomes; and (3) the significant spending associated with Y2K preparation, as companies upgraded or replaced computer systems.

Since last winter, weather has normalized and there has been an impact from the increases in interest rates that began in June 1999. The U.S. economy is also experiencing the "dark shadow" of last year's Y2K expenditures, with much spending having been apparently borrowed from subsequent periods. Personal consumption spending has slowed. Bear in mind that household expenditures, including those for autos, new homes and home furnishings, had been lackluster during much of the economic expansion that began in 1991. They were not particularly energetic until 1997, when the labor markets improved and average household incomes, adjusted for inflation, finally began to rise. The families that purchased new homes and autos between 1997 and early 2000 are less likely to do so again anytime soon.

Profit growth has also moderated since last winter. This is largely a consequence of the slowing economy. For some U.S. companies, the strong dollar has impeded earnings (after currency adjustments), but much of the disappointment from foreign operations has instead been linked to weak economic activity in other nations, as opposed to a lack of competitiveness. Our longstanding forecast for 2001 S&P 500 operating earnings per share is $60.00, an increase of about 7% from our $56.00 estimate for 2000.

Understanding the economic-sector composition of profits in 2001 may be more important than correctly forecasting the aggregate growth rate. Specifically, we expect a notable deceleration (if not an outright decline later in 2001) in the profits of energy-related companies. Our forecast assumes that commodity energy prices will decline in the coming months, putting pressure on the earnings in this sector and, likely, for the overall S&P 500. However, this would be to the ultimate advantage of most other industries, as lower energy costs would ease their total business costs and enhance profit margins.

The Market Imbalance: Not So Much Aggregate Valuation, As Specific Securities

In March 2000, the S&P 500 traded at 1525, marginally below our projected fair-value level for the end of the year. Simply stated, we thought that the S&P 500 was about nine months ahead of itself, but expected the fundamentals to ultimately catch up with the share prices. The NASDAQ, which we do not forecast, traded above 5000. We adjusted our model portfolios, reducing equity exposure in all of them.

At the time, we also noted the wide dispersions in valuation within the financial marketplace. While some securities were trading at high P/E ratios, others were being largely ignored and were priced cheaply relative to the fundamentals of the underlying companies. This could be seen even within the S&P 500, a pre-selected group of the finest corporations in the United States. During most of the 1990s, these shares had traded within a fairly narrow range of P/E ratios, typically bounded by +/- 30% around the average P/E ratio of the index. By March 2000, this had widened dramatically. About 40% of the 500 companies traded at P/E ratios of 12x earnings or less, and a few dozen traded at P/E ratios of 50x earnings and more. The extremes were even more noteworthy outside the S&P 500. Broad categories, including real estate and small- and mid-cap stocks, were largely ignored by investors. At the same time, some young companies without earnings traded at significant multiples of revenues, often based on the industries in which they operated.

These wide variations in equity valuation indicated that capital was being allocated in an inefficient manner. Depending on the sector, some companies had both easy and cheap access to new capital in both the equity and debt markets; consider the triple-digit P/E ratios. Yet others had a more difficult time securing the financing they needed, as indicated by low P/E ratios and wide yield spreads in the corporate bond market.

Back to Basics

These three imbalances have been largely, if not completely, adjusted. As such, we conclude that the equity market should be a friendlier place going forward, especially for those portfolio managers who focus on company fundamentals, rather than momentum strategies. Quantitative work shows that share price momentum was the single most important factor driving future price action during much of 1999 and early 2000. But since April, the more important factors have been earnings momentum, relative ROE and a variety of relative valuation measures. Careful security selection, in both the equity and corporate debt markets, will be the key to strong relative and absolute portfolio performance in 2001, as it has been since March 2000.

Two preconditions are now in place for higher securities prices: attractive valuation and ample liquidity. First, the risk premia already embedded in market prices seem high to us, based on our macro assumptions for the coming year. We believe that the S&P 500 will be at fair value at about 1650 in 12 months. Second, there appears to be ample cash on the sidelines. The most currently available data are for the end of October, when mutual fund cash ratios stood at levels not seen since the gloomy days of autumn 1998, when global recession and global deflation were part of many forecasts. We believe that cash ratios rose further in November in both mutual funds and other institutional portfolios. Balances in money market mutual funds also rose.

But many investors are still waiting for catalysts that would move share prices higher. We expect these to include a greater comfort that the economy will continue to grow, but at a more moderate pace. We believe that less exuberant economic activity is consistent with a longer-lasting cycle, given the milder effects on inflation and the extra leeway it provides the Federal Reserve.

There are three areas to watch carefully in the coming months.

- First, we expect energy prices to peak in the coming weeks and then to move lower by next summer. An intentional supply disruption by OPEC producers would call this into question.

