Buying Goldman's Commodity Sale

04/12/2011 2:48 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The most predictable market pullback in recent memory is going to end predictably—with higher prices.

And when it does, the immediate prompts for the selling will be forgotten just as quickly as they popped up.

But that’s down the road into a future that, for all the predictions, remains unknown. All we really can know now is why people may think they’re selling. That can be a useful exercise in determining whether the current mindset will last.

So: Crude got squeezed Monday when Muammar Gaddafi signed up for the African Union’s ceasefire proposal, but it stayed down when the peace plan was rejected by the rebels. Gold tarnished after the last-minute budget deal averted a government shutdown that could have focused even more attention on Washington’s dysfunction.

And—this is the one that really hurt—the commodity research team at Goldman Sachs (GS) bailed out of its “CCCP” bets, which stands not for the former Soviet Union, but for:

  • crude
  • copper
  • a commodity index
  • and platinum

The recommendation had produced a 25% gain in four months, prompting analysts to take their chips off the table, even as they acknowledged further “upside potential” over the next 12 months.

Investment Advice You Can Trust…Or Else
Sometimes, it’s better to be feared than to be loved. This is Goldman, which haunts the popular imagination as the “vampire squid” with its tentacles on most levers of power. Surely they must know something. The firm’s calls frequently seem to generate outsized reactions.

This particular call had the additional credibility of coming from longtime bulls who, while still bullish over the medium term, are no longer enthusiastic in the here and now. So this wasn’t some perma-bear prophesying the latest apocalypse.

Today, another Goldman analyst piled on with a bearish call on crude. Predicting a 17% tumble for the Brent benchmark all the way down to $105 a barrel. That would still represent a 23% gain over the last year. But in the context of where we’ve been—up 52% in a year as of Friday—what a bargain!

The market sale on gasoline, copper piping, and corn muffins can’t be entirely chalked up to Goldman’s good works, of course. The International Monetary Fund chipped in with a cut to its global growth forecast, while Japan upgraded the severity of the crisis at Fukushima to Chernobyl’s level, and widened the evacuation zone around the stricken plant as radiation continued to spread.

But traders in New York, at least, pay much more heed to Goldman than to the IMF, and the analysts displayed an exquisite sense of timing. The relentless market run since the March 16 low had almost halved the CBOE Options Volatility Index (VIX), also known as the “fear gauge.”

At the same time, the market averages stalled near resistance just below February’s highs. The odds of challenging those highs before next week’s earnings flood were low.

That’s a lot of dry tinder waiting for a spark. So Goldman arguably only gave the overheated market what it wanted.

NEXT: What This Means


What This Means
Some quick observations while human nature takes its course:

  • Woe to the dollar (UUP), which has broken down to a new multi-year low, unable to capitalize on the commodity crunch, nuclear fears, or even the new spirit of compromise in Washington.
  • If this is supposed to be the end of the bull run in commodities, owners of the iShares Silver Trust (SLV) and the ETFS Physical Platinum Shares (PPLT) sure aren’t buying it.
  • By the time most commodity producers report earnings in two and three weeks’ time, the focus will have shifted to near-record oil profits and the tone of corporate forecasts.

There are real risks, from the health of the bond market once the Fed ends its purchases, to the squeeze on consumers and market reaction to potentially cautious corporate profit outlooks. Not everyone will get clobbered like Alcoa (AA), but the recent energy spike does offer a ready excuse for any CEO inclined to caution.

No one knows what will happen in Libya, or how the rising enmity between Saudi Arabia and Iran­—each with mammoth oil reserves and restive populations—will end up.

But the very fact that Goldman’s call shook out so many weak hands suggests that this isn’t the top for commodities or stocks. At tops, bearish calls get short shrift from wildly enthusiastic investors.

This is patently not that time. It’s another buying opportunity for the patient investor.

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