Goldman Leads Wall Street in Regret of New Nifty 50

By Michael Tsang and Michael Patterson

July 14 (Bloomberg) -- Goldman Sachs Group Inc. called international sales a ``life saver'' in April for companies like 3M Co. UBS AG predicted at the end of last year that global growth would boost Cisco Systems Inc. Morgan Stanley said in January that emerging markets would fuel gains in General Electric Co.

All of them were wrong.

3M, Cisco and GE tumbled more than the Standard & Poor's 500 Index this year, sending Morgan Stanley's ``New Nifty Fifty'' index of companies that depend on overseas sales down 18 percent, the worst start in six years. The money-losing advice is the latest misstep by Wall Street, which overestimated fourth-quarter profits by the largest margin ever and failed to anticipate that rising inflation and more than $400 billion of bank losses would spur the biggest sell-off in global equities since 1970, according to data compiled by Bloomberg.

``It's not as easy as saying, `Just buy global and you'll be fine,''' said Dan Veru, a principal at Fort Lee, New Jersey- based Palisade Capital Management, which oversees about $3 billion. ``None of these places have been great places to hide.''

Goldman, the world's largest securities firm, told clients last week to quit the trade it advocated three months ago -- buying a basket of companies with the most overseas sales and selling a group with the least -- after it lost 1.3 percent.

Global Bear Market

David Kostin, Goldman's New York-based U.S. investment strategist, wrote that ``the market is not currently trading the long-term effects of international growth, focusing instead on inflationary pressures and the weak consumer.''

Almost $13 trillion has been erased from equity markets around the world since October, as the worst U.S. housing slump since the Great Depression left the economy on the brink of a recession while record commodity prices stoked global inflation.

The S&P 500, the benchmark for American equities, slumped last week into a so-called bear market, or a decline of 20 percent from a recent peak. Among the 23 industrialized nations in the MSCI World Index, only Canada averted such a sell-off. The MSCI World has dropped 15 percent in 2008, the worst start to a year since 1970, Bloomberg data show.

Futures on the S&P 500 expiring in September added 1 percent to 1,252.70 as of 9:18 a.m. today in London after U.S. Treasury Secretary Henry Paulson asked Congress for authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac.

Central Banks

Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., says U.S. companies that rely on Europe and emerging markets for a large portion of sales may keep trailing the broader market as the countries' central banks raise interest rates to combat accelerating consumer prices.

The European Central Bank boosted its benchmark lending rate this month to a seven-year high. Policy makers in Brazil, Russia, and India have also raised borrowing costs this year as crude oil, corn, soybeans and copper climbed to records.

U.S. central bankers lowered interest rates seven times since September, the most aggressive cuts in two decades. The Federal Reserve held its target overnight lending rate between banks at 2 percent last month, the lowest since 2004.

``There's a great deal of economic vulnerability in the developing world and in Europe,'' said Aronstein. His New York- based Marketfield Fund beat the S&P 500 by 18 percentage points, including dividends, since it began Oct. 12, three days after the index rose to a record.

Brazil, China

U.S. economic growth may accelerate to a 1.8 percent rate next year from 1.5 percent in 2008, according to a Bloomberg survey of economists. Growth in the Euro region, Brazil, Russia and China may slow, the survey shows.

Even so, emerging-market economies are forecast to expand at a faster rate than the U.S., with China growing by 9.5 percent and Brazil increasing by 4 percent. Equity investors should purchase companies with sales in those countries, says Peter Schiff, who helps oversee $1 billion as president of Darien, Connecticut-based Euro Pacific Capital.

``Global companies with global income streams -- those are the only stocks people should buy,'' he said. ``You don't want to own any stocks that are going to be dragged down by the slumping domestic economy.''

Companies that reported higher revenue because the falling U.S. currency boosted overseas sales may lose that source of growth, said Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago.

3M Declines

3M fell 1.9 percent on April 24 even after the St. Paul, Minnesota-based maker of 50,000 products from Scotch-brand tape to electronic signs posted better-than-estimated first-quarter sales. The shares have since extended their 2008 decline to 19 percent as analysts said currency translations inflated revenue.

``People are worried that a lot of that growth has come from the weakening dollar and that foreign exchange profits have improved earnings,'' said Bobrinskoy, whose Ariel Focus Fund is beating 85 percent of its rivals this year. ``At some point you've got to have real earnings growth.''

GE, which has businesses ranging from jet engines to turbines for power plants, lost 25 percent this year. Abhijit Chakrabortti, Morgan Stanley's global equity strategist in New York, called the Fairfield, Connecticut-based company a ``top pick'' in a Jan. 6 note to clients.

Cisco, the San Jose, California-based maker of computer- networking equipment that gets about half its revenue from abroad, slumped 19 percent. UBS's David Bianco said in a December report that Cisco's overseas sales put the shares in a ``sweet spot.'' He predicted the S&P 500 would climb to a record 1,700. Bianco has since cut his year-end target to over 1,600.

Nifty Fifty

The term Nifty Fifty was used in the early 1970s to describe a group of the largest U.S. companies, including Anheuser-Busch Cos. and Eastman Kodak Co., that purportedly guaranteed profits for investors who bought and held the shares.

The ``New Nifty Fifty'' was created in 1995 by Thomas McManus, a former investment strategist at Bank of America Corp. and Wall Street's best stock forecaster in 2007, when he worked at Morgan Stanley. Formally the Morgan Stanley Multinational Index, McManus used the term to reflect U.S. companies that didn't depend on any one country for their growth.

The index beat the S&P 500 in 2006 and 2007 and has posted declines in just three years since it was created.

``Opinion follows prices,'' said Aronstein. ``People get carried away looking at the immediate past.''

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Michael Patterson in New York at mpatterson10@bloomberg.net.