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Reuters

Goldman Sachs sees recession in 2008

Wednesday January 9, 8:33 am ET

NEW YORK (Reuters) - Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.

The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

Goldman strongly advises fund managers to overweight health care, consumer staples, energy and utilities. They are significantly underweight consumer discretionary, financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 percent, the information technology weighting by 400 basis points to 15 percent, and the increase in their health care weighting by 300 basis points to 17 percent, the firm said.

Their reduced allocation to financials reflects weak fundamentals and their declining weight in the S&P 500. The reduction in information technology reflects that the group has been the second-worst performing sector in both the six months leading up to a recession and during the first phase of a recession, Goldman said.

The health care weighting change reflects strong performance of the group during the six months leading up to and during the first phase of a recession in addition to an attractive valuation, Goldman said.

On Monday, Merrill Lynch economist David Rosenberg said the jump in U.S. unemployment in December confirmed that the economy was entering a recession.

(Reporting by Daniel Burns and Nick Olivari; Editing by Tom Hals)

http://biz.yahoo.com/rb/080109/usa_economy....html?printer=1

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I will give Goldman the benefit of the doubt until they screw it up, based soley on the fact that they predicted the real estate and subprime crisis perfectly. When Morgan Stanley and Merrill were buying up mortgage stocks, Goldman was selling them off. Merrill lost nearly $10b on subprime. Goldman lost zilch.

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young mr. grace (1/9/2008)
Yeah those analysts at Goldman Sachs are great. They predicted 5 out of the last 2 recessions. :rolleyes: I remember that great recession prediciton they made for 2004 when the S&P 500 rose almost 11%.
Got a link? I've followed Goldman Sachs and Standard & Poors exclusively since 2003, and they have been extremely accurate.
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Got a link? I've followed Goldman Sachs and Standard & Poors exclusively since 2003, and they have been extremely accurate.

Robert DieterichBloomberg News

Published Dec 24 2001

NEW YORK -- UBS Warburg's Ed Kerschner, the top-ranked investment

strategist last year, predicted a 30 percent advance in the benchmark

Standard & Poor's 500 index for this year.

Goldman Sachs & Company's Abby Joseph Cohen pointed to a 25 percent rise.

Strategists at every big securities firm missed the second straight

annual drop in the stock benchmark, which has slid 13 percent this year.

In the most bearish call, J.P. Morgan Chase & Company's Douglas

Cliggott saw a 6 percent gain. On average, the seers forecast a 21

percent rise.

Their failure underscored criticism by investors, regulators and

lawmakers that analysts are reluctant to recommend against stocks,

potentially costing their firms business. On average, strategists see a

10 percent gain in the S&P next year, extending the 19 percent increase

of the past three months.

"There's a natural optimistic bias across all analysts and

strategists," said Henry Cavanna, who manages $6 billion at J.P. Morgan

Fleming Asset Management. "They don't factor in the one-in-three or

one-in-four possibilities that are negative."

In lawsuits and in testimony before Congress, critics have said

Internet analysts such as Morgan Stanley Dean Witter & Company's Mary

Meeker stayed too bullish as computer-related stocks tumbled.

By the end of the year, Merrill Lynch & Company's Internet analyst,

Henry Blodget, had quit. The firm paid $400,000 to satisfy an investor

who had sued Merrill, claiming he was misled by Blodget's advice.

Collapse of Enron

And Congress was collecting testimony about the collapse of power trader

Enron Corp., which was the second most highly rated stock in the S&P 500

less than two months before it filed for bankruptcy protection.

Looking ahead, Cliggott has sharpened his standing as a Wall Street

bear. He's the only strategist among the biggest firms to forecast a

decline in the S&P next year.

Kerschner, whom an Institutional Investor magazine poll of money

managers ranked as the best strategist in 2000, remains bullish. While

the world's economies are slumping, he sees "the first synchronized

global recovery" in two decades.

Some investors said Kerschner might be repeating past mistakes by

underestimating the depth of the recession.

"Wall Street strategists have not understood the nature of the economic

times we're in, and still don't," said David Webb, who manages $1

billion for Shaker Investments Inc. in Cleveland. For more than a year,

Webb said, analysts have expected a quick economic rebound: "It's always

two quarters out."

