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This is not research and is not intended as such. This has been prepared by individuals on the sales/trading desks of the Securities Division.
This material does not represent a formal or official view of Goldman Sachs as the views expressed herein are solely those of the authors,
which may differ from those of Global Investment Research.
PROPRIETARY AND CONFIDENTIAL
State of the Markets
Best Long and Short Risk Strategies
August 2009
Hedge Fund Strategies
Risk Factors – Please Read
„ CDS Risk Factors
„ No Claims on the Reference Entities. Participation in a Credit Default Swap does not constitute a purchase or other acquisition or assignment of any interest in any obligation of any
Reference Entity. The parties to the Credit Default Swap will not have any recourse against any Reference Entity and will have no rights to enforce directly compliance by any Reference
Entity with the terms of its obligations that are referred to in the Credit Default Swap, no rights of set-off against any Reference Entity, no voting rights with respect to any Reference
Entity and no security interest in any Reference Obligation.
„ Limited Provision of Information about Reference Obligations/Reference Entities. No information will be provided to prospective counterparties with respect to any Reference
Obligation or Reference Entity. Investors should conduct their own investigation and analysis with respect to the creditworthiness of each Reference Obligation and the likelihood of the
occurrence of an event triggering payments under the Credit Default Swap occurring with respect to each Reference Entity and Reference Obligation.
„ Concentration Risk/Structural Risk. The concentration of the Reference Obligations in the Index in one particular type of structured product security subjects the Credit Defaults Swap
to a greater degree of risk with respect to defaults within such type of structured product security. Prospective counterparties should review the list of Reference Obligations and conduct
their own investigation and analysis with regard to each Reference Obligation, including the credit, market, interest rate, structural and legal risks associated with each Reference
Obligation.
„ Evolving Nature of the Credit Default Swap Market. Credit default swaps (including credit default swaps on asset backed securities) are relatively new instruments in the market. While
ISDA has published and supplemented the ISDA Credit Derivatives Definitions in order to facilitate transactions and promote uniformity in the credit default swap market, the credit
default swap market is expected to change and the ISDA Credit Derivatives Definitions and terms applied to credit derivatives are subject to interpretation and further evolution. There
can be no assurance that changes to the ISDA Credit Derivatives Definitions and other terms applicable to credit derivatives generally will be predictable. Amendments or supplements to
the ISDA Credit Derivatives Definitions that are published by ISDA will only apply to the Credit Default Swap if the Credit Default Swap is amended. Therefore, in addition to the credit risk
of Reference Obligations, Reference Entities and the credit risk of their counterparty, persons who enter into Credit Default Swaps are also subject to the risk that the ISDA Credit
Derivatives Definitions could be interpreted in a manner that would be adverse to them or that the credit derivatives market generally may evolve in a manner that would be adverse to
them.
„ Credit Ratings. Credit ratings represent the rating agencies’ opinions regarding credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and/or interest payments and do not evaluate the risks of fluctuations in market value. Accordingly, credit ratings may not fully reflect the true risks underlying any Credit Default
Swap. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than
a rating indicates.
„ Conflicts of Interest; No Reliance. Goldman Sachs does not provide investment, accounting, tax or legal advice in respect of the Credit Default Swaps and shall not have a fiduciary
relationship with any counterparty to a Credit Default Swap. In particular, Goldman Sachs does not make any representations as to (a) the suitability of any Credit Default Swap, (b) the
appropriate accounting treatment or possible tax consequences of any Credit Default Swap or (c) the future performance of any Credit Default Swap either in absolute terms or relative to
competing investments. Prospective counterparties should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to
ascertain the suitability of any Credit Default Swap, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with any
Credit Default Swap as they deem appropriate to evaluate the merits and risks of any Credit Default Swap
„ Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Entities and/or
the obligations of the Reference Entities (including the Reference Obligations) and has not undertaken, and does not intend, to disclose, such status or nonpublic information in
connection with any Credit Default Swap. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of entering into any
Credit Default Swap.
„ Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the
information contained herein or in any further information, notice or other document which may at any time be supplied in connection with a Credit Default Swap and accepts no
responsibility or liability therefore. Goldman Sachs may from time be an active participant on both sides of the market and have long or short positions in, or buy and sell, securities,
commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future
relationships between Goldman Sachs and any Reference Entity or any obligation of any Reference Entity.
2
Risk Factors – Please Read
„ Prospective Investors or Counterparties should read the final swap confirmation or Offering Circular, as the case may be, for a more complete description of risk factors
relevant to the particular investment. Entering into the Default Swaps or purchasing the Securities involves certain risks. Prospective swap counterparties or Investors should carefully
consider the following factors, as well as the risk factors included in the final swap confirmation or final Offering Circular, prior to entering into the Transaction. The following is not
intended to be an exhaustive list of the risks involved in the Transaction.
„ The final Offering Circular for any funded transaction will include more complete descriptions of the risks described below as well as additional risks. Any decision to invest in
the securities described herein should be made after reviewing the Offering Circular, conducting such investigations as the investor deems necessary and consulting the investor’s own
legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the securities
„ Risks Associated with Management Rights. The exercise of management rights by the Investor, particularly in the form of Subordination Trades, can potentially (a) increase the risk of
the investment by reducing the Credit Enhancement and hence increase the probability of suffering an actual “Incurred Loss” from a subsequent Credit Event (b) cause a rating
downgrade of the Portfolio Notes, i.e. if trading results in a reduction in Credit Enhancement such that the Rating Agencies determine that the tranche can no longer maintain its rating or
(c) increase the mark-to-market volatility of the Portfolio Notes.
„ Additional Credit Risks. In addition to the credit risk of the Reference Portfolio, the parties to the Default Swaps are exposed to the credit risk of receipt of payments from the other
party, and the Investors in the Securities are exposed to the credit risk of the issuer of the collateral securing the Securities for the full notional amount of their investment
„ Limited Liquidity of the Transaction. There is currently no market for the Default Swaps or Securities. The Default Swaps represent bilateral contracts that cannot be transferred or
terminated without the consent of the other party, which consent may be withheld or delayed for a number of reasons. Goldman Sachs may, but is not obligated to, unwind or terminate a
Default Swap under terms acceptable to it in its sole discretion. There can be no assurance that a secondary market for the Securities will develop or, if a secondary market does
develop, that it will provide the holder of the Securities with liquidity, or that it will continue for the life of the Securities. Moreover, the limited scope of information available to the swap
counterparties and/or Investors regarding the Reference Entities and the nature of any Credit Event, including uncertainty as to the extent of any reduction to be applied to the notional of
each class if a Credit Event has occurred but the amount of the relevant reduction in the notional amount has not been determined, may further affect the liquidity of the Default Swaps or
Securities, especially the subordinated classes. Consequently, any swap counterparty under the Default Swaps or Investor in the Securities must be prepared to hold such Default Swaps
or Securities for an indefinite period of time or until final maturity.
„ Mark-to-Market Risk. Investors and swap counterparties are exposed to considerable mark-to-market volatility following changes in any of the following: spreads of the credits in the
reference portfolio, comparable CDO spreads, ratings migration in the reference portfolio, ratings migration of the Default Swaps or Securities, and credit events in the reference portfolio
(and hence reduction of subordination). These will be reflected in mark-to-market valuations which are likely to be more volatile than an equivalently rated unleveraged investment
„ Additional Risk of Loss due to Definitions of Credit Events. The probability of occurrence of a Credit Event may be higher than the probability of what may be perceived as a “default”
(for example, what is tracked by rating agencies in their default studies) because of their broader definitions. This is particularly true with respect to the inclusion of “Restructuring” as a
Credit Event in all standard credit default swaps
„ Evolving Nature of the Credit Default Swap Market. Markets in different jurisdictions have also already adopted and may continue to adopt different practices with respect to the Credit
Derivative Definitions, particularly, but not limited to, the definition of “Restructuring”. Past events (e.g. Conseco restructuring and Railtrack bankruptcy) exemplify the fact that the Credit
Derivatives Definitions may contain ambiguous provisions that are subject to interpretation and may result in consequences that are adverse to the investor.
3
Risk Factors – Please Read
„ “Cheapest-to-Deliver” Risk. Given that Goldman Sachs, as buyer of protection, has discretion to choose the portfolio of valuation obligations used to calculate the severity of losses
following a Credit Event, it is likely that the portfolio of valuation obligations selected will be obligations of the Reference Entity with the lowest market value that are permitted to be
delivered pursuant to the relevant documentation. This could result in a lower recovery value and hence a larger loss amount
„ Credit Ratings. Credit ratings represent the rating agencies’ opinions regarding credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and/or interest payments and do not evaluate the risks of fluctuations in market value. Accordingly, the credit ratings may not fully reflect the true risks of the Transaction. Also,
rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than a rating
indicates
„ Interest Rates. Changes in the market conditions such as the interest rate environment may impact the valuation of structured credit products
„ Conflicts of interest; No reliance. Goldman Sachs does not provide investment, accounting, tax or legal advice in respect of the Transaction and shall not have a fiduciary relationship
with any Default Swap counterparty or Investor. In particular, Goldman Sachs does not make any representations as to (a) the suitability of the Transaction, (b) the appropriate
accounting treatment or possible tax consequences of the Transaction or (c) the future performance of the Transaction either in absolute terms or relative to competing investments.
Prospective Default Swap counterparties and/or Investors should obtain their own independent accounting, tax and legal advice and should consult their own professional investment
advisor to ascertain the suitability of the Transaction, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with the
Transaction as they deem appropriate to evaluate the merits and risks of the Transaction
„ Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Collateral, the issuer(s)
thereof, the Reference Entities and/or the obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in
connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of entering into the
Transaction
„ Markets Risk
„ Emerging Markets: Political and economic structures in countries with emerging economies or stock markets may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristics of more developed countries including a significant risk of currency value fluctuation. Such instability may
result from, among other things, authoritarian governments, or military involvement in political and economic decision-making, including changes or attempted changes in governments
through extra-constitutional means; popular unrest associated with demands for improved political, economic or social conditions; internal insurgencies; hostile relations with neighbouring
countries; and ethnic, religious and racial disaffections or conflict. Certain of such countries may have in the past failed to recognise private property rights and have at times nationalised
or expropriated the assets of private companies. As a result, the risks from investing in those countries, including the risks of nationalisation or expropriation of assets, may be
heightened.
„ Foreign Exchange: Foreign currency denominated Underlyers and Products are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or
income derived from, the Products.
4
Risk Factors – Please Read
„ Risk Disclosure Regarding Equity Swaps or Similar Swap Transactions or Agreements
„ Prior to entering into an equity swap, contract for difference (CFD) or other similar swap transaction or agreement (hereinafter referred to as a "Swap Transaction"), Goldman Sachs
believes you should be aware of the following general risks associated with Swap Transactions: (i) Liquidity Risk: There is no public market for Swap Transactions and, therefore, it may
be difficult or impossible to liquidate an existing position on favorable terms; (ii) Transfer Restrictions: Swap Transactions entered into with Goldman Sachs cannot be assigned or
otherwise transferred without its prior written consent and, therefore, it may be impossible for you to transfer any Swap Transaction to a third party; (iii) Credit Risk: Because Goldman
Sachs, or one of its affiliates, may be obligated to make substantial payments to you during the term of a Swap Transaction, you must evaluate the credit risk of doing business with
Goldman Sachs or its affiliates; (iv) Pricing and Valuation: The price of each Swap Transaction is individually negotiated between Goldman Sachs and each counterparty and Goldman
Sachs does not represent of warrant that the prices for which it offers Swap Transactions are the best prices available, possibly making it difficult for you to establish what is a fair price
for a particular Swap Transaction; (v) Early Termination Payments: The provisions of the Swap Transaction may allow for early termination and, in such cases, either you or Goldman
Sachs may be required to make a potentially significant termination payment depending upon whether the Swap Transaction is in-the-money to Goldman Sachs or you at the time of
termination; (vi) Proprietary Trading: Goldman Sachs engages in proprietary trading for its own account and the accounts of its affiliates in the same or similar instruments underlying
Swap Transactions (including such trading as Goldman Sachs deems appropriate in its sole discretion to hedge its market risk in any Swap Transaction whether between Goldman
Sachs and you or with third parties) and such trading may affect the value of a Swap Transaction; and (vii) Indexes: Goldman Sachs does not warrant, and takes no responsibility for, the
structure, method of computation or publication of any currency exchange rates, interest rates, indexes of such rates, or equity indexes, unless Goldman Sachs specifically advises you
otherwise.
„ To understand clearly the terms and conditions of any Swap Transactions you may enter into, you should carefully review the Master Agreement, including any related schedules, credit
support documents, addenda and exhibits. You should not enter into Swap Transactions unless you understand the terms of the Swap Transaction you are entering into as well as the
nature and extent of your risk exposure. You should also be satisfied that the Swap Transaction is appropriate for you in light of your circumstances and financial condition.
„ You should not construe this risk disclosure statement as legal, business, or tax advice, and you should consult your attorney, business advisor, and tax advisor as to legal, business, tax,
and related matters concerning Swap Transactions.
„ Clients must be Eligible Contract Participants ("ECP") as defined in Section 1a(12) of the Commodity Exchange Act of 2000 in order to engage in swap transactions.
„ Generally, customers in either of the following categories are ECPs:
„ 1. corporation, partnership, proprietorship, organization, trust, individual or other entity that has total assets exceeding $10mm.
„ 2. ERISA plan, governmental employee benefit plan which has assets exceeding $5mm or has its investment decisions made by a CTA, financial institution or insurance
company.
5
Risk Factors – Please Read
„ Variance Swap Risk Disclosures
„ Selling variance swaps: Investors who sell a variance swap risk unlimited losses if the realized volatility of the underlyer exceeds the reference strike of the swap at expiration.
„ Buying variance swaps: Investors who buy a variance swap risk a maximum loss equal to the square of the variance strike times the variance notional (variance units * variance
strike2), if realized volatility goes to zero.
„ Prior to entering into a variance swap, dispersion swap or other similar swap transaction or agreement (hereinafter referred to as a "Swap Transaction"), Goldman Sachs believes you
should be aware of the following general risks associated with Swap Transactions: (i) Liquidity Risk: There is no public market for Swap Transactions and, therefore, it may be difficult or
impossible to liquidate an existing position on favorable terms; (ii) Transfer Restrictions: Swap Transactions entered into with Goldman Sachs cannot be assigned or otherwise
transferred without its prior written consent and, therefore, it may be impossible for you to transfer any Swap Transaction to a third party; (iii) Credit Risk: Because Goldman Sachs, or
one of its affiliates, may be obligated to make substantial payments to you during the term of a Swap Transaction, you must evaluate the credit risk of doing business with Goldman
Sachs or its affiliates; (iv) Pricing and Valuation: The price of each Swap Transaction is individually negotiated between Goldman Sachs and each counterparty and Goldman Sachs
does not represent of warrant that the prices for which it offers Swap Transactions are the best prices available, possibly making it difficult for you to establish what is a fair price for a
particular Swap Transaction; (v) Early Termination Payments: The provisions of the Swap Transaction may allow for early termination and, in such cases, either you or Goldman Sachs
may be required to make a potentially significant termination payment depending upon whether the Swap Transaction is in-the-money to Goldman Sachs or you at the time of
termination; (vi) Proprietary Trading: Goldman Sachs engages in proprietary trading for its own account and the accounts of its affiliates in the same or similar instruments underlying
Swap Transactions (including such trading as Goldman Sachs deems appropriate in its sole discretion to hedge its market risk in any Swap Transaction whether between Goldman
Sachs and you or with third parties) and such trading may affect the value of a Swap Transaction; and (vii) Indexes: Goldman Sachs does not warrant, and takes no responsibility for, the
structure, method of computation or publication of any currency exchange rates, interest rates, indexes of such rates, or equity indexes, unless Goldman Sachs specifically advises you
otherwise.
„ Returns on variance and dispersion swaps are not linear. To understand clearly the terms and conditions of any Swap Transactions you may enter into, you should carefully review
the Master Agreement, including any related schedules, credit support documents, addenda and exhibits. You should not enter into Swap Transactions unless you understand the terms
of the Swap Transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the Swap Transaction is appropriate for you in light
of your circumstances and financial condition. Clients must be Eligible Contract Participants ("ECP") as defined in Section 1a(12) of the Commodity Exchange Act of 2000 in order to
engage in swap transactions. Generally, customers in either of the following categories are ECPs:
„
1. Corporation, partnership, proprietorship, organization, trust, individual or other entity that has total assets exceeding $10mm or
„
2. ERISA plan, governmental employee benefit plan which has assets exceeding $5mm or has its investment decisions made by a CTA, financial institution or insurance company.
6
Risk Factors – Please Read
„ Risk Disclosure Regarding OTC Options
„ OTC options may trade at a value other than that which may be inferred from the current levels of interest rates, dividends and the underlyer due to other factors including, but not limited
to, expectations of future levels of interest rates, future levels of dividends and the volatility of the underlyer at any time prior to maturity.
„ Prior to entering into an OTC Option transaction you should be aware of the general risks associated with OTC Option transactions: Liquidity Risk: There is no public market for OTC
Option transactions and, therefore, it may be difficult or impossible to liquidate an existing position on favorable terms; Transfer Restrictions: OTC Option transactions entered into with
Goldman Sachs cannot be assigned or otherwise transferred without its prior written consent and, therefore, it may be impossible for you to transfer any OTC Option transaction to a third
party; Counterparty Credit Risk: Because Goldman Sachs, or one of its affiliates, may be obligated to make substantial payments to you as a condition of an OTC option transaction,
you must evaluate the credit risk of doing business with Goldman Sachs or its affiliates; Pricing and Valuation: The price of each OTC Option transaction is individually negotiated
between Goldman Sachs and each counterparty and Goldman Sachs does not represent or warrant that the prices for which it offers OTC Option transactions are the best prices
available, possibly making it difficult for you to establish what is a fair price for a particular OTC Option transaction; Proprietary Trading: Goldman Sachs engages in proprietary trading
for its own account and the accounts of its affiliates in the same or similar instruments underlying OTC Option transactions (including such trading as Goldman Sachs deems appropriate
in its sole discretion to hedge its market risk in any OTC Option transaction whether between Goldman Sachs and you or with third parties) and such trading may affect the value of an
OTC Option transaction.