- Second, we expect the global economy to continue to grow, despite the deceleration in the United States. Those nations with a solid core of private domestic demand should see only modest effects from a slowdown of exports to the United States.

- Third, little will be known about the economic policies of the next president for some time; it may take until next spring or early summer before the new administration presents its plans to Congress.

Subscribe to WSJ Online @ http://www.wsj.com

......Jen

-- posted by JenL_2

Top 47. Jan 6, 2001 5:56 PM

» Steven_Russell - Re: Abby on 2000/2001

In response to message posted by JenL_2:

"In March 2000, the S&P 500 traded at 1525, marginally below our projected fair-value level for the end of the year. Simply stated, we thought that the S&P 500 was about nine months ahead of itself, but expected the fundamentals to ultimately catch up with the share prices."

Hold on there, Abby. You had expected S&P500 to trade at 1525, by the end of 2000? So by getting there in March, it was early? And by not being there in December 2000 (down 14%), it is now undervalued by that much?

"We believe that the S&P 500 will be at fair value at about 1650 in 12 months."

Whoa, there, Abby. So now we first have to make up that 14% undervaluation with a 15.5% gain, then we will enjoy an additional market rise of 8% by year-end 2001?

"Our longstanding forecast for 2001 S&P 500 operating earnings per share is $60.00, an increase of about 7% from our $56.00 estimate for 2000."

Yes, that's what I thought you said. So to achieve your targets, we need major PE multiple expansion, from here. While the economy is rapidly decelerating, and potentially entering a recession.

So you are telling me that 7% forward earnings growth is worth expanding up to high 20's PE multiples to investors. Hmmmm. What is it you are selling again?

-- posted by Steven_Russell

Top 48. Jan 6, 2001 8:49 PM

» JenL_2 - Re: Abby on 2000/2001

In response to message posted by Steven_Russell:

Steven - Thought you'd like this one:

<img src="/files/mysites/Jen/abbyfortuneteller.gif" width=300 height=250>
http://markpoyser.com/analysts.htm

.....Jen

-- posted by JenL_2

Top 49. Jan 7, 2001 7:15 PM

» JenL_2 - Abby

This post copied from the "US Stock Market" thread:

Author: smile_1
Date: January 5, 2001 6:43 PM
Subject: Abby

Abby was on WSW with Lou. Sounds like her year end target for S&P is about 1660, - market overweight in techs, and is high on financials now, eschewing oils.

-- posted by JenL_2

http://www.siliconinvestor.com/stocktalk...

Top 50. Jan 20, 2001 6:06 PM

» Kirk - Abby On AMAT

FWIW, The article below has some opposing views on AMAT at this point. It is from the Part II "Roundtable", January 22nd Issue of Barrons:
WSJ/Barrons Subscription Required - $75/yr last time I checked (good investment IMHO):
http://interactive.wsj.com/articles/SB97...

Selection 1 From Article:
-----------------------------
Cohen: ... "This year I have two tech names, indicative of my increased comfort level with technology. In March of last year we indicated to our clients that we were dramatically underweight in technology in our model portfolio. A few weeks ago we said we were overweight once again, because we think there are some good values. We're looking at some of the more cyclically sensitive categories, such as semiconductors, that have been very hard-hit. Applied Materials in some ways is the quality name in the semiconductor-equipment group.

Q: What's the P/E currently?
Cohen: The stock is trading for about 16 times earnings. We're forecasting long-term growth in excess of 20%. The stock closed Friday [January 5] at 42.69. The range has been 35 at the low and 115 at the 52-week high. The stock is up 10%-12% over the past few weeks, but on the other hand, it's much closer to the bottom. This was one of the first stocks in one of the first sectors to get hit. It will be among the first to recover.

Neff: That's kind of bothersome, because we're going through a wrenching reassessment. The guys who really get hurt are the capital-equipment guys.

Cohen: John, I agree with you wholeheartedly. My point is that they went through their wrenching process beginning six months ago.

Neff: I'm not talking about the stock. I'm talking about earnings.

Cohen: There may be earnings volatility in the first half of 2001, so the P/E I gave you might be questionable. On the other hand, once investors feel that we've seen the trough in economic activity, this is the sort of stock they'll come back to.

Black: It's more of a second-half stock. I think it will have some difficult quarters because supposedly 11 new fabs are going to be ramped [11 new fabrication plants will be coming on line].

Cohen: Other near-term risks would include the fact some of the excess capacity in the industry is in Asia, and we don't yet know the full extent of what's there. But I'm giving you stocks for a 12-month list.

Samberg: Are revenues going to accelerate? This has been a restructuring story for quite some time.

Cohen: Revenues will accelerate in the second half of the year.