Investors credit strategist Barton Biggs and economist Stephen Roach at

Morgan Stanley as the first to warn that the United States would fall

into a recession.

Falling into recession

They said in January that the United States was in recession. They had

to revise that opinion three months later to say the slump would begin

in the second quarter. The economy fell into recession in March,

according to the National Bureau of Economic Research, which made that

call in November.

Some investors and analysts say the economy might have avoided

recession, or recovered by now, if not for the Sept. 11 terrorist

attacks, which crippled the airline and travel industries and shut down

much of Wall Street for almost a week.

"In a year when everyone was wrong, we had an event that no one

anticipated," said Jerry Castellini, who manages $1.5 billion as

president of CastleArk Management in Chicago. "We all get to say we

wouldn't have had as deep a recession if not for the events of Sept.

11."

The best call this year was recognizing that stocks were cheap after

the sell-off triggered by the attacks, investors said.

In the first week of post-attack trading, the Dow Jones industrial

average had its steepest decline since the Depression; benchmark indexes

all hit their lows for the year Sept. 21. The biggest rally of the year

followed.

"The guys who get the most credit are the ones who jumped in and bought

in September," Castellini said. He said he was not among them, concerned

another attack would derail any gains.

Thomas McManus at Banc of America Securities and Goldman Sachs' Cohen

told investors Sept. 24 they should shift more money into stocks.

'It's time to buy'

"It's time to buy U.S. stocks," Cohen said.

The impact of Cohen's shift was muted because she had made several

bullish calls that didn't pan out earlier in the year. "There is a very

good opportunity in technology," she said on June 26, ahead of a 31

percent slide in the Nasdaq composite index. In March, with the S&P

index 9 percent above today's level, she said "attractive equity

valuation has been restored."

While the economy was slowing a year ago, Cohen and most other

strategists were expecting a rebound in the second half of 2001.

"Recession in the U.S. is extremely, extremely unlikely," Cohen said in

a Dec. 15, 2000, speech.

Misplaced optimism about corporate profits formed the basis of Cohen's

view. She said in her speech that operating profits for S&P 500

companies would grow about 7 percent in 2001, down from the 16 percent

pace of 2000.

"Where the strategists went wrong is not realizing how quickly earnings

would deteriorate," said John Snyder, manager of the $2 billion John

Hancock Sovereign Investors Fund in Berwyn, Pa. Snyder's fund has fallen

6.1 percent, outperforming the S&P 500's 13 percent drop this year.

S&P 500 operating profits will fall about 16 percent this year,

according to Thomson Financial/First Call, hurt by a collapse in demand

at companies such as network equipment maker Cisco Systems Inc.,

chipmaker Intel Corp. and phone gear manufacturer Lucent Technologies

Inc.

Per share profit for Cisco and Intel fell by more than three-fourths in

the most recent quarter.

One strategist who saw the earnings slide coming was Richard Bernstein

of Merrill Lynch & Co. At a luncheon on Dec. 14, 2000, he said that,

since 1970, periods of decelerating corporate profits have always lasted

at least six quarters.

Profit growth peaked in the first quarter of 2000 at 33 percent and has

slowed or fallen since. The year-over-year decline in profits is

estimated to have been 45 percent in the third quarter of 2001,

according to Merrill data, and that will be a sixth quarter of

deceleration.

Bernstein said this month that another quarter or two of deceleration

appears possible. "Our theme for the past year has been that earnings

will likely be weaker for longer than most expect," he wrote.

For Bernstein, Merrill's chief quantitative strategist, his fellow

strategists' optimism has been one of his favorite "contrary"

indicators. It reached record highs this year, which he takes as a

"sell" signal.

In a final twist, Bernstein was named Merrill's chief U.S. strategist

this month, taking the job from Christine Callies, who began this year

predicting -- in line with the Wall Street consensus -- that the S&P 500

would rise to 1,600.

With Bernstein's ascension, a decidedly more bearish analyst gets

control of the firm's official stock forecasts, and Bernstein's favorite

contrary indicator moves about 1 percentage point closer to a "buy"

signal.