„ Note: Options involve risk and are not suitable for all investors. Please ensure that you have read and understood the current options disclosure document before entering into any
standardized options transactions. United States listed options disclosure documents are available from our sales representatives or at http://theocc.com/publications/risks/riskstoc.pdf. A
secondary market may not be available for all options. Transaction costs may be a significant in option strategies calling for multiple purchases and sales of options, such as spreads.
When purchasing long options an investor may loose their entire investment and when selling uncovered options the risk is potentially unlimited. Supporting documentation for any
comparisons, recommendations, statistics, technical data, or other similar information will be supplied upon request.
„ To understand clearly the terms and conditions of any OTC Option transactions you may enter into, you should carefully review the Master Agreement, including any related schedules,
credit support documents, addenda and exhibits. You should not enter into OTC Option transactions unless you understand the terms of the OTC Option transaction you are entering into
as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC Option transaction is appropriate for you in light of your circumstances and financial
condition. You may be requested to post margin or collateral to support written OTC options at levels consistent with the internal policies of Goldman Sachs.
7
Table of Contents
I.
State of the Markets
II.
Tradable Themes
I.
US Commercial Real Estate
II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III.
Other Market Opportunities
I.
Commodity Opportunities
II. Event-Driven Market Neutral Investing
IV.
Appendix
V.
Legal Disclosures
8
State of the Markets Overview
Summary of Hedge Fund Strategies Group Views
If you believe this thesis, then…
Trading and Hedging Opportunities
Consumer
Debt
Repayment
Housing Bubble
- Short REIT Equities
- Buy AAA CMBS
Wealth
Destruction
Higher
Savings
Rate
Lower
Consumer
Spending
Prolonged
Elevated
Unemployment
Equity Market
Decline
- Buy FX Options on CommodityLinked Currencies
- Buy Equities of Non-US Commodity
Producers
- Sell Caps on the US Tax Index or
Receive the SIFMA Ratio
- Short JPY
- Buy Yen CMS Caps
- Short US Consumer and Retail
companies via equity or CDS
- Sell Aluminum Caps
Credit Crunch
Government
Intervention
Risk Shifting to Public
Balance Sheet
- Long Crude Oil vs Short Heating
Oil (Short the Crack Spread)
- Engage in Event-Driven Market
Neutral strategies
For Discussion Purposes Only.
9
State of the Markets
In 2009 Credit Spreads Have Tightened1,2
1Jan2008
9
Equity Prices Are Up From March ’09 Lows1
29Jul2009
8
6
5
7
6
4
5
3
4
3
2
2
1
2008
1
2009
Jan
Apr
Jul
Oct
Jan
Apr
Jul
CDX Index CDXHY Index (RHS) LCDX Index (RHS) iTraxx Europe iTraxx Asia
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
1Jan2008
2008
1Jan2008
29Jul2009
1.6
1.4
0.8
1.2
0.7
1
0.6
0.8
0.5
0.6
0.4
0.4
2008
Jan
Apr
Jul
CMBX AAA OTR ABX AAA OTR
0.2
2009
Oct
Jan
Apr
Jul
1 Source: Goldman Sachs. Data as of July 29, 2009. Past performance is not indicative of future results.
2 All credit indices shown are for 5y OTR contracts
Jul
In 2009 Commodities Markets Recovering1
0.9
0.3
2009
Jan
Apr
Jul
Oct
Jan
Apr
NASDAQ FTSE SX5E NIKKEI HANG SENG KOSPI BOVESPA
In 2009 Commercial Mortgages Up, Subprime Down1,2
1
29Jul2009
1Jan2008
2008
29Jul2009
2009
Jan
Apr
Jul
Oct
Jan
Apr
GS Agriculture GS Precious Metals GS Industrial Metals GS Petroleum
Jul
10
State of the Markets
“Green Shoots” Are Sprouting But Look Less Lively Compared To Nominal Values
US Production Could Be Bouncing2
Economic Data May Have Stopped Their Decline1
22Jul2009
80
600,000
100
70
500,000
80
400,000
60
300,000
40
200,000
20
2005
2006
2007
2008
2009
22Jul2009
50
40
30
20
2000 2001 2002 2003 2004 2005 2006 2007 2008
ISM's Purchasing Managers Index
ISM's CUSTOMERS' INVENTORIES INDEX ISM New Orders Index
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
Initial Jobless Claims (LHS)
Consumer Confidence (RHS)
Industrial Production Is Down Despite Small Bounce3
2009
US Housing Starts Have Bounced But Are At All-Time Lows4
2,500
120
Germany
110
Japan
US
2,000
90
(Thousands)
100
"Green Shoots"
80
Japan Industrial Production
Back to 1984 Levels
70
US Industrial Production
Back to 1998 Levels
60
Germany Industrial Production
Back to 2000 Levels
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
1,500
1,000
"Green Shoots"
500
50
1
2
3
4
22Jul1999
60
Index
New Claims
22Jul2004
120
700,000
0
81 83 85
87 89
91 93
95 97 99
01 03
05 07 09
Source: Goldman Sachs. Data as of July 22, 2009. Past performance is not indicative of future results.
Source: Institute for Supply Management (ISM). Data as of July 22, 2009. Past performance is not indicative of future results.
Source: Haver Analytics, Japan Ministry of Economy, Trade & Industry; Statistisches Bundesamt. Data as of July 22, 2009. Past performance is not indicative of future returns
Source: US Department of Commerce, Bureau of the Census. Chart only shows data back to 1981 so that recent price movement will be recognizable. Full data history available upon request. Indicative Only.
Past performance is not indicative of future results. Data as of July 22, 2009
11
State of the Markets
China May Be Helping
„
China’s GDP growth has remained positive even through the financial crisis and Goldman Sachs Research projects that GDP growth
will return to 12% in 20101
„
Industrial Profit growth also points to a rapid recovery in the Chinese economy2
China Industrial Production and Real GDP1
China Sequential Industrial Profit Growth2
% YoY
20%
18%
GS
Proj.
16%
14%
12%
10%
8%
6%
4%
2%
China - Industrial Production (% chg yoy)
China - Real GDP (% chg yoy)
1
2
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
0%
Source: Goldman Sachs Research ERIWN Economic Database. https://360.gs.com/gs/portal/research/econ/erwin/erwinforecasts/ Past performance is not indicative of future results.
Source: Goldman Sachs Research: Asia Economic Data Flash. June 26, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7391688&fn=/document.pdf. Past performance is not indicative of
future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
12
State of the Markets
Government Intervention Has Been and May Continue To Be Substantial
Central Bank Lending Rates Have Plunged1
6%
21Jul2006
US Federal Debt Held by the Public (% of GDP)2
23Jul2009
5%
4%
3%
2%
1%
0%
2006
2007
2008
2009
Jan
Jul
Jan
Jul
Jan
US Fed Funds Target Rate US 3m T-Bill ECB Refinancing Tender
Jul
Bounce May Have Been Driven By Intervention3,4
Avg PMI
60
GDP Growth Impact (%)
4
55
50
45
40
35
30
Jan-07
Impact on US GDP From Spending May be Large3
Eased
Tightened
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
3
2
1
0
-1
-2
09Q1
09Q2
09Q3
09Q4
10Q1
10Q2
10Q3
10Q4
1 Source: Goldman Sachs Research. Global Economics Weekly. May 6, 2009. https://360.gs.com/gs/portal?action=action.doc&d=7122754. Past performance is not indicative of future results.
2 Source: Congressional Budget Office “The Long Term Budget Outlook” June 2009. http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf Goldman Sachs provides no assurance or guarantee that future results will be consistent with the
projected analysis.
3 Source: Goldman Sachs Research. “US Daily: Where We Stand on Fiscal Stimulus Implementation” May 6, 2009. https://360.gs.com/gs/portal/home/fdh/?st=1&d=7125758. Goldman Sachs provides no assurance or guarantee that future results
will be consistent with the projected analysis.
4 Data updated by GS Research on July 23, 2009. Eased are those whose FCIs have eased since 8/1/08, including India, China, UK, Australia, and Sweden. Tightened include Japan, Switzerland, US, and Euroland.
13
State of the Markets
Asset Bubbles May Still Be Deflating
„
Commercial and Residential Real Estate prices have declined from their peaks
„
Continued home foreclosures should add to the supply of houses up for sale
Housing And Commercial RE Prices
Projected To Fall1
190
4May2000
Large Housing Inventory Overhang2
22Jul2010
180
170
160
150
140
130
120
110
100
90
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Housing Prices (CS) Commercial RE Prices (NCREIF)
1
2
Source: Graph Data from Goldman Sachs. Data as of May 15, 2009. Past performance is not indicative of future results
Source: Goldman Sachs Research. Americas: Technology: IT Services. "Foreclosures at record level in April; pullback in LPS presents a buying opportunity". May 13, 2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=7163957
14
State of the Markets
Impact On Balance Sheets Still Ahead
Asset Price Growth Æ Mortgage Growth Æ Bank Growth1
Total CRE & Resi Mortgages
Outstanding increased $5.2
trillion 2003-2007
15,000
13,000
4,000
Total CRE & Resi Mortgages
on Bank Balance Sheets
increased $1.6 trillion 20032007
11,000
9,000
3,000
7,000
2,000
5,000
1,000
3,000
Total CRE & Residential Mortgages (RHS)
Total CRE & Residential Mortgages ($ in bn)
5,000
6
17,000
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Total Mortgage Debt on Bank Balance ($ in bn)
6,000
Projected Loan Losses on Bank Balance Sheet2
(in percent of total loans)
5
United States
Estimates
4
Europe
3
2
1
0
-1
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Total Mortgage Debt on Bank Balance Sheet (LHS)
1 Source: Federal Reserve Flow of Funds Report. Past performance is not indicative of future results
2 Source: IMF Global Financial Stability Report, April 2009 http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm. Figure 1.30. Past performance is not indicative of future results. Goldman Sachs provides no
assurance or guarantee that future results will be consistent with the projected analysis
15
State of the Markets
Credit Bubble Is Still Deflating
Banks Still Tightening Credit As Conditions Worsen1
Delinquencies (%)
10
Commercial Delinquencies (LHS)
Bank Lending Conditions (RHS)
8
6
10
80
Euro Area
8
60
40
20
4
0
2
-20
0
1991 Q1 1993 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1
12
-40
6
Chng (%)
12
100
Tightening (%)
14
Private Sector Credit Is Falling2
Projected Æ
4
United States
2
0
-2
-4
-6
Dec-05
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
1 Source: Federal Reserve Bank Lending Conditions; Commercial Default Data from Federal Reserve. Sourced through IHS Global Insight. Past performance is not indicative of future results
2 Source: IMF Global Financial Stability Report, April 2009 http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm. Figure 1.5. Past performance is not indicative of future results. Goldman Sachs provides no
assurance or guarantee that future results will be consistent with the projected analysis.
16
State of the Markets
A “V” or “L” Shaped Recovery? The Key May Be the Bursting of the Consumer Bubble
Personal Savings Rate Is Projected to Return to
Historical Norms1
50
Savings Rate (RHS)
25
0
Excess Spending (left axis)
2008
Consumer Spending / GDP (right axis)
-1
1976
1984
1992
2000
2008
Upper Savings Rate Forecast
Lower Saving Rate Forecast
Retail Sales (LHS)
US Savings Rate (RHS)
1 Source: Goldman Sachs, U.S. Department of Commerce. Data as of July 23, 2009. Past performance is not indicative of future results.
2 Source: BEA, Goldman Sachs Analysis. Data as of December 11, 2008. Past performance is not indicative of future returns. Excess spending defined as the spending in excess of 62% Consumer Spending /
GDP, which is approximately the historical average of the Consumer Spending / GDP Ratio. Consumer credit may decrease 10-20% due to decline of assets and sources of credit.
17
Consumer Spending/GDP
60%
2006
1
-200
2002
2004
75
62%
2000
2
0
1998
3
Retail Sales (LHS)
100
64%
1994
1996
125
4
200
1992
5
150
66%
1990
6
175
400
1986
1988
7
200
US Savings Rate (%)
8
225
68%
1984
250
600
1980
1982
9
1978
10
70%
1976
Savings Rate Projections
800
1972
1974
11
1970
300
72%
1968
12
1000
1964
1966
325
275
Retail Sales
13
1962
25Jul2011
1960
23Jul1969
Excess Spending ($bil)
350
Nominal Private Consumption and GDP in the US2
State of the Markets
The Asset and Credit Bubble Led To A Wealth Bubble And…
„
Significant wealth has been accumulated due to housing prices, however, borrowing against these assets as a percentage of value has
grown since 2005 (from ~40% in 2005 to ~50% at the end of 2008)1
„
Net worth of the US consumer dropped from its peak in mid-2007 of $64 trillion to $51 trillion1,2
„
Decrease in value from home equity1
„
Decrease in value from capital gains from corporate equity, mutual funds, and pensions1
The Current Wealth Shock is Three Times Worse
Than Any Previous Post-War Recession3
Net Worth and Home Price Appreciation1,2
% GDP
70,000
Peak: $64 trillion
in net w orth
200
180
60,000
160
50,000
140
$51 trillion in net
w orth (Q408)
40,000
120
100
30,000
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Net Worth ($ in bn) (LHS)
1
2
3
Case-Schiller National Composite Index (RHS)
Source: Federal Reserve Flow of Funds Report. Past performance is not indicative of future returns.
Source: Goldman Sachs Calculations. Assumptions: Home prices fall 15%, Stock prices fall additional 25% from Q3 2008 data. Past performance is not indicative of future returns.
Source: Goldman Sachs Research. Global Economics Weekly. April 1, 2009. https://360.gs.com/gs/portal?action=action.doc&d=6931401
18
State of the Markets
Home Equity Values Have Declined Following the Decline in Housing Prices
„
Approximately 32% of US homes are mortgage free1, implying that the Loan-To-Value ratio on the balance of US homes may be near
95% given a 9% drop in housing prices as implied by the S&P Case Shiller Home Price IndexSM 2
„
The decline in home equity may push savings rates higher and reduce consumer discretionary spending
US Residential Housing Breakdown1
$ Trillion
25
Residential Home Value
85%
20
68%
69%
70%
69%
68%
64%
63%
64%
65%
64%
62%
67%
76%
100%
80%
60%
15
28%
16%
0%
1%
2%
14%
21%
17%
6%
40%
21%
9%
20%
(11%)
10
0%
(20%)
(33%)
(43%)
5
(60%)
(40%)
(60%)
0
LTV & Return on Home Equity
120%
93%
(80%)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Value of Homes (no-mortgage)
Value of Home Equity (on Mortgaged Home Value)
Annual Return on Home Equity
Value of Homes Mortgaged
Loan-to-Value of Homes with Mortgages
1 Sources: Percentages of houses with mortgages from US Census. American Housing Survey 2007. (biannually released: 1995, 1997, 1999, 2001, 2003, 2005, 2007; interpolated between values). Table 3-15.
http://www.census.gov/hhes/www/housing/ahs/ahs07/ahs07.html. Home values from Source: Federal Reserve Flow of Funds Report, Table B.100. Calculations: Goldman Sachs. 2009 is Hedge Fund Strategies
estimate. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
2 Source: S&P Case-Shiller Home Price Values Index. http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html
19
State of the Markets
Low Savings Rates Were Enabled By The Growth Of The Credit Markets
„
Savings and Mortgage Equity Withdrawal (MEW) appear to be inversely linked1
„
Declining home prices and equity valuation might drive savings higher2
Relationship Between Saving and Mortgage Equity
Withdrawal1
ABS Issuance Has Come To A Halt1
1 Source: Goldman Sachs Research, US Economics Analyst. “Some Micro Evidence on Saving and MEW.” June 9, 2006. Past performance is not indicative of future results.
https://360.gs.com/gs/portal/home/?action=action.doc&d=2239993
2 Source: Board of Governors of The Federal Research, Flow of Funds Report <http://www.federalreserve.gov/releases/z1/Current/>
20
State of the Markets
Declining Wealth May Push Saving Rates Higher And Consumption Lower
„
The US consumer may realize that capital gains from real estate and equity are not permanent or persistent and that disposable
income may decrease in this recession
„
Thus, we expect savings rate to adjust upwards as the US consumer saves more money for his/her retirement and wealth, thus
reducing consumer spending
Wealth Ratio vs Savings Rate1
Net Worth Growth Decomposition1
1 Source: Goldman Sachs. Retail-Consumer 2009 Outlook. January 2009. https://360.gs.com/gs/portal?action=action.doc&d=6486350. Past performance is not indicative of future returns
21
State of the Markets
Baby Boomers May Need To Start Saving
„
The “Baby Boomer” generation (born 1945-1964) has generated higher earnings and created more economic growth than any
generation before them. The recent losses in housing, equity markets, and small business value have had a significant impact on their
wealth1
●
„
“approximately two-thirds of Early Boomer households, who are aged 54-63, are financially unprepared for retirement – that is, they
have not accumulated enough savings to maintain their lifestyle as they age.” – McKinsey Global Institute: “Talkin’ ‘Bout My
Generation: The economic impact of Aging US Baby Boomers
Entrance of a larger percentage of women in the workforce combined with higher education levels has contributed to this growth, but
has leveled out in the past 10 years1
The “Boomer Era” from 1980 to 20191
Boomers Have Not Saved as Much as Previous
Generations1
1 Source: McKinsey Global Institute: “Talkin’ ‘Bout My Generation: The economic impact of Aging US Baby Boomers". June 2008.
22
State of the Markets
Where Has The Reduction In US Consumer Spending Gone?
Reduction in US household consumption may have been redirected towards repayment of consumer debt and increased savings in
Bond funds/401K/IRA accounts.
Retail Flows From Money Markets Into Risk Assets2
(250)
(300)
change in T/E Bond Fund Assets
change in Taxable Bond Fund Assets
change in Money Market Asset
500
S&P 500 Value
650
600
15-Jul
Apr-08
Apr-06
Apr-04
Apr-02
Apr-00
Apr-98
Apr-96
Apr-94
Apr-92
Apr-90
Apr-88
Apr-86
Apr-84
Apr-82
Apr-80
Apr-78
Apr-76
Apr-74
Apr-72
1.0%
Apr-70
0
Cum
Cum
Cum
S&P
1-Jul
200
700
(200)
17-Jun
1.5%
750
(150)
3-Jun
400
800
(100)
20-May
2.0%
600
850
(50)
6-May
800
900
0
22-Apr
2.5%
1000
950
50
8-Apr
1200
100
25-Mar
1400
1000
11-Mar
3.0%
150
25-Feb
1600
Cumulative Change in MM & Fund Asset ($bn)
3.5%
11-Feb
S&P 500
Personal interest payments/Disposable Income (RHS)
1800
28-Jan
Consumers Continue To De-Lever1
14-Jan
„
1 Source: Bureau of Economic Analysis, Goldman Sachs. Data as of May 11, 2009. Past performance is not indicative of future results.