Black: Applied Materials has a bulletproof balance sheet. They have $4 billion in net cash sitting on the balance sheet now. This is a money machine. It generates nothing but free cash."

Selection 2 From Article:
-----------------------------
Black: ... "We own other things, but I think it's too early to be buying the Applied Materials and KLA-Tencors in this cycle. There's more staying power quarter-to-quarter in companies like Arrow because of their broad distribution."

-- posted by Kirk

Top 51. Feb 8, 2001 11:49 AM

» CaptRon - AJC, 2/8/01

FWIW, from SI post:
Goldman's Cohen warns of recession talk
WASHINGTON, Feb 8 (Reuters) - Influential Wall Street
analyst Abby Joseph Cohen said on Thursday the economic
slowdown in the last few months was more pronounced than she
expected but doubted the nation was headed into a recession.
"The economy has slowed, that is true; much of it was
predictable," she said in a speech to the Association of
American Publishers.
"The slowdown, however, has been more pronounced than we
might have expected over the last two or three months" because
of three transitory factors -- high energy prices, cold weather
and the prolonged outcome of the presidential election, she
said.
Cohen, the chief U.S. strategist at investment bank Goldman
Sachs, said November to December of 2000 was the coldest period
in 105 years while the same period in 1999 was the warmest in
105 years.
"That does have an impact on whether we're willing to get
out, go shopping, test drive a new car."
Despite figures showing consumer confidence at its lowest
level in four years, Americans should not be worried about the
economy, she said.
"The time to have been worried was a year ago" when the
U.S. economy and corporate profits were growing at
unsustainable rates.
The real risk going forward is that people will take the
news of a slowing economy "and conjure up a story in which the
economy is going into a dark, deep recession. We don't think
so," Cohen said.
"But we do know it is important that consumer confidence
not erode further. We do not think that it will do so but we
all have to wait and see what happens."
((Peter Ramjug, Reuters SEC Desk, 202-898-8399))
REUTERS
*** end of story ***

-- posted by CaptRon

Top 52. Mar 7, 2001 6:21 AM

» Rande - From CBSM:

From CBSM:

Breaking News
--Goldman's Cohen ups equity

-- posted by Rande

Top 53. Mar 7, 2001 6:24 AM

» Kirk - notable undervaluation

Goldman's Cohen Says Buy Stocks - Wednesday March 7 8:49 AM ET
NEW YORK (Reuters) - Goldman Sachs Chief Investment Strategist
Abby Joseph Cohen told clients on Wednesday to use their cash to buy
stocks, reversing the call she made last March.

Cohen, one of Wall Street's most respected strategists, raised the equity
allocation in Goldman's model portfolio to 70 percent from 65 percent, and
reduced the cash position to zero from 5 percent.

The fixed income component was left unchanged at 27 percent, she said
in a note to clients. Goldman also recommends a 3 percent allocation to
commodities.

``Many of the imbalances identified during the past year have now been largely redressed,'' Cohen said.
``Risk tolerance has been replaced by risk aversion.''

Moderate overvaluation of the S&P 500 has been followed by notable undervaluation, she added.

-- posted by Kirk

http://biz.yahoo.com/smart/010307/200103...

Top 54. Mar 7, 2001 6:27 AM

» Kirk - Upbeat Goldman Call Juices Futures

SmartMoney.com - Market Analysis
Upbeat Goldman Call Juices Futures
By Steve Sakson

THE POWER of the pundit was being felt again on Wall Street this morning.

Goldman Sachs' eternally-optimistic market strategist Abby Joseph Cohen kick-started the futures market with a big, new (what else?) bullish call.

Nasdaq futures soared more than 30 points and those tied to the S&P 500 were up more than eight. Cohen's call comes even as the rate of profit warnings in the tech sector accelerates with the closing of the first quarter. However, for the past two days, market players have been willing to ignore bad news and buy stocks, simply because they are so cheap after months of decline, and the temptation to bet they've bottomed is just too strong.

Cohen wrote to clients this morning that many of the ``imbalances'' in the economy and market of the past months are gone. For instance, stocks have fallen (really?) to the point where many are no longer overvalued. And, economic growth has slowed to noninflationary levels.

She recommended that investors put 70% of their money in stocks, up from 65%, and she said they should take the money from their cash accounts, reducing the level of cash from 5% to zero.

And she reiterated her year-end predictions, saying the S&P 500 will rise 31% from where we are to 1650. The Dow will pop 23% to 13,000, she said.

``The nation benefits from the world's most productive work force, best-managed companies...and controlled inflation,'' she wrote. Goldman doesn't expect a recession and is ``increasingly confident that a too-gloomy consensus scenario is priced into share prices.''

-- posted by Kirk