It seems like it was only yesterday when Goldman was predicting either two-thirds chance of a 10% correction in stocks, said that the S&P is either 30% or 45% overvalued relative to its historical value, or warned about a market slide when it downgraded the S&P500 "to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities." Alas, that was the old Goldman: the one which still considered the impact of fundamentals in a centrally-planned world. The new one is far more pragmatic for the New Normal times, and overnight David Kostin, who has consistently fluctuated on either his year end S&P500 price target in 2014, or the justification for getting there (first higher bonds yields, then lower), came out with his latest thesis why now is the time to own stocks. Naturally, his catalysts have nothing to do with actual fundamentals, and instead all focus on the three only relevant metrics of the new normal: beta, momentum and career risk, which can be summarizes as follows: buy stocks because Hedge Funds suck.

Incidentally, it's not that hedge funds suck, it's that they are hedged and have short positions, which in a market that no longer is allowed to decline crush their P&L, which just happens to be the reason why over two years ago we said that the best strategy in this broken, manipulated market is to be long the most shorted stocks to take advantage of hedge fund pain.

Finally, even Goldman admits it, although not in those words. Here is how Kostin frames it:

Most mutual fund and hedge fund managers have struggled in 2014. We believe investors will be compelled to add long exposure to existing positions in an attempt to boost returns before year-end. Guided by historical 4Q patterns following weak fund performance, we highlight 15 Buy-rated S&P 500 stocks that should benefit from a combination of beta, momentum, and fund popularity. Stocks include DAL, HAL, and CRM.

And some more detail:

Many fund managers are entering the home stretch of 2014 with just a few months to make up for weak performance so far this year. As they return from the beach or sightseeing and get back to work, nearly 80% of large-cap mutual fund managers will be forced to reevaluate their portfolios or embrace the likelihood of drafting very disappointing year-end letters.

Only 23% of large-cap core mutual funds have outperformed the S&P 500 benchmark YTD, rivaling their worst performance in the past decade. This figure has averaged  37% on an annual basis since 2003, with only 2006, 2010 and 2011 equal to or below the current 23% figure. Large-cap growth and value managers fare even worse vs. their respective Russell 1000 style benchmarks, with less than 20% of each universe outperforming. Smallcap funds are the exception, with 62% of core funds beating the Russell 2000 YTD.

Hedge funds have also struggled despite strong returns of the most popular long positions. The average hedge fund has returned just 2% YTD, according to HFR,  compared with a 10% return for the S&P 500, which continues to reach new record highs. Choice of shorts and market timing are the clear sources of blame given that the most popular long positions continue to outperform. YTD our Hedge Fund VIP list (Bloomberg: GSTHHVIP) has returned 12%, outperforming the S&P 500 by 242 bp.

Historical 4Q returns in an environment of weak fund performance provide an investment template that matches with intuition. We compared overall index returns and the performance of individual stock characteristics based on mutual fund performance at the end of 3Q, using data since 1991. The connection between returns and  hedge fund performance is less clear given their historical trend of diminishing absolute returns and that hedge funds operate without a benchmark, but the general performance trends and intuition behind those trends that we observe in environments of poor mutual fund returns apply in regimes of poor hedge fund performance as well.

The S&P 500 should continue to rise in 4Q as funds are compelled to add exposure in an attempt to boost returns before year-end. Since 1991, the nine times when  fewer than 40% of large-cap core mutual funds were beating the S&P 500 at the end of 3Q, the index has averaged a 4Q return nearly 200 bp higher than in times when more funds were outperforming. We expect the S&P 500 will return 2% by year-end, rising to 2050. In addition to the supply/demand dynamics from underperforming funds, the environment of continuing above-trend US GDP growth, strong corporate earnings, and stillaccommodative Fed policy should support a continuing "grind higher" in US equities.

For those confused: no, you read that right. The latest "justification" to buy stocks is because, drumroll, hedge funds suck! One wonders if the same logic could have been applied in reverse: if hedge funds had a great year would Goldman see that as a catalyst to sell everything? Don't make us laugh.

So how does one trade an idiotic market in which Fear Of Missing Out (on one's Christmas bonus) is the only "catalyst"?

For stock-pickers, we highlight three strategies with historical precedent that should outperform into year-end:

1. Stocks with high beta should outperform as the S&P 500 rises modestly in 4Q. In particular, our Dual Beta basket (Bloomberg: GSTHBETA) consists of 50 stocks on a sectorneutral basis with the highest combined sensitivity to the S&P 500 and US economy.
2. High price momentum stocks that have posted the strongest returns YTD will likely continue to outperform laggards as investors reallocate positioning in an attempt to ride "what's working" into year-end.
3. The most popular stocks should benefit as funds add incremental length to existing positions they already own and which are already outperforming in 2014. Our Hedge Fund VIP list (GSTHHVIP) and Mutual Fund Overweight list (GSTHMFOW) each identify the 50 stocks most popular among fund managers

 

The punchline: "investors should buy the following 15 S&P 500 stocks, rated "Buy" by Goldman Sachs Equity Research analysts, which should benefit from a combination of beta, momentum, and popularity as funds attempt to remedy their weak YTD performance heading into late 2014."

Translation: come inside the Hedge Fund hotel Kalifornia: it's nice and warm inside, and superb returns are virtually assured.

And finally, since this is Goldman after all, here is how Kostin hedges just in case Goldman's few remaining clients (remember: with trading volumes beyond zombified the only way Goldman makes money now is through its prop desk, i.e., frontrunning what little flow orders it has) end up poorer, here is the hedge:

US equities are expensive on an absolute basis. Consider that the S&P 500 index trades at a forward P/E multiple of 16x – the highest multiple outside of the 1997-99 Tech bubble. The median S&P 500 stock trades at a forward P/E of 17x, above the average of the past decade (15.0x) and more than one standard deviation above the 35-year average of 13.1x.

Our year-end 2014 price target for the S&P 500 remains unchanged at 2050, reflecting a slim 2% expected return. We roll-forward our 3-month, 6-month, and 12-month price targets to 2050, 2075 (March 2015), and 2150 (September 2015). Our previously published multi-year forecasts through year-end 2018 remain unchanged.

Good luck muppets.