2 Source: AMG, Goldman Sachs. Data as of July 23, 2009. All data shown is for 2009. Past performance is not indicative of future results. Recent data shown rather than extended history to highlight recent trend.
23
State of the Markets
The Bursting of the Consumer Bubble Creates Headwinds
The US savings rate has been around 1.6% this past decade,
but it is projected to climb to 6-10% in the near future1,4
„
The increase in the US savings rate may be a structural
change rather than a cyclical change
●
●
●
„
Savings may need to increase to replace the $13 trillion
decline ($63 trillion to $50 trillion) in US wealth since mid20072,3
Savings may increase as baby boomers increase saving
rates as they age4
Savings may increase because the credit markets will
constrain consumers as they try to spend out of future and
current wealth4
Savings could be used to deleverages consumer balance
sheets
Savings Rate vs Consumer Credit1,3
140%
120%
Forecasted
deleveraging of the
consumer
14.0%
12.0%
10.0%
8.0%
100%
6.0%
80%
4.0%
60%
Forecasted
increase in savings
40%
2.0%
0.0%
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
„
Consumer Credit / Disposable Income (%) (LHS)
Personal Savings Rate (%) (Savings / Disposable Income) (RHS)
1
2
3
4
Source: BEA . Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. Past performance is not indicative of future returns
Source: GS Calculations. Assumptions: $10.6 trillion disposable income (2008). Savings rates increases from 1.8% to 10%. Home prices fall 15%; Stock prices fall additional 25% from Q3 2008 data
Source: Fed Flow of Funds. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. Past performance is not indicative of future returns
Source: Goldman Sachs. "The Day After Tomorrow: The changing face of the consumer." October 1, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=5955848
24
State of the Markets
US Equity Valuations Driven By The Consumer
„
Equity values might have downside
„
Peak earnings in the last cycle may be difficult to replicate given fundamental changes in the financial, energy, and, most importantly,
the consumer sectors
„
Combined, the financial and the consumer sectors accounted for over 50% of peak S&P income in mid-20072
S&P 500 Historical Earnings1
90
1May1954
S&P 500 Earnings in 2009 Dollars
S&P 500 Earnings Contribution by Sector2
28Jul2009
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1963
1973
1983
S&P 500 Earnings in 2009 Dollars 10yr Rolling Average
US Recession
S&P 500 Earnings in 2009 Dollars
1993
2003
1 Source: Goldman Sachs. As of July 23, 2009. Past performance is not indicative of future returns
2 Source: Goldman Sachs Research. “Where We Stand Now: US Equity Market Outlook for Turbulent Times” November 10, 2008. p. 29. Data as of October 31, 2008. Past performance is not indicative of future
returns. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6194686&fn=/document.pdf The chart shows Net Income, defined as “earnings before extraordinary items available to common shareholders.”
Only positive data points are included.
25
State of the Markets Overview
Summary of Strategies To Implement These Views
If you believe this thesis, then…
US Real Estate
Section
Markets
Public Balance Sheet
Conditions
„ Capitalize on the
Strategy
Japan
US Retail and
Consumer
Commodities
Market Neutral
Opportunities
„ Economic fundamentals favor EM
divergence in CRE price
balance sheets as developed
estimates between REITs economies increase public debt
equity and CMBS markets
„ US faces high government
borrowing, unaddressed social
liabilities, and the potential long-term
erosion of the USD as the global
reserve currency
„ Position for a
weaker economy
with slowing
exports as well as
increasing
government debt
„ Position for lower
consumer spending
and a weaker
economic outlook
„ Position for stronger crude „ Capitalize on event-driven
oil demand, weaker USD
situations to generate
and inflation
attractive risk-adjusted
returns with low correlation to
„ At the same time,
broad market movements
capitalize on the slack in
refining capacity and high
implied volatility on
aluminum options
„ Short REIT Equity
„ Sell The Yen
„ Buy 5y or 7y CDS
Protection on Retail
and Consumer
Related CDS
„ Buy long-dated oil
„ Merger / Risk Arbitrage
„ Short the crack spread
„ Stubs/ Holding Companies
„ Sell calls on aluminum
„ Spin-offs
„ Long CMBS through
buying AAA CMBS or
selling protection on AAA
CMBX
Trade Ideas
„ Short debt-laden developed
economies/ long select emerging
economies
„ Buy CMS Caps
on JPY Rates
„ Buy USD, JPY or EUR Puts vs. Calls
on the currencies of commodityexporting countries (AUD, BRL, CAD,
NOK)
„ Buy 6m or 1y Put
Spreads on the S&P
Retail Select Index.
Consider selling a Call
to cheapen the option
„ Buy the equities of non-US
commodity producers
„ Dual Share Class
„ Capital Structure Arbitrage
„ Buy GS inflation Proxy Commodity
index
„ Sell Caps on the US Tax Index/
Receive the SIFMA ratio
„ Puts or put spreads may „ Buy FX currency forwards/FX options „ Sell the Yen
Description
be purchased on a REIT (to express a view on sovereign credit)
equity index or a basket of
„ Buy CDS protection on low beta
individual names in the
Retail and Office sectors developed countries/ Sell CDS
protection on select EM economies
„Buy non-TALF eligible
CMBS AAA bonds of late „ Currency trades may be executed on
individual crosses, or as a basket
2006 or early 2007
Vintage A3/A4s
„Sell protection on the
CMBX 5 AAA tranche
„ The US Tax Index tracks the US
Federal Marginal Income Tax Rate
„ The investor may
„ Buy Knock-in or Knock-out
choose to buy
Call options on oil to take a
protection on
long-term constructive view
individual names or on
„ Buy two contracts of
a broad basket
Crude Oil and Short one
contract each of Gasoline
„ Buy an OTM Call „ Puts, put spreads,
option on JPY 10y and put spread collars and Heating Oil to take a
rates struck at 3% may be purchased on bearish view on refining
or 4%
the S&P Retail Select margins
Index, a similar ETF,
or a custom basket of „ Sells call options on
aluminum
equities
outright, or buy
JPY puts / USD
calls or JPY puts /
KRW calls
For Discussion Purposes Only. All options mentioned are OTC options.
Please see the Risk Factors section of this presentation as well as each section’s trade summary page for important risks and considerations to these products and trades
„ Hedged purchases of
target company shares
„ Create synthetic positions
to benefit from price-to-netasset ratios
„ Exploit inefficiencies in
shares of newly listed entities
„ Relative value arbitrage of
share classes and capital
structure
26
Table of Contents
I.
State of the Markets
II.
Tradable Themes
I.
US Commercial Real Estate
II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III.
Other Market Opportunities
I.
Commodity Opportunities
II. Event-Driven Market Neutral Investing
IV.
Appendix
V.
Legal Disclosures
27
US Commercial Real Estate Markets
Residential Housing Market Continues to Weaken
Agency Conforming Home Prices Appear to be Stabilizing
US Home Price Appreciation (YOY)1
60+ Day Delinquencies (%) 2
20%
50%
5.0%
60+ Delinquency Rate (OTS)
15%
10%
5%
0%
-5% 90
92
94
96
98
00
02
04
06
08
-10%
-15%
OFHEO Home Price Index
-20%
40%
4.0%
30%
3.0%
20%
2.0%
10%
1.0%
0%
0.0%
5/07
National S&P Case-Schiller Home Price Index
-25%
8/07
11/07
Subprime
Year Over Year HPI 1Q 20093
80%
ME
ND
OR
VT
NH
NY MA
CT
MN
SD
ID
WI
WY
MI
PA
IA
NE
NV
IL
UT
IN
WV
CO
KS
CA
AZ
OK
NM
VA
MO
KY
TX
RI
AR
11/08
Alt A
2/09
5/09
Prime ( R )
80%
1st Lien Loss Severity
70%
70%
60%
60%
50%
50%
40%
40%
DC
30%
30%
> 0%
20%
20%
(4)% – 0%
10%
SC
AL
8/08
NJ
DE
MD
NC
TN
MS
AK
OH
5/08
Option ARM
1st Lien Loss Severity2
WA
MT
2/08
GA
LA
FL
HI
1 Source: Office of Housing Enterprise Oversight (OFHEO), CSW
2 Source: LoanPerformance. Data shown for recent years to show recent trend.
3 Source: FHFA. http://www.fhfa.gov/Default.aspx?Page=87 Data accessed July 21, 2009
(8)% – (4)%
< (8)%
10%
0%
0%
5/07
8/07
11/07
Subprime
2/08
5/08
Option ARM
8/08
11/08
Alt A
2/09
5/09
Prime
29
Commercial Real Estate Beginning To Take Center Stage
Commercial Prices Are Falling And Trailing Residential 1
Historic And Expected Cap Rates Relative to CRE Values2
300.00
250.00
200.00
150.00
100.00
50.00
Commercial Real Estate (MIT)
Residential Real Estate (CS)
Vacancies Are Increasing (Retail Most Rapidly) 2
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0.00
Cumulative life-time losses, by vintage (%)3
1 Source: Goldman Sachs, MIT Center for Real Estate, Moodys/REAL Commercial Property Price Index, S&P/Case-Shiller. Data as of July 28, 2009. Past performance is not indicative of future returns.
2 Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf
3 Source: Goldman Sachs Research. “Stress-testing losses for higher cap rates and financing costs” October 31, 2008. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6135768&fn=/document.pdf
30
CRE Historic Default Rates Shed Some Light…
„
From the period between 1978-1990, 10-yr default rates peaked as commercial real estate appreciation was at the lowest in eight
years
„
From the period between 1995-2006, historical and projected life defaults declined significantly as commercial real estate appreciated
in value
Default Rates and Property Values 1978 – 19901,2
4%
12%
2%
20%
0%
15%
-2%
10%
-4%
5%
0%
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
20%
18%
16%
10%
14%
12%
8%
10%
6%
8%
6%
4%
4%
-6%
2%
-8%
0%
2%
0%
1995
1996
1997
Vintage
Historical 10-Yr Defaults¹ (left)
CRE Annual Appreciation² (%)
14%
Default Rate¹ (%)
Historical 10-Yr Defaults¹ (%)
25%
6%
CRE Annual Appreciation² (%)
30%
All Property2,3
1998
1999
2000
2001
2002
2003
2004
2005
2006
Vintage
CRE Annual Appreciation² (right)
Historical Default¹ (left)
Projected 10-Yr Defaults¹ (left)
1 Source: Esaki et. al. Please note that this data is for the period 1978-1990 only. Past performance is not indicative of future results.
2 Source: National Council of Real Estate Investment Fiduciaries (NCREIF). Please note that this data is for the period. Past performance is not indicative of future results.
3 Source: Commercial Mortgage Securities Association
CRE 10-Yr Annual Appreciation² (right)
31
CRE Equity May Have Further to Fall…
Or May Be Completely Wiped Out…
„
CRE values are estimated to have declined approximately 26% from the peak1, and could potentially decline a further 20-30%2
according to S&P's rating stress for CMBS
„
A handful of recent transactions have sold in the market 60-65% down from peak February 2007 prices (e.g. Worldwide Plaza in New
York which sold on July 9, 2009 for $600mm after a previous sale of $1.74bn in February 2007)4
„
Secured financing markets remain closed and government programs seem to be doing little to help
Sources of Acquisition Financing3
As of March, 2009
1
2
3
4
CMBS Securitization Has Effectively Stopped3
As of April, 2009
Source: MIT Transactions-Based Index. http://web.mit.edu/cre/research/credl/tbi.html. Data as of July 12, 2009. Past performance is not indicative of future results
Standard and Poors "US CMBS Rating Methodology and Assumptions for Conduit/Fusion Pools". June 26, 2009.
Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf
Source: Wall Street Journal. “Deutsche Bank to Sell New York Skyscraper”. July 7, 2009. http://online.wsj.com/article/SB124692321690102803.html
32
Retail May Consolidate To Correct Accelerated Growth
Store Closings May Hurt Commercial Real Estate Property Owners
„
US REITS have raised $13bn YTD in capital1, however they may still need $40-60bn1 more, even without further reduction in values
„
Vacancy rates have begun to rise geometrically in specific CRE sectors, with Retail and Suburban Office nearing 17%2.
„
Goldman Sachs Research expects 15% obsolescence with roughly 200 regional malls closing in the next 5-10 years3
●
Retail square footage per capita has increased but retail sales have fallen
●
Regional Mall construction peaked from the late 60s – early 80s averaging almost 13% annual growth and retail stocks grew by
about 2% per year, while the population only grew by about 1% per year3
Retail Stock Square Footage Per Capita3
Retail Growth Has Outpaced Population Growth3
1 Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf
2 Source: Goldman Sachs Research. “Americas: Retail: Broadlines: Retail REITs: Final Four a Destination, but still a few rounds away”. July 14, 2009.
https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7480830&fn=/document.pdf
3 Source: Goldman Sachs Research. “Americas: Real Estate” July 21, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7508032&fn=/document.pdf Paste performance is not indicative of future
returns
33
REIT Equity Prices Have Risen…
…But Property Values Have Continued to Fall
„
REITs as a broad Index (DJUSRE Index GP <GO>) have rallied nearly 50% since the lows in early March1, despite negative
Commercial Real Estate price discovery
„
The trend downward in Commercial Real Estate price indices does not show signs of abating2
„
A continued trend downward could imply a ~40% decline in REIT equity prices from current levels3. In addition, there is a potential for
further dilution should REITS encounter capital markets resistance to refinancing debt coming due in the next several years.
„
The Hedge Fund Strategies Group estimates that there is a divergence in CRE price estimates between equity and CMBS
markets close to 25%
US REIT Equity / CMBX AAA Prices1
350
105
All Price
110
100
300
100
95
250
90
90
200
80
85
70
80
60
75
50
70
40
65
30
60
20
2007
Jan
Apr
2008
Jul
Oct
Jan
Apr
Oct
Jan
Apr
CMBX AAA On-The-Run (RHS)
Dow Jones Real Estate Index (DJUSRE) (LHS: Jan 1 2007 = 100)
Jul
Industrial
Office
Retail
100
50
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1994
0
CMBS Implied Losses4
55
2009
Jul
Apt
150
1996
21Jul2009
1995
1Jan2007
Price
Index Level
120
All Property Price Index Level2
Tranche
Name
CMBX 1 AAA
Avg Attch Avg Exhst
Markit
Price** Spread**
WAL*
Point*
Point*
PV01***
29.76%
100.00%
89.25
211
5.34
6.01
CMBX 5 AAA
29.76%
100.00%
1 Source: Goldman Sachs. Data as of July 20, 2009. Past performance is not indicative of future results
2 Source: MIT Transactions-Based Index. http://web.mit.edu/cre/research/credl/tbi.html . Data as of July 12, 2009. Past performance is not indicative of future results
3 Source: Goldman Sachs Analysis. As of July 10, 2009
4 Source: * = Intex; ** = GS; *** = Markit
75.50
433
6.15
7.99
AAA Implied
Loss**
12.38%
Collat Implied
Loss**
26.65%
30.21%
45.97%
34
REIT Equities and CMBS May Imply Different CRE Losses
There May Be A 25% Mis-pricing In Loss Expectations For CRE
Real Estate Structures ( February 2007) 1
REIT
CRE Loan
Debt
40%
Commercial
Property
(Asset)
Commercial
Property
(Asset)
Equity
60%
Market Prices and Implied Losses (Current) 2
CMBS
Debt
70%
CRE Loan
Pool
(Debt)
REIT
Implied
Market
Price Chg Pricing
AAA
70%
Debt
40%
Market
Change
- 38%
-65%
Impact of CRE Price Decline On REIT Equity and AAA CMBS3
Current Value vs. February 2007
AAA CMBS
-20%
-40%
-60%
-80%
-100%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-120%
CRE Implied Loss
-70%
-80%
Debt
Recovery
53%
Market
Change
- 62%
-32%
-90%
CMBS
CRE Loan
Pool
(Debt)
CMBS
AAA
75.5
-30%
Market
Change
- 47%
-17%
-27%
-3%
Structure As Implied By Market Prices2
0%
REIT Equity
Commercial
Property
(Asset)
Equity
Mezz
27%
3%
Equity
30%
Commercial
Property
(Asset)
CRE Loan
-100%
REIT Equity Performance: -64%
Orig. Debt Value
40,000,000
Orig. Equity Value
60,000,000
CMBS AAA Price: 75.5
CRE Debt Orig. Value
70,000,000
CRE Equity Orig. Value
30,000,000
Debt Value
Equity Value
40,000,000
21,620,000
Loss on CMBS
Equity Loss
Debt Loss
Debt Recovery
38,380,000
0
100.0%
CRE Debt Loss
CRE Debt Value
Equity Value
CRE Property
Original CRE Value
100,000,000
Current CRE Value
61,620,000
Change in CRE Value
-38%
CRE Property
Original CRE Value
Current CRE Value
Change in CRE Value
47%
33,005,000
36,995,000
0
100,000,000
36,995,000
-63%
Structures are hypothetical and used for illustrative purposes only. All levels (prices) are indicative and there is no representation that any transaction can or could have been effected at such level (price). Goldman Sachs provides no assurance or
guarantee that future results will be consistent with the projected analysis.
1
Source: Goldman Sachs. REIT Structure based on average LTV of 75 REITs as of February 2, 2007. CRE / CMBS structure illustrative assuming 70% LTV and 30% Subordination for CMBS.
