Goldman Sachs’ Oil Forecasting Prowess

Goldman Sachs is a firm often in the limelight for hiring the best talent on Wall Street, winning the high profile deals, having close ties to the government and paying enormous compensation. It’s also a firm under intense scrutiny and often in the cross hairs.

The last time I wrote specifically about one of their market calls was when they “curiously” downgraded the biotech sector in January 2014. You can read that piece here. http://investfortomorrowblog.com/archives/941

This week, Goldman cut their crude oil forecast by $15, which on the surface, should not get much attention. But it did get me thinking. I vividly recall spring 2008 when oil was soaring and the country was worried about it never ending. At that time, Goldman called for $200 oil when oil was $125 and had already rallied $40 in under six months. To me, it seemed like the venerable firm was caught up in the hype and hysteria, and was only inflating the bubble even more.

So this morning, I did some research and found other occurrences of Goldman changing their forecast on energy. To be fair, it is certainly possible I may have missed some, but below is what I could find.

As you can see below, in June 2008 with oil at $125, Goldman raised their target to $200. Oil did rally for another month before utterly collapsing to $35 in less than a year.

In May 2011 (below), Goldman raised their forecast on oil, only to see it plummet almost immediately by 20%+.

In October 2012 (below), the firm lowered their target on oil, but within a few weeks, oil began a major rally.

Today, as you can see below, after oil was taken to the woodshed, Goldman cut their forecast by $15. If history is any guide and I believe it is, the next significant move in oil should be a major rally.

My takeaway from this is that just because Goldman Sachs is cheered, revered or sometimes jeered, doesn’t mean they have a good crystal ball or make accurate forecasts.

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Goldman Sachs and the “Curious” Biotech Downgrade

I like to take things at face value. It’s makes life so much easier that way! But every once in a while, and probably more so in this business, some things just make you go “hmmmmmmmmm…”.  Two weeks ago, Goldman Sachs issued a very public call on the biotech sector. If it was almost anyone else, you would shrug your shoulders and move on. However, with Goldman, I sometimes take the “curious” stance, rightly or wrongly so.

Goldman downgraded biotech as it digested a series of all-time highs. While it wouldn’t have been the place I would have downgraded a group, it’s certainly their prerogative. Curiously, that day saw biotechs’ lowest close of 2014 and a breakdown from the pattern which presumably caused some stops to be hit and more selling. But the very next day, the sector began a 9 day, 10% nearly vertical rally.

So the question that begs to be asked is, did Goldman downgrade to force stock from weak hands to strong hands before the big rally? OR, did Goldman just make an embarrassing bad call in the short-term?

ibb

I will let you decide…

Dow Jones Shakes Up Industrial Average

Last week, Dow Jones, the keeper of the popular stock market indices Dow Jones Industrials, Transportation and Utilities, had a major shake up in their most widely watched Industrial Average. Being thrown out are Alcoa, Bank of America and Hewlett Packard. On the other hand, Goldman Sachs, Nike and Visa are coming on board.

On the surface, this makes all the sense in the world as Alcoa has been a stodgy old aluminum company while B of A and Hewlett are kind of boring and old fashioned. Oh yeah, and all three have cheap share prices. Let me repeat that in a different way; all three are lower priced stocks. Unlike almost every other popular stock market index, Dow Jones weights each company based on price. So the more expensive the stock price, the more impact on the index. The three downtrodden now account for roughly 2.5% of the index.

With GS, NKE and V trading around $168, $68 and $190 respectively, the divisor for prices move in the Dow just changed significantly. That means the index should have bigger price moves simply because the components have higher share prices. Think of it this way, is it easier for an $8 stock like Alcoa to move $1 or $190 stock like Visa? Of course, it’s Visa by a wide margin.

Now comes the fun part. On the surface, you should conclude that Dow Jones is throwing out AA, BAC and HPQ because they no longer represent our economy as the index intends to and by replacing the with GS, NKE and V, the index is more representative of the economy. I cannot argue with that conclusion.

HOWEVER, I do find it “curious” when Dow Jones reconstitutes the index every few years that we usually see higher priced shares coming in to make it much easier to move the index. Given the Dow’s popularity as the bellwether for what stock market is doing, this change adds some strong juice to get the Dow moving. Wouldn’t it be amazing if this change helped the Dow exceed 16,000 and beyond next year?