GS Finance’s bearish autocalls on S&P give bears and others high chances to win

By Emma Trincal

New York, June 16 – GS Finance Corp.’s bearish autocallable contingent coupon index-linked notes due July 5, 2024 linked to the S&P 500 index give investors with a sideways or bearish view on the market a high probability of winning their bet, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

Both the structure of the product and current market conditions contribute to the positive return outcome, he added.

The notes will pay a contingent quarterly coupon of at least 9.25% per year if the index closes at or below its coupon trigger level, 115% of the initial level, on the relevant observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The exact coupon rate will be set at pricing.

The notes will be automatically called at par plus the coupon if the index closes at or below its initial level on any quarterly valuation date.

If the index finishes at or below its buffer level, 115% of the initial level, the payout at maturity will be par plus the final coupon.

Otherwise, investors will lose 1% for every 1% gain above the 15% buffer.

Range of success

“As long as the market is down on one of those quarters, you’ll get called. In my opinion, chances are you will be called after the first quarter,” said Kaplan.

The notes could meet the expectations of a variety of income-seeking investors. Payments will be made in any market unless the S&P 500 rises above 15%.

“The note gives you a good opportunity to get paid. The timing is good. You have more chances to see the market being down than up. But even if you have a sideways view, it should work to your advantage as well,” he said.

Kaplan’s optimistic outlook relied on his bearish view on U.S. equity.

He pointed to several signals indicating “extreme valuations” from fundamental and behavioral standpoints.

Fear and greed

One of them was the “extremely high” Fear and Greed index at 83.

Created by CNN Business, the index is used to gauge the mood of the market based on several variables such as momentum, stock prices, breadth, option prices and volatility among others.

“At 83, the index has now climbed higher than its peak through the bubble high of late 2021 and early 2022. In normal times, this index is in the 70s. We are now at extremely high greed levels,” he said.

Such “extreme greed” times have in the past preceded some of the worst bear markets of this century, he said pointing to the 2000-02 and 2007-09 bear markets when the S&P 500 index lost 57.7% and 48.9% of its value, respectively.

Put/call ratio, inflows

Another reliable yet more traditional measure of market sentiment is the put/call ratio.

“The put/call ratio is also extremely low. People are buying more calls and less puts. They’re more excited about making money than concerned about protecting their assets with puts. Investors are overly confident,” he said.

Another dramatic bearish red flag was the amount of inflows into equity in the past recent years.

In 2021, inflows into equity funds exceeded the total inflows of the past 20 years combined, he noted.

This year, investors have been focusing on artificial intelligence stocks.

“The total 2023 inflow into tech stocks is already greater than all of 2021. And we’re only halfway through the year,” he said.

Pouring into equity

In addition to that, investors are now holding 90% of their assets into U.S. equity, according to the National Association of Active Investment Managers.

“There is a sense of fearlessness out there. Those allocations are at record highs too.”

Other bearish signs include very low levels of implied volatility as well as a shrinking S&P’s dividend yield, which is less than half of its historical average.

The decrease in the dividend yield suggested that the S&P is trading double its fair value, he noted.

Mini bubbles

Kaplan also mentioned the short life of recent market bubbles.

“Since 2021 we had two bubbles in a row,” he said.

For instance, the S&P 500 index peaked on Jan. 4, 2022, bottomed in October and rebounded in this year’s first quarter.

“Seeing bubbles bursting so quickly and recovering so fast is unprecedented. There were times when it took an entire generation for a market to come back to its previous high,” he said.

“Those indicators point to an extreme. You can easily expect a big reversal,” he said.

Partial hedge

The notes offered a high probability of getting paid, which for Kaplan made the investment relatively attractive.

“Presumably you can also use it as a partial hedge against a long position,” he said.

The hedge is only partial because in a severe bear market, the notes would not provide enough protection.

“But it’s still a good thing to be able to make money when stock prices are down. It’s not a perfect hedge. But it’s better than nothing,” he said.

Risk-adjusted return

Finding out if a note pays enough for the risk taken is a major challenge for market participants.

Investors should not just focus on returns but also on the probabilities of achieving these returns, said Kaplan.

“This note is akin to selling covered options. You’re getting money upfront. You’re giving up huge gains. But the probability of a positive outcome is quite significant.

“It’s never a bad idea to have a high probability of getting paid, even if the gain is not going to be a big gain,” he said.

Bears shorting the market or investors taking fully hedged positions may be able to earn more than what the note has to offer. But their risk profile would be different.

“Here, you’re going to get a smaller return, but you have more protection,” he said.

“The market is up 20%, you only lose 5%.

“It’s a conservative note.

“Obviously a very bullish investor would not be interested in it. The prospects for gains would be too limited.

“But for a bear or someone with a neutral outlook, it’s a reasonable trade,” Kaplan said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes are expected to price on June 30 and to settle on July 6.

The Cusip number is 40057TC85.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.