2
Source: Goldman Sachs. Data as of July 20, 2009. Equity REIT performance based on US REIT Index performance 2/2/2007 – 7/20/2009. CMBS performance based on price of 75.5 for CMBS 07-2 AAA
3
Source: Goldman Sachs as of July 20, 2009. Assumptions: REIT LTV 40%, CRE Loan LTV 70%, AAA Subordination 30%
35
US Commercial Real Estate Market
Implementation
If you believe this thesis, then:
Description
„ Puts can be purchased on a REIT equity index or on a basket of individual names in
S
H
O Buy 1-2yr Puts or Put
R Spreads on REITs
T
the Retail and Office sectors
„ Buy a put outright or cheapen the cost by selling a further out of the money put to
create a put spread
„ Loss is limited to premium paid
„ Risk: The Investor stands to lost the entire option premium if REIT equities
decline less than anticipated
„ Buy non-TALF eligible CMBS AAA Bonds of late 2006 or early 2007 Vintage A3/A4s
„ Collect a regular stream of cash flows and potentially benefit from price appreciation
Buy AAA CMBS
L
O
N
G
„ Goldman Sachs trading desks maintain an inventory of bonds
„ Risk: the underlying loans may cease to pay their mortgage payments which
could impair the value of the bond price and impact cash flows
„ Sell protection on the CMBX 5 AAA tranche
Sell Protection on
AAA CMBX
Note: For discussion purposes only.
„ Risk: CMBX spreads may widen exposing the investor to a loss
36
Public Balance Sheet Conditions
Currencies And Sovereign CDS May Present Unusual
Opportunities…
„
Foreign Exchange markets may be driven by a number of factors, including:
Interest rates, terms of trade, labor productivity, perceived safety of the country/currency
●
„
Foreign Exchange spot markets are sensitive to short term catalysts while forwards and implied volatility project slower moving trends
„
Developed economies credit spreads may suffer relative to emerging countries
Currency, Credit, and Commodity Production Road Map1
70%
Commod Exports % GDP
1.35
Norway
60%
Size of bubble = GDP
14Jul2005
Sweden
Return
to
trend?
1.3
1.2
USD Gradual
Decline
1.15
40%
Canada
Australia
1.1
France
1.05
South Korea
Italy
30%
Russia
New Zealand
Japan
20%
United States
1
Mexico
0.95
China
10%
United Kingdom
Brazil
Turkey
Indonesia
Argentina
(CDS = 2,233bp)
0%
0
14Jul2009
1.25
Germany
50%
USD Generally Trending Weaker?2
100bp
200bp
Credit Spread
300bp
400bp
0.9
0.85
2005
2006
2007
2008
Jan
Jul
Jan
Jul
Jan
EURUSD USD Index Commodity Currency Basket vs USD
Financial
Crisis 2009
Jul
Jan
1 Sources: Sovereign Credit Spreads from Goldman Sachs as of July 13, 2009. Commodity Exports from the UN (http://comtrade.un.org/db/default.aspx), GDP data from CIA world factbook (www.cia.gov). Chart
represents countries in the G20 for which Goldman Sachs trades and tracks sovereign CDS levels and the country’s currency. In addition to G20, the chart also includes New Zealand, and Norway which are not
in the G20 but which are in the Commodity Currency basket highlighted in this presentation.
2 Source: Goldman Sachs. Data as of July 13, 2009. Past performance is not indicative of future returns. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected
analysis.
Jul
38
Global GDP Growth Attributable to Current Accounts
The Balance Is Shifting
„
The current account balance summarizes the flow of goods, services, income and transfer payments into and out of a country
„
Persistent current account deficits may lead to a natural depreciation of a currency, as importing, and making income and transfer payments usually
reflect that one’s currency is leaving the country to make payments in a foreign currency
„
Significant GDP growth has been attributed to the increasing imbalance in US account deficits
Cumulative Current Account Balance (1980- 2008)1
1 Source: IMF: World Economics Outlook Database, data shown in USD billions.
Note that some countries do not report its data to the IMF or have not reported such data from 1980
39
Trade Resulted In Skewed Current Account Balances
Driving Tremendous Growth in World GDP
„
Current Account positions as a percent of GDP have shifted more in Asia versus developed economies
„
Aggregation of International Reserves have outpaced current account shifts in emerging economies
Real GDP Growth (% Chg YoY)1
Contribution to Total GDP Growth (PPP Basis, %, 3y Avg)1
10
Other Developing
China
United States
Other Advanced
6
8
5
6
4
4
3
2
2
2009
Current Account Positions (% of GDP)1
25
Latin America
Emerging Europe
Middle East
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-1
1976
-6
1974
0
Advanced economies
Emerging and developing economies
1972
2006
2003
2000
1997
1994
1991
1988
1985
1982
1
1970
-4
1979
1976
1973
-2
1970
0
International Reserves (2000 = 100, 3m Moving Avg)1
Asia
US
20
1200
Latin America
Emerging Europe
Middle East
Asia
US
1000
15
800
10
600
5
0
400
-5
200
-10
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
2000
2001
2002
2003
1 Source for all graphs: IMF World Economic Outlook, April 2009 http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm. Past performance is not indicative of future results.
2004
2005
2006
2007
2008
2009
40
Developed Economies Have Become Debt Laden, and
Deployed Massive Liquidity With Record Velocity…
While IP and Employment has diverged favoring emerging balance sheets
Central Bank Total Assets (2007 = 100)1
400
Quantitative Liquidity Measures (% GDP) 1
12
Euro area
UK
US
Japan
350
300
Base money plus reserves
Reserves
Base money
10
8
250
Industrial Production (% Chg YoY)1
4
15
3
10
2
5
1
0
0
-5
-1
World
Advanced economies (2)
-15
-2
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
United States
Japan
-3
Emerging economies (1)
-20
2003Q1
Employment (% Chg YoY)1,2
20
-10
2002Q2
2001Q3
2009
2008
2008
2008
2008
2008
2008
2007
-2
2007
0
0
2007
50
2007
2
2007
100
2007
4
2006
150
2000Q1
6
200
2000Q4
Euro area
Brazil *
2009
2008
2008
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2001
2001
2000
2000
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-4
2002
„
1 Source for graphs: IMF World Economic Outlook, April 2009 http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm. Past performance is not indicative of future results.
(1) Emerging Economies: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Estonia, Hungary, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, Slovak Republic, South Africa, Thailand,
Turkey, Ukraine, and Venezue la. (2) Advanced Ecomonies: Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China,
United Kingdom, and United States. World Trade
2 Brazil employment data from Haver
41
Foreign Demand for US Treasuries May Dictate Rates
And USD
“...The ability to float large amounts [of debt] in the short to …medium-term depends on the credibility of a longer term plan that brings the deficits
down. If market don’t think that you’re on a sustainable path, then they will bring forward in time their concern about the future deficits”1
Federal Reserve Chairman Ben Bernanke
“Bond markets in general, and US government bonds in particular, are staring at the prospect of a lower allocation of sovereign investments. The
declining share will reflect a natural diversification in the asset allocations of SWFs”2
Mohamed El-Erian
„
„
Foreign economies are becoming increasingly less dependent on US
demand because of growth in domestic consumption in the emerging
markets and Europe
●
From 1995 to 2007, US share of Chinese exports declined from
31% to 23%2
●
Changes in composition of trade may lead to concomitant
changes in reserve accumulation
Foreign investors are developing more sophisticated approaches to
investing and asset allocation, as evidenced by the growth of
sovereign wealth funds (SWF’s)
●
„
Chinese Exports4
Surplus countries have increasingly begun to direct reserves
towards investments with higher expected long term real returns
than treasuries4
Foreign investors would not need to sell their existing reserves to
have an impact on the US’ ability to finance its deficit – all they would
need to do is slow their rate of accumulation5
●
According to House Budget Committee testimony, if, over the
course of one year, foreign investors maintained their current
amount of US government bonds holdings but did not accumulate
additional holdings, long rates could rise by at least 100 basis
points6
1 Source: Ben Bernanke Testimony before House Financial Services Committee. July 21, 2009.
3 Source: Financial Times, Fears for level of interest as US gears up for huge Treasury bond issuance, 28-Oct-08
5 Source: Goldman Sachs, Global Economics Paper: In defense of Sovereign Wealth Funds, 21-May-08
2 Source: When Markets Collide, 2008, Mohamed El-Erian, p. 138
4 Source: Goldman Sachs, Global Economics Paper: BRICs Monthly, 22-Jul-08
6 Source: Testimony of Brad Setser Before House Budget Committee, 26-Jun-07
42
The Combination of Increasing US Debt and Budget Deficit
May Force a Continued Devaluation of the US Dollar
„
US Balance of payments has increased (less negative) substantially in the past 6 months, while the USD and Treasury bonds became a store of
wealth during the financial crisis.
„
Meanwhile, the US has begun running a current budget deficit of ≈ $1.2 trillion, equal to nearly 75% of its annual revenues (excluding Social Security
tax collections)
„
Large projected social services expenditures may put continued pressure on deficits – causing dollar devaluation/higher US taxes
US FX / Budget / Balance Of Payments Calculation1
1,000
1.60
1.40
500
1.20
1.00
0
0.80
US Balance of Payments
EURUSD
$0
($100)
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
0.00
Jan-98
(1,500)
Jan-96
0.40
0.20
Jan-94
(1,000)
Jan-92
0.60
Jan-90
(500)
Billions of 2009 Dollars
$100
Fx Rate
1.80
($bn)
1,500
Projected Social Security and Medicare Costs2
US Annual Deficit/Surplus (-)
AUDUSD
($200)
Medicare HI cash deficit
($300)
Social Security cash deficit (2016)
($400)
($500)
($600)
($700)
Social Security Cash Flow
Medicare HI Cash Flow
($800)
2009
2014
2019
2024
2029
2034
1 Source: Congressional Budget Office, Goldman Sachs. Past performance is not indicative of future returns
2 Source: Goldman Sachs analysis of data from the Office of the Chief Actuary, Social Security Administration and Office of the Actuary, Centers for Medicare and Medicaid Services. Note: Projections based on
the “intermediate” assumptions of the 2009 Trustees’ Reports. The CPI is used to adjust from current to constant 2009 dollars. Data accessed July 28, 2009. Analysis methodology from Government
Accountability Office. http://www.gao.gov/cghome/d08446cg.pdf, slide 10. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
43
Trade 1: Short the USD vs. Currencies of Commodity
Producers
Commodity-linked currencies have demonstrated a positive correlation to
commodity prices1, fundamentals in the commodity market may point to
upside risk in commodity prices2, and commodity prices may rise in
periods of USD inflation
We choose an equally weighted basket of AUD, CAD, NOK, and BRL due
to their sensitivity to commodities and relative lack of EM currency risk:
„
AUD: The Australian Bureau of Agricultural and Resource Economics
estimates that Australia will export ~$150bn of commodities in fiscal
year 2009 (July08-July09)3
FX Basket v. GSCI – Regression of 6m Returns: 2003-20096
20%
FX Basket - 6m Returns
If you believe in this thesis, consider going long a basket of AUD,
CAD, NOK and BRL against the USD
10%
0%
-10%
-20%
Eq: -0.010+ 0.343X
Rsqua re :
68.077
-30%
-40%
-0.8
-0.6
-0.4
-0.2
0
GS CI - 6m Re turns
0.2
0.4
CAD: Canada is second to Saudi Arabia in oil reserves and exported
~2.4 mm bbl/day to the US in 2007, the highest share (19%) of US
petroleum imports in 20074
FX Spot: (CAD, AUD, NOK, BRL) Basket v. Fair Value7
„
NOK: Norway is the world’s third largest gas exporter. Petroleum
exports account for half of all exports and 30% of state revenue5
1.1
„
BRL: Brazil has run current account surpluses since 1992 (with
exports of $200mm in 2008 and is a significant producer of iron ore
and soybeans)5
0.9
„
Though USD already begun to weaken as investors re-risk, relative
to recent past and fair value, entry points may be attractive
1.2
28Jul1999
0.6
28Jan2010
1
0.8
0.7
0.6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
FX Basket Spot FX Basket Fair Value
1
2
3
6
7
Source: Goldman Sachs, as of 13-Apr-09. GS Commodity Research, “Commodities, Asset Returns and Inflation,” 25-Jun-07. https://360.gs.com/gs/portal/home/?action=action.doc&d=3719244
Source: Goldman Sachs Commodity Research, “2009 Outlook: Pricing Supply Destruction”, 11-Dec-08 https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6384255&fn=/document.pdf
Source: http://www.abare.gov.au; 4 Source: http://www.eia.doe.gov/cabs/Canada/Oil.html 5 Source: CIA world factbook: https://www.cia.gov/library/publications/the-world-factbook/countrylisting.html
Source: Goldman Sachs Sales and Trading. Indicative as of 20-Apr-09. Regression of rolling 6 month returns for the GSCI index and FX Basket from Oct-03 to Apr-09
Source: Goldman Sachs. Indicative as of 28-Jul-09. Fair value data is derived from the Goldman Sachs Dynamic Equilibrium Exchange Rate (GSDEER) model, a purchasing power parity model that incorporates
productivity, terms of trade and trends in the current and capital accounts - Global Viewpoint Jan 07 - The Evolving GSDEER Currency Model
https://portal.gs.com/gs/portal?st=1&action=action.binary&d=2971163&fn=/document.pdf . Past Performance is not a reliable indicator of future performance. The above is based upon simulated historical analysis of
the Basket. GS provides no assurance or guarantee that the Basket would have operated in the past in a manner consistent with the above analysis. GSDEER levels are not intended as forecasts, and the FX basket
44
may or may not perform in-line with the fair value estimates produced by GSDEER
Note: For Discussion Purposes Only.
Trade 2: Long Non-US Commodity Producing Equities
If commodity prices rally in a cyclical recovery or following inflation
or a devaluation of the dollar, equities of commodity producers may
rally
Goldman Sachs has created a basket of 95 such commodity and
basic material producers. The basket constituents are available on
Bloomberg by entering GSGLCPXU <Index> MEMB <GO>
Historical Performance of GSGLCPXU vs. S&P 5002
3.5
3
2.5
Basket Construction
„
Began with MSCI All Country World Index as of April 27, 2009 (2,414
Constituents)
„
Selected only companies in Energy, Materials, Industrials (exact GIC
sector list may be found in footnote below)
„
Reduced 570 remaining companies to 95 by eliminating US
companies and optimizing a tracking basket with: A) similar sector
exposure; B) minimal tracking error; and C) sustainable liquidity
„
2
1.5
1
0.5
GSGLCPXU
S&P 500
0
2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
For more details, please contact your GS representative
Trade Mechanics
„
Investor Buys a Call Spread on the Basket
●
●
„
Investor buys a 6m call option on the basket, struck at 120% of
current spot
Investor sells a 6m call option on the basket, struck at 140% of
current spot
Indicatively, net upfront premium would be [2.69]% of notional1
Payout
„
If basket return is < 20%, 0 payout
„
If basket return is between 20% and 40%, payout = basket return 20%
„
Maximum potential payout is 20%, or [7.4]x upfront premium1
„
Maximum potential loss is premium paid
Risks to this trade: Global macro-economic conditions continue to deteriorate and demand for commodities weakens or stagnates.
For Discussion Purposes Only. All options mentioned are OTC options.
1 Pricing indicative only as of July 29, 2009.
2 Source: Bloomberg. Data as of July 28, 2009. Past performance is not indicative of future results.
GSGLCPXU GIC Sectors: Construction & Engineering; Construction & Farm Machinery & Heavy Trucks; Diversified Chemicals; Diversified Metals & Mining; Electrical Components &
Equipment; Fertilizers & Agricultural Chemicals Forest Products; Gas Utilities; Gold; Heavy Electrical Equipment; Highways & Railtracks; Industrial Conglomerates; Industrial Gases;
Industrial Machinery; Integrated Oil & Gas; Oil & Gas Equipment & Services; Oil & Gas Exploration & Production; Paper Products; Precious Metals & Minerals; Steel
45
Trade 3: Commodities Based Approach
Goldman Sachs Inflation Proxy Commodity Index
„
„
The Inflation Proxy Commodity Index has been created as a hedge
against both rising inflation and unanticipated inflation
Corn, 10%
The index is made up of S&P GSCI Enhanced Strategies in Energy
(50%), Industrial Metals (10%), Agriculture (20%) and Gold1 (20%)
●
„
Inflation Proxy Commodity Index (Dollar Weightings)
Gold, 20%
Soybeans,
10%
Based on historical data, the basket would have been a good
proxy for both US CPI and unanticipated US inflation with an
average annual correlation over the past 10 years of 76% and
73% respectively
Copper, 5%
Aluminum, 5%
Based on historical data, the Inflation Proxy Commodity Index has a
high R-square of over 73.5% with US CPI, and over 57% with
unanticipated US inflation2
Heating Oil,
10%
Inflation Proxy Commodity Index v. Unexpected Inflation2
Gasoline, 40%
Inflation Proxy Commodity Index v. Actual Inflation3
2%
140%
103%
140%
1.5%
130%
102.5%
130%
1%
120%
0.5%
110%
0%
100%
-0.5%
90%
-1%
102%
120%
101.5%
110%
101%
100.5%
100%
100%
90%
99.5%
80%
99%
80%
-2%
70%
98.5%
70%
-2.5%
60%
98%
-3%
50%
-1.5%
-3.5%
1999 2000
40%
2001
2002
2003
2004
2005
2006
2007
2008
2009
High
Low
Avg.
Last
Quarterly change in Unexpected Inflation (LHS)
1.8068% -3.4791% -0.151% 0.5018%
Quarterly change in Inflation Proxy Commodity Index (RHS) 130.7708%44.5202% 103.9905%104.644%
60%
97.5%
50%
97%
96.5%
1999 2000
40%
2006
2007
2008
2009
High
Low
Avg.