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young mr. grace (1/10/2008)
Got a link? I've followed Goldman Sachs and Standard & Poors exclusively since 2003, and they have been extremely accurate.

Robert DieterichBloomberg News

Published Dec 24 2001

NEW YORK -- UBS Warburg's Ed Kerschner, the top-ranked investment

strategist last year, predicted a 30 percent advance in the benchmark

Standard & Poor's 500 index for this year.

Goldman Sachs & Company's Abby Joseph Cohen pointed to a 25 percent rise.

Strategists at every big securities firm missed the second straight

annual drop in the stock benchmark, which has slid 13 percent this year.

In the most bearish call, J.P. Morgan Chase & Company's Douglas

Cliggott saw a 6 percent gain. On average, the seers forecast a 21

percent rise.

Their failure underscored criticism by investors, regulators and

lawmakers that analysts are reluctant to recommend against stocks,

potentially costing their firms business. On average, strategists see a

10 percent gain in the S&P next year, extending the 19 percent increase

of the past three months.

"There's a natural optimistic bias across all analysts and

strategists," said Henry Cavanna, who manages $6 billion at J.P. Morgan

Fleming Asset Management. "They don't factor in the one-in-three or

one-in-four possibilities that are negative."

In lawsuits and in testimony before Congress, critics have said

Internet analysts such as Morgan Stanley Dean Witter & Company's Mary

Meeker stayed too bullish as computer-related stocks tumbled.

By the end of the year, Merrill Lynch & Company's Internet analyst,

Henry Blodget, had quit. The firm paid $400,000 to satisfy an investor

who had sued Merrill, claiming he was misled by Blodget's advice.

Collapse of Enron

And Congress was collecting testimony about the collapse of power trader

Enron Corp., which was the second most highly rated stock in the S&P 500

less than two months before it filed for bankruptcy protection.

Looking ahead, Cliggott has sharpened his standing as a Wall Street

bear. He's the only strategist among the biggest firms to forecast a

decline in the S&P next year.

Kerschner, whom an Institutional Investor magazine poll of money

managers ranked as the best strategist in 2000, remains bullish. While

the world's economies are slumping, he sees "the first synchronized

global recovery" in two decades.

Some investors said Kerschner might be repeating past mistakes by

underestimating the depth of the recession.

"Wall Street strategists have not understood the nature of the economic

times we're in, and still don't," said David Webb, who manages $1

billion for Shaker Investments Inc. in Cleveland. For more than a year,

Webb said, analysts have expected a quick economic rebound: "It's always

two quarters out."

Investors credit strategist Barton Biggs and economist Stephen Roach at

Morgan Stanley as the first to warn that the United States would fall

into a recession.

Falling into recession

They said in January that the United States was in recession. They had

to revise that opinion three months later to say the slump would begin

in the second quarter. The economy fell into recession in March,

according to the National Bureau of Economic Research, which made that

call in November.

Some investors and analysts say the economy might have avoided

recession, or recovered by now, if not for the Sept. 11 terrorist

attacks, which crippled the airline and travel industries and shut down

much of Wall Street for almost a week.

"In a year when everyone was wrong, we had an event that no one

anticipated," said Jerry Castellini, who manages $1.5 billion as

president of CastleArk Management in Chicago. "We all get to say we

wouldn't have had as deep a recession if not for the events of Sept.

11."

The best call this year was recognizing that stocks were cheap after

the sell-off triggered by the attacks, investors said.

In the first week of post-attack trading, the Dow Jones industrial

average had its steepest decline since the Depression; benchmark indexes

all hit their lows for the year Sept. 21. The biggest rally of the year

followed.

"The guys who get the most credit are the ones who jumped in and bought

in September," Castellini said. He said he was not among them, concerned

another attack would derail any gains.

Thomas McManus at Banc of America Securities and Goldman Sachs' Cohen

told investors Sept. 24 they should shift more money into stocks.

'It's time to buy'

"It's time to buy U.S. stocks," Cohen said.