Last
Quarterly change in US CPI (LHS)
102.6343%96.7541% 100.6421%100.5374%
Quarterly change in Inflation Proxy Commodity Index (RHS) 130.7708%44.5202% 103.9905%104.644%
2001
2002
2003
2004
2005
1 Gold underlier is the S&P GSCI Gold Index, not an enhanced strategy.
2 Over a 3 month horizon. Source: Goldman Sachs. Past performance not indicative of future results. Unanticipated inflation = US Consumer Price Index Change – US Treasury Bill Return. Past performance is not
indicative of future return
3 Source: Goldman Sachs. Indicative only as of 01-May-09
Source: NYMEX, CBOT, CME, COMEX, LME
46
Tax Rates In The US May Increase
„
In addition to a substantial unaddressed social benefits liability, the
current borrowing might lead to substantially higher US tax levels
„
During the 1970’s, the highest Marginal Tax Rate (income over
$200,000) was at 70%
„
Post the ’81 and ’86 Tax reforms by Reagan, the major lever for
Congress to control Deficit and debt levels was increased taxes
(Bush I & Clinton)
„
Relative to the rest of the world US Federal taxes remain low (although
State taxes take us near the top rates)
Budget Deficit / Surplus / Highest Marginal Tax Rate2
1100
Brackets ($000s)
1000
900
800
2009
700
1968
600
500
1974
400
200
100
300
1980
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
Tax Rate
Marginal Tax Brackets in the US: Historical Snapshot1
Highest Marginal Tax Rate By Country3
60%
80%
Reagan (ERTA: Aug81)
70%
50%
Bush (OBRA: Nov90)
60%
40%
Bush II (EGTRRA: Jun01)
50%
30%
40%
30%
20%
20%
10%
Reagan (TRA: Oct86)
10%
Bush II (JGTRRA: May03)
0%
1970
1973
1976
1979
1982
Highest Marginal Income Tax Rates
1985
1988
1991
1994
1997
2000
2003
2006
2009
Total Federal Debt less Government Held as % of GDP
Netherlands
Austria
Belgium
Australia
Germany
Italy
Portugal
Ireland
France
Greece
Japan
Poland
United Kingdom
New Zealand
Luxembourg
Hungary
Korea
Turkey
United States
Finland
Canada
Mexico
Spain
Denmark
Norway
Sweden
Iceland
Slovak Republic
Czech Republic
Switzerland
Clinton (RRA: Aug93)
0%
1 Source: Tax Foundation. http://www.taxfoundation.org/taxdata/show/151.html. Data accessed July 27, 2009. Pre-2009 tax brackets were converted to 2009 dollars using the Consumer Price Index (CPI) for All
Urban Consumers. Source for CPI data: Bureau of Labor Statistics. Past performance is not indicative of future returns.
2 Source: TaxPolicyCenter.Org Data accessed July 21, 2009. http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=199&Topic2id=20&Topic3id=23,
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213
3 Source: OECD
47
US Debt as a Percentage of Tax Revenues Has Climbed
„
In addition to potential taxes associated with the Obama healthcare reform, an automatic increase of 4.6% to the highest tax bracket
will occur in 2011
„
In July the US Congress passed “Pay As You Go” legislation which mandates a reduction in expenditure or increase in revenue for any
new project
„
Currently, to return Federal Debt to its 30 year average to annual revenues would take approximately a doubling of those revenues
US Federal Debt and Reserves1
US Tax Revenue By Type (2008)1
3%
350%
10,000.0
9,000.0
1%
1%
300%
8,000.0
2%
45%
7,000.0
250%
Individual Income Tax
6,000.0
200%
Corporate Income Taxes
5,000.0
4,000.0
150%
3,000.0
100%
2,000.0
1,000.0
Total Federal Revenues (Income Tax)
Total Publicly Held Debt
1 Source: Congressional Budget Office
Excise Taxes
Estate and Gift Taxes
50%
Customs Duties
0%
Miscellaneous Receipts
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
0.0
Social Insurance Taxes
36%
Total Federal Revenues (All Other)
% Debt/Revenues (rt)
12%
48
Taxes May Need to Look Like 1970’s to Normalize the
Ratio of Debt to Revenues…
„
Since 1969, the average ratio of debt to Revenues has been 196%, given total publicly held debt of $8.7 trillion by year end, we would
need to raise revenues from $2.4 trillion to $4.4 trillion
„
Doubling the income tax would only raise $1.1 trillion
„
The highest earning 15% of households pay over 60%of all taxes collected
„
Federal Non-Discretionary spending as a % of total spending has continued climbing leaving much less flexibility for adjustments.
Interest cost on debt may reach 15% of expenditure by the year end2
Taxes Paid By Household Income1
Discretionary/Non-Discretionary Spending2
35,000,000
30.00%
30,000,000
25.00%
Percent of Total Outlays
100%
Net Interest
80%
25,000,000
20.00%
20,000,000
15.00%
Discrectionary
60%
15,000,000
10,000,000
5,000,000
10.00%
40%
5.00%
20%
0.00%
0
025,000 - 50,000 - 75,000 - 100,000 -150,000 -200,000 - 250,000
25,000 50,000 75,000 100,000 150,000 200,000 250,000 and
Greater
Number of Households
% of Taxes paid
0%
1962
Proj.
Mandatory
1970
1978
1986
1994
2002
2010
2018
Estimated Effective Tax Rate
1 Source: Census Bureau, Internal Revenue Service
2 Source: Congressional Budget Office. Historical Data from: "A Preliminary Analysis of the President's Budget and an Update of CBO's Budget and Economic Outlook" March 20, 2009, Table F-5.
http://www.cbo.gov/budget/historical.shtml. Projections: “ An Analysis of the President's Budgetary Proposals for Fiscal Year 2010. June 16, 2009, Tab 1-5. http://www.cbo.gov/budget/budproj.shtml. Goldman
Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
49
Trade 4a: US Tax Index Cap Strategy – Sell Caps
USD-US Tax Index – [BBG – MUNRMSLR Index]
Description:
The Index is the daily inverse of the 90 day weighted average yield on high-grade tax-exempt bonds divided by the previous
90 day reset yield of taxable bonds. The tax-exempt and taxable yields are represented by the SIFMA Municipal Swap Index
and the 3 month LIBOR, respectively.
Index Value:
The USD-US Tax Index represents the value of tax-exempt income to investors in the short-term market, expressed as a
percentage. There is no restriction on the Index falling below zero.
Historically, the Index has tracked the US Federal Marginal Income tax rate, with three other major forces:
„
Absolute level of USD interest rates
„
Trading supply and demand
„
US Federal Tax Rate for individuals and corporations
USD-US Tax Index Historic Pricing and Statistics1
US Tax Rate and Tax Index
120.00%
100.00%
Ex Area1
25.88%
115.02%
64.40%
9.91%
7.00
6.00
5.00
80.00%
4.00
60.00%
3.00
Area 1
40.00%
2.00
20.00%
0.00%
1993
1.00
Fed Funds Rate (%)
Statistic 1994-YTD Area1
Min
25.88% 53.84%
Max
115.02% 96.25%
Average
68.07% 80.59%
Stdev
11.58%
7.35%
140.00%
0.00
1994
1995
1996
1997
1998
1999
2000
1 - US Federal Tax Rate
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns.
2001
2002
2003
USD-US Tax Index
2004
2005
2006
2007
2008
2009
Fed Funds Rate
50
Trade 4b: Receive the SIFMA Ratio
Ratio Curve1
Market Dynamic Commentary
„
The long end of the SIFMA Basis swap market moves relative to
Interest Rates (inversely), Municipal Cash Bond supply and demand
(asset swap players), structured note issuance and the relative ratio
of the 1 week Index to LIBOR.
„
While the correlation broke down during the crisis, bonds and swaps,
as well as interest rates volatility in the markets remains high, and
correlation has returned.
Term
2
5
10
15
20
25
30
Bid
76.625%
78.375%
80.250%
82.625%
84.000%
85.250%
86.125%
10y BMA Ratios vs US 10y Swap (10y History)1
Offer
77.625%
79.375%
81.250%
83.625%
85.000%
86.250%
87.125%
Ratio Delta
0.03%
0.14%
0.33%
0.49%
0.61%
0.70%
0.78%
Historic Ratios (5yr, 10yr)1
8%
105%
SIFMA Ratio (5y)
SIFMA Ratio (10y)
100%
7%
5%
4%
3%
SIFMA Ratio
95%
6%
90%
85%
80%
75%
70%
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns.
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
100%
Jun-03
95%
Jun-02
90%
Jun-01
80%
85%
ussw10/100
Jun-00
65%
70%
75%
USD 10y BMA Ratios
Jun-99
65%
2%
105%
51
Public Balance Sheet Conditions
Implementation
If you believe this thesis, then:
Description
F
X
E
Q
Buy currency forwards or FX
options to express a view about
sovereign credit
„
Sovereigns with a burden of debt or perceived credit risk may see their currency depreciate, and the
investor can position to capitalize on this possibility
„
Trade can be implemented through:
Buy equities of non-US
commodity producers
„ One-delta purchase of GSGLCPXU
„ One-delta purchase of the constituents of GSGLPXU
„ Purchase of calls or call spreads on GSGLCPXU
C
O
M
M
O
D
M
U
N
I
C
R
E
D
I
T
„
The Inflation Proxy Commodity Index may be a hedge against both rising inflation and unanticipated
inflation
„
Express a view on higher taxes by selling a proxy for put options on the tax rate
„
View can also be expressed by receiving a fixed percentage of 3M Libor in exchange for paying the
SIFMA Municipal Swap rate. The ratio between the two would be expected to decrease in an era of
higher taxes
„
Pricing on developed sovereign CDS may be too cheap as it may underestimate the risks to developed
countries who have recently issued large amounts of debt
„
Emerging economies may be in a stronger fiscal position than their sovereign CDS levels imply
Buy the GS Inflation Proxy
Commodity Index
Sell Caps on the US Tax Index or
Receive the SIFMA Ratio
Buy CDS of developed
Sovereigns, Sell CDS on select
Emerging Economies
Note: For discussion purposes only.
52
How Did the Various Asset Classes Respond in the 70s?
Case Study
115
11%
11%
8%
10%
7%
9%
105
5%
7%
4%
6%
3%
5%
1972 1973 1974 1975 1976 1977 1978 1979 1980
5y Treasury (LHS) US YOY CPI (%) (RHS)
2%
1981 1982
100
7%
95
300
6%
90
85
5%
200
4%
100
3%
80
1972 1973 1974 1975 1976 1977 1978 1979
US$ Trade Weighted Index (LHS) US YOY CPI (%) (RHS)
1980
0
1972 1973 1974 1975 1976 1977 1978 1979 1980 1981
GSCI Agricultural Excess Return Index (LHS)
GSCI Livestock Excess Return Index (LHS)
GSCI Precious Metals Excess Return Index (LHS) US YOY CPI (%) (RHS)
2%
1982
1981
Credit1
13%
130
12%
11%
120
10%
110
9%
100
8%
7%
90
6%
5%
80
4%
70
3%
1979
1980
1981
2%
1982
US Taxes2
% Growth
400
7
80%
350
6
70%
5
300
250
3
200
2
150
1
0
100
-1
50
-2
0
Jan-72
60%
4
Jan-74
Jan-76
Jan-78
Jan-80
-3
Jan-82
Moody BAA Long-Term Credit Spreads vs. Treasuries
Real GDP Growth
50%
40%
30%
1980
1974
1968
2009
20%
10%
0%
200
15%
14%
140
bps Spread
100
1Jan1982
0
1Jan1972
60
1972 1973 1974 1975 1976 1977 1978
S&P 500 Index (LHS) US YOY CPI (%) (RHS)
400
8%
Equities1
150
500
9%
6%
8%
600
10%
1100
9%
700
11%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1982
1000
10%
12%
12%
900
13%
800
13%
110
1Jan1982
800
12%
14%
700
13%
14%
900
15%
600
15%
120
1Jan1972
500
14%
1Jan1982
400
15%
16%
Commodities1
1Jan1972
Tax Rate
17%
Currencies1
1Jan1982
300
Interest Rates1
1Jan1972
Brackets ($000s)
1 Source: Goldman Sachs. Data as of July 21, 2009. Past performance is not indicative of future returns
53
Japan
Japan: Government Debt and GDP Forecasts
„
Japanese government debt maturing in a year is 47.3% of 2009 estimated GDP1
„
Given Japan’s reliance on exports, falling exports may lead to a chain of events that may lead to increased credit risk in its government
debt
„
Falling exports may lead to Æ Decreased corporate revenues Æ Rising unemployment Æ Lower consumer spending and income Æ
Less tax revenues Æ Higher budget deficit Æ Rising debt to GDP Æ Ratings pressure Æ Wider sovereign spreads
Japanese Government Debt Maturity1,2,3
Japan Government Debt Maturity ($ in mn)
< 1Yr
1
1-2Yr
2-3Yr
3-4Yr
4-5Yr
5-6Yr
6-7Yr
7-8Yr
8-9Yr
9-10Yr
10-15Yr
15-20Yr
20-25Yr
449,967
441,568
434,041
390,374
332,701
511,987
519,794
56,710
129,728
10,274
25-30Yr
> 30Yr
Total Government Debt Issuance
1
($ in mm)
2009E GDP ($ in bn)
2
2009E Government Revenue ($ in bn)
Debt Maturing <1 Year / 2009E GDP
2,273,775
894,142
717,711
651,424
657,533
3
Debt Maturing < 1 Year / 2009E Government Revenue
Total Government Debt Issuance / 2009E GDP
Total Government Debt Issuance / 2009E Government
Revenue
8,471,729
4,809
1,486
47.3%
153.0%
176.2%
570.2%
2009 GDP Forecasts4
Country
Japan
US
Euroland
UK
Norway
Sweden
Switzerland
Canada
Brazil
Mexico
Australia
New Zealand
China
India
Korea
Malaysia
Singapore
Taiwan
Thailand
Indonesia
Philippines
2009 GDP 2009 GDP Forecasts
Forecasts less 10-yr average
-5.8
-8.4
-2.5
-4.4
-4.0
1.6
-4.7
-1.8
-1.9
-1.0
-8.5
0.3
-1.3
8.3
5.8
-1.7
-3.5
-6.0
-7.0
-4.0
4.2
-0.5
-3.8
-6.5
-6.6
-0.4
-7.6
-3.8
-4.9
-4.4
-11.5
-3.0
-4.6
-1.5
-1.3
-7.2
-8.9
-11.5
-10.8
-8.8
-0.5
-5.4
GS less
consensus
0.4
0.1
0.0
0.0
2.9
0.1
0.7
0.4
0.4
0.9
0.6
-0.5
0.4
0.0
-0.4
-1.9
-0.1
0.3
-1.1
1 Source: Reuters
2 Source: GS ERWIN forecasts.
3 Source: Moody’s
4 Source: GS ERWIN for updated GDP Forecasts. GS Global Economics. Asia Economics Flash. A Macro Look at the Yen Crosses. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6906086&fn=/document.pdf for 10yr average
calculations. GS Global Investment Research Asia for consensus figures. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
55
Japan
The Yen: Vulnerable To an Export Slowdown Driven by a Slowing US Consumer
„
Possible factors for yen depreciation
● Realization that Japan may not be the safe haven in this global slowdown
> GS forecasts GDP to fall 7.5% and exports to fall an estimated 32.1% in 2Q 2009, with limited improvement in 3Q 20091
> Debt / GDP = 171% (US: 66%, UK: 50%)2
> The government unveiled a stimulus package of ¥56.8trn (12% of GDP); GS projects government debt to reach 215.4% in 20103
● Declining export revenue; trade deficit increasing4
> Relationship between Japan’s trade balance and USDJPY (graph below)4
● Yen carry trade subsiding5
● Reversal of USD hedges – Exporters have hedged their overseas USD revenue by selling USD forward, but as USDJPY moves higher (yen
weaker), they may unwind their hedges, adding additional downward pressure on the yen (and upward pressure on the USD)5
Public Debt/GDP2
Yen Carry Trade Unwinding Has Subsided4
200
180
Japan
160
140
120
Italy
100
80
US
France
Germany
Canada
UK
60
40
20
1
2
3
4
5
09
08
20
07
20
06
20
04
05
20
20
03
20
02
20
01
20
99
00
20
20
98
19
97
19
96
19
19
19
95
0
1600
1400
1200
1000
800
600
400
200
0
-200
-400
-600
15May1984
15May2011
-80
-100
-120
-140
-160
-180
-200
-220
1988
1993
1998
2003
2008
- JPY/USD (1-year Lagged) (RHS)
Trade Balance (3m Moving Average, billion yen) (LHS)
Source: GS ERWIN
Source: Japanese Ministry of Finance 2008. Current Japanese Fiscal Conditions and Issues to be considered. http://www.mof.go.jp/english/budget/pamphlet/cjfc2008.pdf
Source: GS Research. “Japan Economics Analyst.” April 14,2009. https://360.gs.com/gs/portal/home/atx/?st=1&d=6985902&r=3
Source: Goldman Sachs. As of July 28.2009. (Pricing shown is indicative.) Past performance is not indicative of future results.
Source: Goldman Sachs Research. “The Yen as Safe Haven.” February 19, 2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=6698556
56
Japan
Sell JPY, buy USD
Investors may consider buying a call on USDJPY (i.e. a call on USD / put on JPY)
„ Investors benefit if JPY depreciates above the call strike
● JPY is trading at 95.22, i.e. 1 USD is equivalent to 95.22 JPY.1 At maturity, the 105-strike call will have intrinsic value if the
JPY depreciates such that 1 USD is equivalent to more than 105 JPY1
● An investor will breakeven once JPY appreciates to approximately 106.70 JPY per USD, given that the cost of a 105 strike
1y expiry option is 1.57%1
„ The short yen, long dollar cross has positive carry of 0.6% over 1y, 2.6% over 2y, and 5.6% over 3y3
„ GS Research forecasts that USDJPY will be at 105 in 12 months.2 The GSDEER estimates a fair value of JPY of 117 in April
20104
USDJPY – spot, forward, and fair value4
Indicative pricing1
140
USDJPY Level
130
Dollar appreciation /
JPY depreciation
120
110
100
Option
Tenor
Call
Call
Call
Call
Call
Call
1y
2y
3y
1y
2y
3y
Strike
(JPY per USD)
105
105
105
110
110
110
Offer
(% of notional)
1.57%
2.53%
2.77%
0.80%
1.53%
1.82%
90
80
7Jul99
1Jan03 1Jan05 1Jan07 1Jan09
Spot GSDEER Spot Fair Value Estimate Forward 105 Call Strike
1. Source: Goldman Sachs. Indicative only as of 28-Jul-09. Spot reference = 95.22; 1y forward reference = 94.62; 2y forward reference = 92.79; 3y forward reference = 89.93. Carry is defined as the forward
exchange rate minus the spot exchange rate, as a percent of the spot rate. Positive carry implies that should the exchange rate remain at the spot level instead of rolling to the forward, investors will earn money.
2. Source: Goldman Sachs. “FX Monthly Analyst”. As of 10-June-09. Available: https://360.gs.com/gs/portal/home/?action=action.doc&d=7313442
3. Source: Goldman Sachs. Indicative only as of 28-Jul-09. Carry is defined as: (Spot Level – Forward Level) / Spot Level
4. Source: Goldman Sachs. Indicative as of 6-Jul-09. Fair value is derived from the Goldman Sachs Dynamic Equilibrium Exchange Rate (GSDEER) model, a purchasing power parity model that incorporates
productivity, terms of trade and trends in the current and capital accounts. Global Viewpoint Jan 07. Available: https://portal.gs.com/gs/portal?st=1&action=action.binary&d=2971163&fn=/document.pdf. Past
performance is not indicative of future results.
57
Japan
An Intra-Regional Trade: sell JPY, buy KRW
Debt to GDP2
Korea may be better positioned than Japan within the region
„
GS forecasts Korea GDP to decrease 2.3% compared to a
decrease of 5.9% in Japan in 2Q2009
> A rebound to positive GDP growth is expected in 3Q2009 in
Korea with continued strength throughout 2010, compared to
a more modest recovery in Japan
200%
●
Debt / GDP = 171% for Japan vs. 29% for Korea2
100%
●
Demographics favor Korea: By 2020, approximately 1 in 3
Japanese is expected to be age 65 or over vs. 1 in 6 in Korea 3
> The old-age/ working age dependency ratio data is even
more challenging for Japan, highlighting the strain on the
working population of an aging demographic 3
●
180%
160%
140%
Japan
120%
South Korea
80%
60%
40%
20%
0%
1990
Real GDP (% change YoY)1
1992
1994
1996
1998
2000
2002
2004
2006
2008
Aging Population: Japan vs. Korea Dependency Ratio3
60
8
6
50
4
40
0
2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010
-2
-4
-6
-8
-10
Japan
South Korea
30
20
Japan
South Korea
10
0
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
2
Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
1. Source: Goldman Sachs ERWIN. Trade Balance figures shown in 10 billions of USD.
2. Source: OECD. http://webnet.oecd.org/nawwe/factbook09/default.html
3. Source: UN World Population Prospects. The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64. All ratios are presented as number of dependants per 100 persons of working age (15-64)
58
Japan
An Intra-Regional Trade: sell JPY, buy KRW
Trade balance is forecasted to remain on a positive trajectory for
Korea. This compares to a negative trajectory for Japan through our
forecast period, with the exception of 4Q20091
„
Korea’s exports decline was relatively moderate compared to other
countries in the region2
„
An investor may consider buying a put on JPYKRW (i.e. a put on JPY
/ call on KRW)
JPYKRW3
18
22Jul2004
16
14
12
●
Investors benefit if JPY depreciates against the KRW, and the
cross falls lower than the put strike
●
A 1y JPYput / KRWcall struck 10% OTM costs 3.04% JPY.3
8
●
Should the JPYKRW exchange rate revert back to 2007 levels,
payouts could exceed 16x. 3,4
6
●
GS Research’s 12-month forecast for JPYKRW is 11.434
10
2005
2006
2007
2008
Spot and Forward 1yr GS Forecast
Exports Growth2
2009
40
40
Japan
35
30
20
China
Japan
30
Korea
India
25
Taiwan
10
2010
Trade Balance (in $10bn)1
Exports Growth
% yoy
22Jul2010
South Korea
20
0
15
-10
10
5
-20
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1999
1998
-5
-40
1997
0
-30
2000
„
-10
-50
May-08
Aug-08
Nov-08
Feb-09
May-09
-15
1. Source: Goldman Sachs Research ERWIN. Trade Balance figures shown in 10 billions of USD. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
2. Source: Goldman Sachs Research Asia Economics Analyst , July 8, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7454249&fn=/document.pdf
3. Source: Goldman Sachs indicative pricing as of July 17,2009. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
4. Source: Goldman Sachs. GS FX Forecast taken from Global FX Monthly Analyst July 2009. Pricing shown is indicative as of July 21, 2009.
59
Japan
Vulnerable to an Export Slowdown & Rising Leverage
„
The Japanese government’s attempt to bail out the financial system / economy may result in a solvency issue, weaker currency, or
higher rates
„
Debt issuance grew as Japanese deficit increased to finance its way out of its problems that were driven by the bursting of its asset
bubble
● Public Debt/GDP ballooned from 69% to 170% over the past 20 years1
„
Japanese interest rates may rise as Japanese debt issuance increases because Japanese individuals may not be able to meet the
marginal demand, as they did during the 1990s
● High individual savings rates (10 to 15%) were used to absorb the high rate of government debt issuance in the 1990s
● Demand from individuals may not be sufficient given their low savings rates, which has fallen to 2.7% in 2008 as Japan’s
population continues to age and enters retirement2
Japan Public Debt / GDP and
Public Debt / Capita1
200%
70,000
180%
60,000
160%
140%
Savings Rate vs.
JGB Individuals’ holding2
14%
3.5
12%
3.0
2.5
10%
40,000
8%
100%
60%
4.0
50,000
Public Debt/GDP (lhs)
120%
80%
16%
30,000
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
2.0
1.5
4%
1.0
10,000
2%
0.5
0
0%
20,000
20%
JGB Holdings USD trn (rhs)
6%
Public debt per capita
40%
Savings rate (lhs)
0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
1 Source: Goldman Sachs Economic Research. IMF. Past performance is not indicative of future results. 2009-2010 figures are estimates. Goldman Sachs provides no assurance or guarantee that future results
will be consistent with the projected analysis.
2 Source: Goldman Sachs Research, OECD Economic Outlook. Holdings include JGBs held indirectly through insurance, pension, investment trusts, brokers and social security fund. Past performance is not
indicative of future results. 2009 data are estimates.
60
Japan
Vulnerable to an Aging Population
„
As the Japanese age and enter retirement, other fiscal problems may arise as well
„
Expenditures have contributed ¥150 trn to the increase in JGBs outstanding of ¥390 trn since 19901
●
More recently, expenditures’ contribution to growing debt issuance are mostly attributable to social security-related expenditures resulting from
the aging Japanese society. These expenditures have contributed ¥110 trn to the cumulative increase in outstanding general bonds. (28.2% of
increase)1
●
Presently, nearly one in five Japanese is age 65 or older. This figure will rise to more than one in three in the next 3 decades2
●
This may lead to increasing issuances of JGBs to fund rising social security expenditures
Ratio of People Aged 65 and
Over to Total Population1
Contribution of Expenditures1
40
Japan
Gemany
France
UK
US
35
30
25
20
15
10
5
2050
2040
2030
2020
2010
2000
1990
1980
1970
1960
1950
0
1 Source: Japanese Ministry of Finance 2008. Current Japanese Fiscal Conditions and Issues to be considered. http://www.mof.go.jp/english/budget/pamphlet/cjfc2008.pdf. Past performance is not indicative of
future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
2 Source: UN World Population Prospects. http://esa.un.org/unpp/index.asp?panel=1
61
Japan
Vulnerable to an Aging Population
„
Demand from individuals for JGBs may not be sufficient given their low savings rates, which has fallen as Japan’s population continues
to age and enters retirement
„
Retired couples must dissave to finance consumption in excess of disposable income and thus have a significantly negative savings
rate1
●
„
To finance this excess consumption they have to draw down on their financial wealth and make use of their deposits and
insurance/pension reserves1
Since consumption exceeds disposable income by nearly 25%, the gap must be financed by dissaving from accumulated assets1
Consumption and Savings by Household Type1
Net Acquisition of Financial Assets by Households2
1 Source: NLI Research Institute: On the Financial Situation of Elderly Households http://www.nli-research.co.jp/english/economics/2009/eco090317.pdf. Past performance is not indicative of future results.
2 Source: McKinsey&Company: Japan: The World’s Savers Retire. Past performance is not indicative of future results.
62
JPY CMS Caps
Trade Mechanics
„
JPY ATM 3y10y and 5y10y swaption vol is less than half comparable USD swaption vol
„
Low absolute prices for CMS caps - i.e. 3y expiry caps/calls on 10y JPY CMS struck at 3% (e.g. ~110bps OTM) cost ~25bps, which
could make these potentially low cost/highly asymmetric "tail" options1
„
Payouts may reach up to 19x the option premium if rates return to 1991 levels1
„
In addition, given our view of fundamental weakness in the region, the FX component of the trade can be hedged as well - through
quanto CMS caps or vanilla JPY put / USD calls
US vs. JPY ATM Swaption Vol2
10
28Jul1999
JPY 10yr Swap Rate2
28Jul2009
9
9
8
8
7
7
28Jul1989
28Jul2009
6
5
6
4
5
4
3
2
3
1
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
USD 3y10y JPY 3y10y
1992
1995
JPY 10yr Swap Rate
1998
1 Source: Goldman Sachs. Indicative as of July 28, 2009. Risk: investor stands to lose entire premium paid if the interest rate fails to move past strike price at expiration.
2 Source: Goldman Sachs. As of July 28, 2009. Volatility shown in basis points per day. Past performance is not indicative of future returns.
2001
2004
2007
63
Japan
If you believe this thesis, then:
If you believe this thesis, then:
Description
Sell the Yen
„ Buy JPY puts / USD calls, Buy KRW calls / JPY puts
Sell JPY CMS rates
„ Buy a JPY CMS rate cap
For discussion purposes only. All options are OTC options.
Risk: With all options mentioned above, the investor risks losing the entire option premium in the event that the spot price does not move beyond the strike price at expiration. Macroeconomic
conditions in Japan may improve. International trade environment may be better than expected and financing conditions might ease.
64
US Consumer and Retail
Retail and Consumer CDS
Lower Consumer Spending May Be a Structural, Rather Than Cyclical, Change
„
The US Household has lost 23% or $14.3 trillion in net wealth over the past 18 months1 and doubled their outstanding debt over last 8 years to $13.8
trillion2
„
US consumer spending and savings rates have been out of line: The US Savings rate was 1.6% in the past decade, and fell to 0.5% in the first
quarter of 2008, compared to a 7% post-war average.3 At the same time, the ratio of household debt to disposable income increased from 101% to
138% fueled by a low interest rate environment.2
„
Goldman Sachs Economists expect the consumer savings rate to rise to 6-10% by the end of 2010 to bring savings in line with the historical
average.4,5
„
Further, to bring the household debt/income ratio back to historical average may require $2.8 trillion of consumer deleverageing2
Personal Savings Rates are Predicted to Increase4
Household Leverage is 27% Above Trend2
$2.8 tr
1 Source: Federal Reserve Flow of Funds Report (Z-1). March 11, 2009.
2 Source: McKinsey Global Institute. "Will US Consumer Debt Reduction Cripple the Recovery?". March 2009.
3 Source: Goldman Sachs. "The Day After Tomorrow: The changing face of the consumer." October 1, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=595584
4 Source: Goldman Sachs. US Economics Analyst: “9 Questions for 2009.”December 31, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=6466617. Goldman Sachs provides no assurance or guarantee that future results will be
consistent with the projected analysis.
5
Source: Goldman Sachs. US Economics Analyst: “The Return of the Frugal Consumer.”February 27, 2009. https://360.gs.com/gs/portal/?action=action.doc&d=6751711
66
Retail and Consumer CDS
Spread Tightening Despite Weak Fundamentals
„
US Consumer-linked and Retail CDS spreads have tightened an average of 60% from their respective 52-week wides1 despite
continued macro-economic weakness, GS Credit Research notes that “CDS shorts on consumer cyclicals have never looked better”2
„
The US Consumer Confidence Index remains near all-time lows. While the most recent level beat analyst expectations, the US
consumer’s “perceptions of the present remained very low”3
„
Housing prices continue to decline, albeit at a slowing rate, contributing to further consumer wealth destruction4
„
Consensus forecasts for macro economic indicators are worse than they were the last time CDS spreads were at comparable levels1,5
Spreads Have Returned to the Levels of Jan 08…1
600
500
…But The Economic Outlook Seems Worse5
Comparison of Economic Forecasts Jan 2008 vs. April 2009
Forecasts for Current and Upcoming Year
US Consumer and Retail Basket
Europe Consumer and Retail Basket
CDX Index
Jan 08
Spread (bp)
400
GDP Forecast
Disposable Personal Income
Personal Consumption Expenditure
Corporate Profits
Unemployment Rate
300
200
100
0
Jan
2007
2008
2.20%
2.40%
2.10%
1.80%
5.00%
2009
2.70%
3.10%
2.40%
4.00%
5.00%
Apr 09
2009
-2.60%
1.90%
-1.10%
-16.60%
8.90%
Values represent forecast Y/Y change from previous year
Unemployment Rate represents forecast avg for year
Apr
2007
Jul
2007
Oct
2007
Jan
2008
Apr
2008
Jul
2008
Oct
2008
Jan
2009
Apr
2009
Jul
2009
1 Source: Goldman Sachs. Data for 5y CDS as of July 24, 2009. Past performance is not indicative of future returns. Indicative Baskets represent retail and consumer CDS traded by GS; exclude names rated Outperform by GS Research
Sachs Credit Research and desk analysts. The Indicative Baskets each have 33 constituents. Indicative basket constituents can be furnished upon request and are subject to change.
Source: Goldman Sachs Credit Strategy. “IG Bonds: Still a source of risk-adjusted value vs. equity”. 1-May-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7099503
Source: Conference Board, Goldman Sachs Global ECS US Research. “USA: Consumer Confidence – Out of the Depths, Mostly in Expectations”. As of 28-Apr-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7070093
Source: Goldman Sachs Global ECS US Research. “USA: S&P Case Shiller Home Price Index - Only a Small Easing in the Rate of Decline”. As of 28-Apr-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7069631
Source: Source: Aspen Publishers, "Blue Chip Economic Indicators". Wolters Kluwer. Jan 10, 2008 and April 10, 2009. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis.
2
3
4
5
2010
1.80%
1.80%
1.70%
7.00%
9.40%
67
Similarly, Retail and Consumer Equity Have Risen
But The Fundamentals May Not Support The Price Movement
„
US Consumer-linked and Retail Equity prices are up an average of 99% from their respective 52-week lows1
„
Unemployment continues to rise2 which may impact the decision of consumers to spend as they may be less secure in their long term
income prospects
„
A survey of senior loan officers shows that banks have continued to tighten lending standards for consumer loans3, which may also
impact consumers’ ability to spend
Job Losses Continue to Rise…2
…Yet Retail Equities Have Risen4
Unemployment Measures
18%
U-3
16%
1.2
U-6
June 09
Indicative Historical Equity Performance
24Jul2009
1.1
16.50%
14%
1Jan2007
1
9.50%
12%
0.9
10%
0.8
8%
0.7
6%
0.6
4%
0.5
0.4
2%
0.3
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
0%
2007
2008
2009
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
S&P Retail Select Index (Jan 1 2007 = 1) S&P 500 Index (Jan 1 2007 = 1)
1 Source: Goldman Sachs. Data for Equity performance as of close on May 12, 2009. Past performance is not indicative of future returns. Indicative Baskets represents 33 retail and consumer names as consistent with the CDS basket referenced
above. Indicative basket constituents can be furnished upon request and are subject to change. The S&P Retail Seclect Industry Sector which is a broad measure or retailers is up 76% from its lows as of May 12, 2009.
2 Source: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.t12.htm . Data accessed May 11, 2009. Data last updated for April, 2009. Past performance is not indicative of future results.
3 Source: Federal Reserve Board. http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200905/chartdata.htm
4 Source: Goldman Sachs. Data as of May 12, 2009. Past performance is not indicative of future returns.
Jul
68
Retail and Consumer CDS
Trade Implementation
If you believe this thesis, then:
If you believe this thesis, then:
Description
„ Buy 5y or 7y CDS protection on retail and consumer names which may be
Buy CDS Protection on Retail and
Consumer related CDS
poised to widen in an extended consumer slowdown
„ The investor may choose to buy protection on individual names or on a
broad basket
„ Buy put spreads on the S&P Retail Select Index, a similar ETF, or a custom
Buy Put Spreads on the S&P Retail
Select Index
basket of equities
„ In addition to the put spread, the investor may choose to sell a call to defray
the cost of the put spread, and thereby initiate a short position with no
upfront premium outlay
For Discussion Purposes Only. All options mentioned are OTC options.
Risks to these trades:
Buying CDS: CDS Spreads may tighten exposing the investor to a loss
Buying puts or put spreads: Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price
at expiration. Investors who buy put spreads (buy a put and sell a further OTM put) also have a maximum loss of the upfront premium paid. The
maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid.
Selling calls: Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the strike price plus the upfront
premium received and may have their security called away if the security price exceeds the strike price of the short call. Additionally, the investor has
full downside participation that is only partially offset by the upfront premium taken in. Investors short naked calls (i.e. sold calls but don’t hold
underlying security) risk unlimited losses of security price less strike price. Investors who sell naked call spreads (i.e. sell a call and buy a farther outof-the-money call with no underlying security position) have a maximum loss of the difference between the long call strike and the short call strike, less
the upfront premium taken in, if the underlying security finishes above the long call strike at expiration. The maximum gain is the upfront premium taken
in, if the security finishes below the short call strike at expiration.