The impact of Cohen's shift was muted because she had made several

bullish calls that didn't pan out earlier in the year. "There is a very

good opportunity in technology," she said on June 26, ahead of a 31

percent slide in the Nasdaq composite index. In March, with the S&P

index 9 percent above today's level, she said "attractive equity

valuation has been restored."

While the economy was slowing a year ago, Cohen and most other

strategists were expecting a rebound in the second half of 2001.

"Recession in the U.S. is extremely, extremely unlikely," Cohen said in

a Dec. 15, 2000, speech.

Misplaced optimism about corporate profits formed the basis of Cohen's

view. She said in her speech that operating profits for S&P 500

companies would grow about 7 percent in 2001, down from the 16 percent

pace of 2000.

"Where the strategists went wrong is not realizing how quickly earnings

would deteriorate," said John Snyder, manager of the $2 billion John

Hancock Sovereign Investors Fund in Berwyn, Pa. Snyder's fund has fallen

6.1 percent, outperforming the S&P 500's 13 percent drop this year.

S&P 500 operating profits will fall about 16 percent this year,

according to Thomson Financial/First Call, hurt by a collapse in demand

at companies such as network equipment maker Cisco Systems Inc.,

chipmaker Intel Corp. and phone gear manufacturer Lucent Technologies

Inc.

Per share profit for Cisco and Intel fell by more than three-fourths in

the most recent quarter.

One strategist who saw the earnings slide coming was Richard Bernstein

of Merrill Lynch & Co. At a luncheon on Dec. 14, 2000, he said that,

since 1970, periods of decelerating corporate profits have always lasted

at least six quarters.

Profit growth peaked in the first quarter of 2000 at 33 percent and has

slowed or fallen since. The year-over-year decline in profits is

estimated to have been 45 percent in the third quarter of 2001,

according to Merrill data, and that will be a sixth quarter of

deceleration.

Bernstein said this month that another quarter or two of deceleration

appears possible. "Our theme for the past year has been that earnings

will likely be weaker for longer than most expect," he wrote.

For Bernstein, Merrill's chief quantitative strategist, his fellow

strategists' optimism has been one of his favorite "contrary"

indicators. It reached record highs this year, which he takes as a

"sell" signal.

In a final twist, Bernstein was named Merrill's chief U.S. strategist

this month, taking the job from Christine Callies, who began this year

predicting -- in line with the Wall Street consensus -- that the S&P 500

would rise to 1,600.

With Bernstein's ascension, a decidedly more bearish analyst gets

control of the firm's official stock forecasts, and Bernstein's favorite

contrary indicator moves about 1 percentage point closer to a "buy"

signal.

Where was that 2004 recession? That looks like they missed in 2001, just like everybody else, including you and me.

Say what you will, Goldman nailed the housing market and subprime crisis. I think they've earned the right to be listened to.

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Where was that 2004 recession? That looks like they missed in 2001, just like everybody else, including you and me.

Say what you will, Goldman nailed the housing market and subprime crisis. I think they've earned the right to be listened to.

The subprime crisis wasn't difficult to predict. Everyone knew or should have known that overly leveraged buyers with ARMs were going to get burned when rates adjusted. Firms like Goldman make tons of money by telling people when they should be in and when they should be out of the stock market. My experience is that you should always be in the market because nobody can predict the future and nobody can time the market.

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young mr. grace (1/10/2008)
Where was that 2004 recession? That looks like they missed in 2001, just like everybody else, including you and me.

Say what you will, Goldman nailed the housing market and subprime crisis. I think they've earned the right to be listened to.

The subprime crisis wasn't difficult to predict. Everyone knew or should have known that overly leveraged buyers with ARMs were going to get burned when rates adjusted. Firms like Goldman make tons of money by telling people when they should be in and when they should be out of the stock market. My experience is that you should always be in the market because nobody can predict the future and nobody can time the market.

I love it when I hear the monday morning qb's come out. Reseting ARMs are NOT what are killing the subprime folk. The spread in risk between mortgage backed securities and treasuries is what are killing them. The entire market vanished overnight, a year earlier than "predicted." Glad to hear that you were smarter than everybody else. Why are you wasting time on this message board wehn you could be getting your message out on a soap box on the corner of Peachtree?

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