69
Retail and Consumer CDS Portfolio
Indicative Portfolio Characteristics1
Historical Indicative Mid Spread Average (bps)1
500
Portfolio Size
[$5-20mm] on each name
450
Terms
5yr – 7yr (terminating 20 Sep 2014/2016)
400
Weighting
Equal Weighted
300
Average Portfolio CDS Spread1
5yr [172]bps (tightened from 460 highs)
250
Premium Payment Frequency
Quarterly (20th of each Mar, Jun, Sep, Dec)
150
Confirmation
Individual confirmation for each credit
Collateral Terms
As per ISDA Master Agreement and Credit
Support Annex
350
200
100
50
Moody’s Rating Distribution1
Textiles and Leather
45%
Retail Stores
40%
35%
Leisure, Amusement and Entertainment
30%
Hotels, Motels, Inns and Gaming
25%
Home and Office Furnishings, Housewares
20%
Grocery
15%
Cargo Transport
10%
Broadcasting and Entertainment
5%
Beverage, Food and Tobacco
20
09
4/
2/
20
09
8
39.4%
12.1%
6.1%
6.1%
6.1%
3.0%
3.0%
3.0%
15.2%
WR
Caa1
B2
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
0%
A3
1/
2/
6.1%
Personal, Food and Miscellaneous Services
A2
20
0
Moody’s Industry Distribution1
50%
A1
/2
/
10
20
08
7/
2/
20
08
4/
2/
7
20
08
1/
2/
20
0
/2
/
10
20
07
7/
2/
20
07
4/
2/
1/
2/
20
07
0
This material has been prepared for illustrative purposes only. The analysis or information provided is based on certain assumptions which may not be assumptions that Goldman Sachs normally employs. Past
performance is not indicative of future results which may vary. Charts are intended only to facilitate discussion. Rating, industry and CDS spreads data are based on indicative portfolio of 33 names. Basket is
subject to change. Constituents are available upon request
1 Source: Goldman Sachs, indicative only as of July 24, 2009. Ratings/industry information are Moody’s ratings.
70
Retail and Consumer Equity
For clients wishing to express a short view on the retail sector via
equities:
„
.SPSIRE is an equal-weighted index that draws constituents from the
GICs sub-industries that contain companies involved in retail-related
activities. Among these are mid- and small- cap names which may be
more sensitive to the consumer slowdown.
Indicative Historical Prices and Option Strike Prices1
1900
1Jan2008
24Jul2009
1800
1700
1600
(Indicative Only as of July 24, 2009)
1500
1400
Spot Ref: 1537.74
1300
Trade 1
1200
Buy a 1yr 90% / 75% Put Spread
1100
„
Cost: 4.9%
„
Potential Gross Payout Ratio 3.06x
1000
900
800
Trade 2
Buy a put spread collar with zero upfront premium
(Buy a put, sell a put, and sell a call to fund)
„
Jul 2010: Buy a 90%/75% Put Spread, Short the 121% Call
„
Jan 2010: Buy a 90%/75% Put Spread, Short the 113.5% Call
„
Oct 2009: Buy a 90%/75% Put Spread, Short the 108.5% Call
700
2008
2009
Jan
Apr
Jul
Oct
Jan
Apr
121.5% Strike (Jul 10) 113.5% Strike (Jan 10) 108.5% Strike (Oct 09)
.SPSIRE - S&P Retail Select Index 90% Strike 75% Strike
Jul
All options mentioned are OTC options
For Discussion Purposes Only.
1 Source: Goldman Sachs. Data as of July 24, 2009. Indicative Only. Past performance is not indicative of future returns which may vary.
71
Table of Contents
I.
State of the Markets
II.
Tradable Themes
I.
US Commercial Real Estate
II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III.
Other Market Opportunities
I.
Commodity Opportunities
II. Event-Driven Market Neutral Investing
IV.
Appendix
V.
Legal Disclosures
72
Commodity Opportunities
WTI Crude Prices May Decline Further in the Near Term
Fundamental Weakness May Lead to Attractive Entry Point for the Long Term
„
Oil prices have risen since the lows in February1, but the market may continue to decline in the near term
„
The gains in commodity prices since mid-February may have been driven by growing optimism about the global financial outlook as
well as production cuts1
„
However, oil demand has declined both year over year and sequentially, while inventories have continued to rise2,3
„
US oil demand has fallen to the lowest level since 1999 and US total oil inventories rose to record high levels for this time of year3
„
The near term supply / demand imbalance balance may indicate that oil price recovery is overdone and prices may be poised to
decline as low as $45/bbl in the near term as excess supply becomes increasingly difficult and costly to store at high inventory levels4
Total Demand for Refined Products3
22000
28Jul1999
Crude Oil Price and Y/Y Supply and Demand3
28Jul2009
160
28Jul2004
28Jul2009
1000
140
21500
21000
750
120
500
100
250
80
20500
20000
19500
0
60
-250
40
-500
20
-750
-1000
0
-1250
-20
19000
-1500
-40
-1750
-60
18500
18000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Demand for Crude Oil and Petroleum Products (four week avg, thousands bbl / day)
1250
-80
-2000
2004
2005
2006
2007
2008
2009
-2250
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
WTI Crude Nearby Price ($bbl)
Y/Y Chg in Petroleum Inventory (bbl millions) Y/Y Chg in Oil Demand (bbl thousands, RHS)
1 Source: Goldman Sachs Research. Commodity Watch “Expected near-term pullback provides good buying opportunity”. April 26, 2009 https://360.gs.com/gs/portal/?action=action.doc&d=7056346
2 Source: Goldman Sachs Research. Energy Weekly “Diesel needs to rebalance before the complex can go higher”. April 28, 2009. https://360.gs.com/gs/portal/?action=action.doc&d=7069035
3 Source: Goldman Sachs, US Dept of Energy. Data as of July 28, 2009. Demand for Refined Products is "Disposition - Products Supplied - Oil and Petroleum”
4 Source: Goldman Sachs Research. Commodity Watch: “Bridging the gap between a weak today and a strong tomorrow”. May 8, 2008. https://360.gs.com/gs/portal/?action=action.doc&d=7139647
Note: For all notes above, Past performance is not indicative of future results.
74
In The Long Term, Commodity Prices May Increase
Constraints in the Commodity Supply Chain, Combined with Growing Demand
„
Structural supply constraints in the oil markets have been exacerbated by the economic downturn as oil companies choose to invest less, yet
resurgent demand from developing countries could cause commodity prices to rise
„
Low oil prices and constrained credit conditions forced a decline in maintenance which may result in higher depletion rates on existing oil fields1
„
GS economic research estimates current global oil production capacity of ~88mmb/d, and current production of ~83.4mmb/d;2 This implies current
capacity utilization of ~95%. The market was last at full capacity in the summer of 2008
„
“We would expect the annual excess returns to the S&P GSCITM commodity index to fall by 51.5% in 2009 before increasing by 67.1% in 2010 and
22.7% in 2011….While the magnitude of these returns may seem quite large, they are not without historical precedent”3
Global Oil Production and Capacity (MM B/D)4
Global Refining Capacity (MM B/D)4
90
Global production
capacity
90
Global Refining
Capacity
80
80
World Petroleum
Demand
70
70
60
60
Global output
50
50
40
40
World Petroleum
Supply
30
30
20
20
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
67
69
71
73
75
77
79
81
83
85
87
89
1 Source: Goldman Sachs Research. “2009 Outlook: Pricing Supply Destruction”, December 11,2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=6384255 p. 17
2 Source: GS Estimates, 83.4mmb/day production in March 2009
3 Source: GS Research: “Commodity Returns, The Next Five Years” https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7056127&fn=/document.pdf, pp.7, 8
4 Source: International Energy Agency (IEA), DOE and GS Global ECS Research. 2008
Note: For all notes above, Past performance is not indicative of future results.
91
93
95
97
99
01
03
05
07
75
Constructive on Oil In the Long-Term
Higher Demand, Possible Inflation or a Weaker Dollar May Send Oil Prices Up
„
The anticipated pullback in short-term oil prices due to fundamental supply/demand weakness may present a compelling buying
opportunity as oil supply constraints may remain tight even as demand picks up1
„
Despite continued economic contraction, the industrial cycle may be stabilizing which might bring higher WTI crude oil prices1
„
Chinese demand for oil shows an increasing trend while oil demand in the rest of the world and the US remains stagnant3; the Hedge
Fund Strategy group believes that the prospect of continued growth in China may lend support to oil prices over the next several years
„
A long position in oil may also provide a hedge against inflation as the value of real assets may be expected to appreciate in an
inflationary environment
ISM Purchasing Managers Index Shows Improvement4
100
1Jan2000
28Jul2009
90
80
Crude Oil Price and Y/Y Supply and Demand3
2.00
1.80
Above 50 implies Expansion
1.40
60
1.20
50
1.00
30
Despite signaling a contraction in economic
activity, the ISM manufacturing survey shows
that the industrial cycle may be stabilizing
United States
China
0.80
0.60
20
0.40
10
0.20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ISM Purchasing Managers Index 50
Total World
1.60
70
40
(May 2001 = 1)
0.00
2001
2002
2003
2004
2005
2006
2007
1 Source: Goldman Sachs Research. Commodity Watch: “Bridging the gap between a weak today and a strong tomorrow”. May 8, 2008. https://360.gs.com/gs/portal/?action=action.doc&d=7139647
2 Source: Goldman Sachs Research. Energy Weekly “It’s always darkest before the dawn”. May 5, 2009 https://360.gs.com/gs/portal/?action=action.doc&d=7111585
3 Source: IHS Global Insight. Data as of May 11, 2009
4 Source: Institute for Supply Management. Data as of May 11, 2009
Note: For all notes above, Past performance is not indicative of future results. For Discussion Purposes Only.
2008
76
Call Options on Long-Dated WTI Crude
Implementation
To play longer-term bullish oil fundamentals at a discount, an investor may
consider trades for 2010/2011 recovery which would capitalize on moderate
prices through the remainder of 2009.
Steep Near-Term Contango in WTI1
88
(Indicative only as of July 28, 2009)
Trade Idea # 1: Knock-In Call
100-strike call on Dec12 WTI Crude Oil (Forward ref. 81.98)
Knocks-In if 1st Nearby WTI Futures contract settles at or below $55/bbl between
now and 17Nov2009 (spot ref 71.37)
Offer price $4.00/barrel (vanilla call option $8.75 savings of 67% )
28Jul2009
28Jul2014
86
84
82
80
78
76
Trade Idea # 2: Knock-Out Call
80-strike call on Dec11 WTI Crude Oil (Forward ref. 79.83)
Knocks-Out if 1st Nearby WTI Futures contract settles at or above $75/bbl
between now and 16Dec2009 (spot ref 71.37)
Offer price $3.50/barrel (vanilla call option $7.00, savings of )
74
72
70
68
Trade Idea # 3: Knock-Out Call
A slight variation to trade idea #1, this trade Knocks Out instead of Knocking In
100-strike call on Dec12 WTI Crude Oil (Forward ref. 81.98)
Knocks-Out if 1st Nearby WTI Futures contract settles at or above $80/bbl
between now and 17Nov2009 (spot ref 71.37)
Offer price $3.70/barrel (vanilla call option $8.75, savings of )
1 Source: Goldman Sachs. Data as of July 28, 2009. For Discussion Purposes Only.
2009 2010
2011
2012
Jan
Jul
Jan
Jul
Jan
Jul
NYMEX Light Sweet Crude Forward Curve
2013
Jan
2014
Jul
Jan
Jul
Above: Steep near-term contango. The forward curve prices oil at mid-Feb
almost $6 over spot, and oil at mid-Dec almost $7 over. This raises the implied
probability of upward knock-out, and lowers the implied probability of downward
knock-in, cheapening all three trades.
77
Bearish Refining Margins
US Petroleum Stocks and Refining Capacity
US Refinery Capacity is at ~85%
„
US Refinery Capacity is at ~85%
„
Both gasoline and distillate (heating oil) stocks are growing
„
Distillate stocks in particular are significantly higher than
seasonal ranges
Crude Stocks are Higher Than Normal…
….As Are Distillate Stocks…
…And Gasoline Stocks are Rising
1 Source: Energy Information Administration. http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html. Data accessed July 28th, 2009
78
Short US Refinery Margins
„
While US Crude stocks have been dropping, US gasoline has
begun to rise and heating oil stocks, starting in January have
risen very significantly
„
At the same time there is plenty of slack in refining capacity: the
upside for refining margins is not there
„
We believe that US petroleum products, in particular heating oil,
has yet to adjust to the current economic environment, and that a
downside adjustment is warranted, given in particular the growth
in heating oil inventories
WTI 2:1:1 Crack (in USD/BBL)
26
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
1Jan2006
2006
Jan
Jul
2:1:1 WTI Crack
1 Source: Goldman Sachs. Pricing is Indicative Only as of July 28, 2009.
28Jul2009
2007
Jan
2008
Jul
Jan
2009
Jul
Jan
Jul
79
Sell the Aluminum Upside
China Aluminum Imports Not Rising1
„
Both aluminum and US steel prices, often substitutable, have
more than halved over the past year, as demand has abated and
inventories built
„
While China still imports plenty of copper, keeping its price
elevated, China has built aluminum smelter capacity powered
uneconomically by local generation. This may keep a cap on
world aluminum prices for a long time to come
LME Aluminum Cash Price ($/MT)2
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
14Jul2005
US Steel Hot Rolled Price ($ / MT)3
14Jul2009
4.5m
$1,200
4m
3.5m
3m
$1,000
$800
2.5m
2m
1.5m
1m
500000
2005
2006
Jan
2007
Jul
Jan
2008
Jul
Jan
0
2009
Jul
Jan
Jul
$600
$400
$200
$0
Aug-04 Feb-05Aug-05Feb-06Aug-06 Feb-07Aug-07Feb-08Aug-08 Feb-09
Stocks, London Metal Exchange, Aluminum (RHS)
Aluminum Long Term Combined High and Low Grade Price (LHS)
1 Source: Bloomberg. Data as of July 14, 2009. Past performance is not indicative of future returns
2 Source: Goldman Sachs. Data as of July 14, 2009. Past performance is not indicative of future returns
3 Source: Dow Jones US Hot-Rolled (HR) & Cold-Rolled (CR) Coils Index. Data as of July 14, 2009. Past performance is not indicative of future returns
80
Aluminum Volatility May Be Too High
Sell Aluminum Calls
„
„
LME Aluminum 1y ATMF Volatility – 15 years1
Today’s aluminum volatility is consistent with one fifth of
current inventory levels
45.0%
Conversely, with today’s price and inventories, on a historical
basis, volatility should be about one half its current level
40.0%
Volatility (%)
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
0
500000
1m
2m
2.5m
3m
LME InventoryMT
STOCKS, LONDON METAL EXCHANGE, ALUMINUM
Implementation and Indicative Pricing:
With growing inventory and a China imposed cap, sell both
price and volatility with a short call strategy:
„
Sell Calls 1,000 MT per month for CY’10 - CY’11 at a strike of
2,200 for $165 / MT
Alternatively, those who are more risk averse may prefer a put
spread ratio:
„
1.5m
3.5m
4m
4.5m
5m
Aluminum 1y ATMF Vol
Indicative Call Pricing2
3m ALM Reference Price: $1825
Strike
2,200 / MT
3,000 / MT
2y
$165 / MT
$50 / MT
3y
$205 / MT
$75 / MT
Period
1 x 2, 1800/1500 put ratio spread, either 2y or 3y. Cost is
$50/mt for either 2y or 3y, starting 1/1/10 2
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns
2 Source: Goldman Sachs. Pricing is Indicative Only as of July 28, 2009.
81
Commodity Opportunities
Implementation
If you believe this thesis, then:
If you believe this thesis, then:
Description
Buy Long-Dated Oil
„ Buy Knock-in or Knock-out Call options on oil to take a long-term
constructive view and benefit from cost savings based on market
expectation
Short the Crack Spread
„ Short December Refinery Cracks
„ Buy two contracts of Crude Oil and Short one contract each of
Gasoline and Heating Oil to take a bearish view on refining margins
Sell Caps on Aluminum
or buy a Put Spread ratio
„ Sells call options on aluminum to capture high volatility and express
the view that trading will be range-bound
„ For a more risk-averse approach, buy a put option and sell two put
options at a lower strike
For Discussion Purposes Only. All options mentioned are OTC options.
Risks to these trades:
Buying puts or put spreads: Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price
at expiration. Investors who buy put spreads (buy a put and sell a further OTM put) also have a maximum loss of the upfront premium paid. The
maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid.
Selling calls: Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the strike price plus the upfront
premium received and may have their security called away if the security price exceeds the strike price of the short call. Additionally, the investor has
full downside participation that is only partially offset by the upfront premium taken in. Investors short naked calls (i.e. sold calls but don’t hold
underlying security) risk unlimited losses of security price less strike price. Investors who sell naked call spreads (i.e. sell a call and buy a farther outof-the-money call with no underlying security position) have a maximum loss of the difference between the long call strike and the short call strike, less
the upfront premium taken in, if the underlying security finishes above the long call strike at expiration. The maximum gain is the upfront premium taken
in, if the security finishes below the short call strike at expiration.
82
Event-Driven Market Neutral Investing
Event-Driven Market Neutral Investing
Alternatives for a Challenging Market Environment
„
Extreme market volatility has posed significant challenges to traditional investing and trading approaches
„
Market-neutral strategies around event-driven situations offer the potential for clients to generate attractive risk-adjusted returns with a
low correlation to market movements
„
Opportunities exist in the following types of corporate events / structures:
Strategy
Description
Merger / Risk Arbitrage
„
Involves hedged purchases of target company shares trading at discounts to
acquisition value due to transaction and timing risk as well as cost of capital
Stubs / Holding Companies
„
Corporate structures characterized by cross-holdings of publicly-listed securities
„
Trading strategies generally seek to create synthetic positions in assets within a
holding company or benefit from fluctuations in price to net asset value ratios
„
Creation of newly-listed entities via distribution of shares in a subsidiary to existing
shareholders
„
Often give rise to technical trading patterns and inefficiencies that can be exploited
using a variety of strategies
„
Seeks to take advantage of movements in the relative valuation of high-vote and
low-vote shares
Spin-offs
Dual Share Class
For Discussion Purposes Only.
84
Event-Driven Market Neutral Investing
Merger Arbitrage
„
Due to drawdowns, redemptions and fund closures, the pool of dedicated capital pursuing merger arbitrage opportunities has shrunk …
„
… and gross spreads for pending strategic transactions have widened considerably relative to historical comparable transactions
US Merger Gross Spreads – Then and Now…1
Target
4/10/2007
BK
CBSS
FRK
IFIN
LI
NVL
KSE
RDN
7/16/2009
JAVA
PCZ
SGP
WYE
1
Acquirer
MEL
BBV
VMC
STT
FGP LN
HNDL IN
NG/ LN
MTG
ORCL
SU
MRK
PFE
Target Value
($mn)
Gross
2
Spread
$30,804
$9,336
$4,610
$3,976
$3,103
$3,325
$7,321
$4,312
Median
Average
1.4%
2.8%
2.5%
1.8%
3.0%
1.0%
4.1%
5.4%
2.7%
2.8%
$7,078
$18,204
$43,194
$64,693
Median
Average
3.6%
1.1%
3.9%
4.1%
3.7%
3.2%
Illustrative Merger Arbitrage Spread Calculation2
Acquirer stock price
Target stock price
Expected closing date
Expected time to closing in years
Cash offered per Target share
Acquirer share offered per target share
Deal price
Current gross spread
$20.00
$42.00
09/30/09
0.51
30.00
0.7500
$45.00
$3.00
Net spread calculation
Gross spread
Dividend effect
Rebate earned on Acquirer short @ 1%
A)
B)
185
C)
#REF!
D)
E)
F) = D + (E * A)
G)
$3.00
0.12
0.08 H) = E * A * C * 1%
$3.20 I)
Gross percentage return
Annualized return as a % of Target price
7.6% J) = I / A
15.0% = J / C
Historical Strategic Transaction Timeline3
< 120 days
Between 120
and 180 days
> 180 days
48%
30%
21%
For in-depth analyses of these situations and to discuss specific opportunities contact Goldman Sachs Hedge Fund Strategies
1 Source: Company reports, SEC filings, Goldman Sachs. List represents announced public pending transactions with a target market cap of greater than $3 billion
2 Source: Goldman Sachs.
3 Source: Company reports, Goldman Sachs. Distribution based on 66 strategic transactions (excluding Utility deals) completed since 6/1/07 with a target market cap greater than $3bn
85
Event-Driven Market Neutral Investing
Stubs / Holding Companies
„
Stubs are a unique asset class that allow investors to isolate businesses within a company that do not trade publicly, or express a
viewpoint on the value of a holding company relative to the price of its underlying assets
„
Stubs can be created from any public company with publicly-traded cross-holdings. Investors create long positions in a “stub”
synthetically by purchasing shares in the parent company and selling short the appropriate ratios of shares in the publicly traded
subsidiaries
„
Stubs can be traded in anticipation of a corporate action such as a spin-off, split-off, IPO or sale of non-public (stub) assets. Completion
of the corporate action can result in significantly increased valuation of the stub as the parent company’s discount to its Net Asset
Value (NAV) narrows
Selected US Stubs / Holding Companies1
Example Stub / HoldCo Structure and Trade Implementation
Holding Company (ABC) - 100mm shares outstanding @ $10.00/sh
% of
Co.
Owned
27.4%
Stub
Ratio
0.208
Stub
Price
$12.31
Stub % Market Cap (mm)
of
Parent Parent
Stub
73.1% 34,840
25,461
Parent
Altria Group
Cross Holdings
SAB Miller
EMC Corp
VMWare
83.3%
0.162
8.61
64.4%
26,894
17,327
News Corp
BSkyB
Sky Network TV
Alibaba.com
Yahoo! Japan
BlackRock Inc.
39.1%
43.6%
39.0%
34.8%
92.0%
0.262
0.065
1.409
0.014
0.094
6.56
74.0%
23,180
17,160
8.78
55.9%
21,914
12,249
21.91
56.4%
17,896
10,086
CNA Financial
Boardwalk Pipeline
Diamond Offshore
DirecTV Group
90.1%
77.1%
50.4%
51.4%
0.557
0.315
0.161
1.000
(1.54)
-5.6%
11,959
(669)
1.75
6.6%
13,725
907
CNX Gas
81.7%
0.682
13.46
42.3%
5,744
2,431
Fortescue Metals
9.0% 1.166
9.64
47.2%
Jefferies Group
28.4% 0.204
AmeriCredit Corp
24.8% 0.138
Inmet Mining
10.0% 0.023
57.5% 0.014
Jupiter Telecom
Liberty Global
(0.61)
-3.7%
Telenet Group
50.4% 0.201
Austar United
54.8% 2.490
1 Source: Bloomberg and Company Filings. Represents US stubs where stub value < 80% of parent value and parent market cap > $3 billion. Stub prices and market caps as of July 15, 2009
4,865
2,298
Net "Stub" or Non-Public Assets
(Implied Market Value of $650mm or
$6.50 per ABC share)
Public Subsidiary #1 (XYZ)
50mm shares held by
ABC @ $5.00/sh
Yahoo! Inc
PNC Financial
Public Subsidiary #2 (UVW)
25mm shares held by
ABC @ $4.00/sh
„ To establish a position in the ABC HoldCo “stub” assets, investor would buy
shares of ABC and hedge public holdings by selling short XYZ and UVW
„ Hedge ratios can be calculated by dividing subsidiary shares held by ABC by
total shares of ABC outstanding
„ In this example, for each share of ABC purchased, investor would short 0.5
XYZ and 0.25 UVW to create ABC “stub” for $6.50
Loews Corp.
Liberty
Entertainment
Consol Energy
Leucadia National
Corp
4,613
(169)
86
Event-Driven Market Neutral Investing
Spin-offs
„
Spin-offs involve the creation of newly-listed and / or fully-floated entities via distribution of shares in a subsidiary to existing shareholders
„
The nature of these transactions frequently give rise to technical trading patterns and inefficiencies that can be exploited
„
Factors such as forced selling by parent company shareholders and a lack of analyst coverage of the newly spun-off entity drive the inefficiencies
Historical Performance of Carve-Out IPOs Spun-off1
„
Carve-out IPOs tend to underperform in advance of the spin-off and immediately postspin but outperform peers over the long-term
Relative Performance of Carve-outs Subsequently Spun-off
3 Months
2 Weeks
1 Week
Pre-Spin
1 Month
3 Months
1 Year
Historical Performance of 100% Spin-offs3
„
100% spin-offs have historically underperformed in the weeks / months post-spin and
tend to revert and outperform peers over longer time periods
Relative Performance of 100% Spin-Offs Post Ex-Date
1 Week
1 Month
2 Months
3 Months
6 Months
1 Year
+10.8%
Post-Spin
+11.0%
+3.6%
-2.0%
+2.5%
-0.9%
-0.1%
-2.6%
-2.3%
-4.0%
-6.4%
-11.5%
Historical Performance of ParentCo “Stubs” Around Carve-Spins2
„
“Stubs" (parent company ex-spinco) generally outperform peers and the broader
market over various time periods that straddle the spin-off ex-date
Parent (Stub) Cumulative Relative Performance Around Spin-off Dates
Measured as Pre-Spin to Post-Spin Equal Time Period
Median Outperformance %
% of Stubs Outperforming
1
2
3
4
2 Months
1 Month
2 Weeks
1 Week
+8.0%
79%
+6.0%
68%
+6.1%
77%
+5.7%
77%
2009 US Spin-off Pipeline4
Parent
Cardinal Health
SpinCo
Liberty Entertainment
CareFusion (Clinical and
Medical Products Business)
Liberty Starz Group
Pride International
Seahawk Drilling
Ocwen Financial
Altisource Portfolio Solutions
Entergy Corp
Enexus Energy Corp
Time Warner
AOL
Date
Spin-off Type
August 31, 2009 100% Spin-off
September 2009 Spin-Merge + Tracker
(Est.)
Spin-off
Q3 2009
100% Spin-off
Q3 2009
100% Spin-off
"Late 2009 / Early 100% Spin-off
2010"
"By Year End" 100% Spin-off
Source: Bloomberg, Company press releases and Goldman Sachs. Data represents median relative performance (vs. relevant subsectors) of US carve-out IPOs subsequently spun-off 2001-2008 with market cap >$100 million at time of spin
Source: Bloomberg, Company press releases and Goldman Sachs. Data represents median relative performance (vs. relevant subsectors) of US Parent Company “stubs” (excluding stakes in spun-off entities) from 1998-2008
Source: Bloomberg, Company press releases and Goldman Sachs. Median relative performance data for US 100% spin-offs > $500mm market cap at time of spin-off from 1995-2008
Source: Company filings, conference call transcripts and press releases
87
Event-Driven Market Neutral Investing
Dual Share Class
„
Several US companies have dual share class structures where each class possesses different liquidity, voting and index membership
attributes
„
Percentage spreads between share classes of a given company tend to fluctuate over time based on various market factors
„
These movements can be exploited by buying the undervalued class and shorting the overvalued class if one expects spread
convergence or reversing the trade (buying overvalued / selling undervalued) to play for spread divergence / widening
„
Share class consolidations triggered by the expiration of post-spin-off / split off waiting periods can also provide trading opportunities
Selected US Dual Class Share Structures1
More Liquid / Less Liquid
Market Cap
More
Less
Avg. Trd Shares
Short
Company Name
($mm)
Liquid Tkr Price Liquid Tkr Price Volume
Out
Interest
Central Garden
$772
CENTA
$10.71
CENT
$11.89
1.1
2.5
0.4
Comcast
40,256 CMCSA
14.10 CMCSK
13.61
3.1
2.5
1.9
Chipotle
2,387
CMG
81.90
CMG/B
69.05
4.8
0.8
35.3
Discovery Comm
6,356
DISCA
23.57
DISCK
21.60
4.0
1.0
10.8
HEICO
865
HEI
37.90
HEI/A
30.05
4.4
0.7
18.7
Lennar
1,535
LEN
9.15
LEN/B
6.95
148.0
4.6
96.3
Liberty Global
4,594
LBTYA
16.74
LBTYK
16.66
4.9
1.0
2.8
Molex
2,722
MOLX
16.15 MOLXA
15.16
9.6
1.2
18.6
News Corp
1,818
NWSA
8.86
NWS
10.42
3.2
2.3
0.7
SunPower
2,158 SPWRA
23.69 SPWRB
20.65
4.0
1.3
8.6
Telephone & Data
3,004
TDS
28.00
TDS/S
25.80
4.3
1.0
28.9
Viacom
13,462
VIA/B
22.07
VIA
23.43
37.3
9.6
2.2
Average
19.1x
2.4x
18.8x
Median
4.4
1.3
9.7
1 Source: Bloomberg and Company Filings. Price and spread data as of July 15, 2009
Current
In
Dollars
(1.18)
0.49
12.85
1.97
7.85
2.20
0.08
0.99
(1.56)
3.04
2.20
(1.36)
Spread
As a
%
-11.0%
3.5%
15.7%
8.4%
20.7%
24.0%
0.5%
6.1%
-17.6%
12.8%
7.9%
-6.2%
5.4%
7.0%
TTM Avg.
Spread %
-4.8%
3.7%
11.2%
5.4%
20.1%
22.6%
3.0%
8.2%
-8.1%
15.2%
7.0%
-5.8%
6.5%
6.2%
Difference
-6.3%
-0.2%
4.5%
2.9%
0.6%
1.5%
-2.6%
-2.0%
-9.5%
-2.4%
0.8%
-0.3%
-1.1%
-0.3%
88
Table of Contents
I.
State of the Markets
II.
Tradable Themes
I.
US Commercial Real Estate
II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III.
Other Market Opportunities
I.
Commodity Opportunities
II. Event-Driven Market Neutral Investing
IV.
Appendix
V.
Legal Disclosures
89
Appendix
„
Over the past decade, both mezzanine subordination level and tranche thickness have consistently decreased (decreasing credit
enhancement and increasing leverage)
„
Between 1995 and 20071:
●
AA-rated subordination declined from 26.8% to 9.5% while tranche thickness decreased from 6.7% to 2.5%
●
A-rated subordination declined from 21.2% to 7.2% while tranche thickness decreased from 5.6% to 2.3%
CMBS Capital Structure Evolution2
40%
35%
CMBS Capital Structure
30%
25%
20%
AAA & Super Senior
15%
AA
10%
A
BBB
5%
BB
Equity
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
AA Subordination (%)
AA Thickness (%)
26.8
6.7
27.2
6.0
24.6
6.2
23.4
5.4
21.5
5.2
18.7
4.1
17.9
3.8
16.6
4.3
14.7
5.0
12.2
4.1
10.1
3.1
10.0
2.6
9.5
2.5
A Subordination (%)
A Thickness (%)
21.2
5.6
20.6
6.6
18.3
6.3
17.8
5.6
16.7
4.8
14.5
4.2
13.9
4.0
12.4
4.2
10.3
4.4
8.4
3.8
7.2
2.9
7.4
2.6
7.2
2.3
1 Please note that this data is for 1995-2007 only. Past performance is not indicative of future results.
2 Source: Goldman Sachs analysis and Commercial Mortgage Alert.
90
Appendix
CMBX1
CMBX2
CBMX3
CMBX4
CMBX5
Tranche Subordination (%)
AAA
AJ
AA
A
BBB
BBBBB
29.76
12.50
10.45
7.71
4.49
3.32
29.88
12.20
10.15
7.60
4.29
3.15
2.40
29.88
11.42
9.46
7.14
3.91
2.77
2.15
29.88
12.33
10.23
7.77
4.44
3.36
2.50
29.76
12.70
10.63
8.00
4.72
3.68
2.69
Tranche Width (%)
AAA
AJ
AA
A
BBB
BBBBB
70.24
7.26
1.65
1.46
1.01
1.16
70.12
7.68
1.85
1.40
1.09
1.14
0.34
70.12
8.46
1.65
1.21
1.05
1.14
0.30
70.12
7.55
1.43
0.98
1.11
1.07
0.31
70.24
7.06
1.18
0.91
1.07
1.04
0.38
15.30
0.54
30.78
32.33
8.80
3.78
0.00
0.00
2.06
3.35
1.56
1.50
0.00
13.16
0.59
31.86
32.38
10.44
5.52
0.00
0.05
1.08
1.75
1.86
1.29
0.00
17.07
0.32
28.89
30.62
8.61
6.39
0.00
0.59
1.16
1.69
3.57
1.10
0.00
16.89
0.06
27.08
31.58
11.54
5.28
0.00
0.45
1.76
1.90
2.93
0.53
0.00
11.82
0.06
33.81
25.86
12.63
6.45
0.00
0.20
1.98
1.98
3.70
1.50
0.00
CMSA Property Type (Balance %)
MultiFamily
Co-op Housing
Retail
Office
Lodging
Industrial
Warehouse
Health Care
Mobile Home
Self Storage
Mixed Use
Other
N/A
1 Source: Trepp, LLC. Stratifications for CMBX vintages are indicative only. Data as of July 21, 2009
91
Appendix
LTV (Balance %)1
LTV (Balance %)¹
Up to 49.9
50.0 - 54.9
55.0 - 59.9
60.0 - 64.9
65.0 - 69.9
70.0 - 74.9
75.0 - 79.9
80.0 - 84.9
85.0 - 89.9
90.0 - 94.9
95.0 - 99.9
100.0 and up
Occupancy (Balance %)
CMBX1
CMBX2
CBMX3
CMBX4
CMBX5
9.83
4.33
7.11
9.92
12.84
20.43
34.55
0.92
0.08
0.00
0.00
0.00
9.37
2.94
5.66
10.16
14.74
23.67
32.07
1.12
0.16
0.11
0.00
0.00
9.64
5.24
5.56
8.11
13.11
19.55
35.79
2.30
0.65
0.05
0.00
0.00
6.04
2.38
3.79
12.18
15.79
19.07
37.45
2.80
0.42
0.06
0.00
0.02
8.17
4.38
6.14
11.09
19.25
23.04
25.71
1.80
0.37
0.03
0.00
0.02
Occupancy (Balance %)
Up to 50
50 - 54.9
55 - 59.9
60 - 64.9
65 - 69.9
70 - 74.9
75 - 79.9
80 - 84.9
85 - 89.9
90 - 94.9
95 - 99.9
100 and up
DSCR (Balance %)2
DSCR (Balance %)²
Up to 0.89
0.90 - 0.99
1.00 - 1.09
1.10 - 1.19
1.20 - 1.29
1.30 - 1.39
1.40 - 1.49
1.50 - 1.59
1.60 - 1.69
1.70 - 1.79
1.80 - 1.89
1.89 - 1.99
2.00 and up
CMBX1
CMBX2
CBMX3
CMBX4
CMBX5
0.71
0.50
1.07
1.66
3.58
4.43
5.34
6.89
12.35
21.50
41.98
0.00
1.37
0.87
1.35
1.46
3.16
4.73
4.26
6.67
11.41
21.22
43.50
0.00
0.94
0.68
1.21
2.08
3.24
4.04
5.57
8.10
13.37
20.02
40.74
0.00
0.99
0.58
0.92
2.44
3.10
6.35
5.37
6.65
12.86
19.95
40.79
0.00
1.30
0.67
1.05
2.73
5.23
5.39
5.36
7.24
8.66
17.77
44.60
0.00
Delinquency Status (Balance %)
CMBX1
CMBX2
CBMX3
CMBX4
CMBX5
0.00
0.00
0.39
7.24
26.41
14.45
11.39
9.57
6.40
4.68
3.74
2.60
13.12
0.00
0.00
3.64
17.31
31.08
14.08
10.03
7.31
3.23
3.07
2.91
2.32
5.00
0.00
0.99
2.34
16.89
25.55
17.24
12.42
5.78
3.20
2.80
2.70
2.18
7.91
0.04
0.58
5.64
22.64
27.01
16.18
9.88
6.14
2.53
2.35
1.76
0.90
4.35
0.00
0.49
6.92
25.27
23.38
15.29
11.13
4.69
2.70
2.48
2.09
2.33
3.24
Source: Trepp, LLC. Stratifications for all CMBX vintages indicative only. Data as of July 21, 2009.
1 LTV's are calculated using appraisals that were performed at loan origination in most instances
2 DSCRs are updated as of latest monthly data where available
Delinquency Status
30 Days
60 Days
90+ Days
< 1 Month
Current
Foreclosure
Grace Period
NonPerf Mat Balloon
Perf Mat Balloon
REO
CMBX1
CMBX2
CBMX3
CMBX4
CMBX5
1.20
0.69
1.27
4.99
83.66
0.00
7.97
0.04
0.05
0.00
0.70
0.81
2.56
4.36
85.11
0.00
6.46
0.00
0.00
0.00
1.85
0.14
2.62
3.24
85.26
0.00
6.89
0.00
0.00
0.00
0.72
0.64
2.40
6.00
86.78
0.00
3.50
0.00
0.00
0.00
0.58
0.96
2.32
3.76
87.38
0.00
5.02
0.00
0.00
0.00
92
Table of Contents
I.
State of the Markets
II.
Tradable Themes
I.
US Commercial Real Estate
II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III.
Other Market Opportunities
I.
Commodity Opportunities
II. Event-Driven Market Neutral Investing
IV.
Appendix
V.
Legal Disclosures
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98
Hedge Fund Strategies Group
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Contact
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99