Goldman’s Oil Thesis: Timing is Everything

Gyrating markets can sure interrupt beach season in the Hamptons. My attempts to unplug have been largely unsuccessful, and the collapse in oil and other commodities have the wheels spinning inside my Neanderthal-like brain cavity.

But grunting at my screen will only get me so far. They say that imitation is the sincerest form of flattery. And on Wall Street, very few people have original ideas. A Goldman Sachs research note from July 31st has been keeping me awake at night, and it appears I am several hours late in passing along my take.

Perhaps Goldman's timing was off by a few weeks...but it is worth examining their thesis in trying to explain moves in oil, which often defy "neat explanations".

Is the "negative gamma" trade in crude finally out of gas?

July 31st
Negative gamma issues pose near-term downside risk, but we maintain a year-end forecast of $149/bbl

Concern over demand weakness was likely a key driver behind a large financial liquidation that has underpinned the recent sell-off. The liquidation has brought prices close to levels where a large amount of put options are struck....

Goldman Gets It Wrong on Dollar, Crude Oil

Goldman Sachs might be the biggest and the best, but they are human. And they are willing to admit when they are wrong, and have reversed course on their outlook for the greenback:

Goldman Sachs Group Inc. reversed course on its dollar forecast, saying the greenback has `bottomed'' as global growth weakens, oil prices decline and the U.S. trade balance improves.

The U.S. currency, after reaching a 5 1/2 month high of $1.48 per euro, will climb to $1.45 per euro in three months, analysts led by Thomas Stolper wrote in a research note. Goldman had forecast a decline to $1.56 for the same period. From today's 109.8 yen, the dollar will strengthen to 110 yen in three months, up from a previous forecast of 106.

The Dollar Index traded on the ICE futures market, which tracks the U.S. currency against six major U.S. trading partners, touched a six-month high today on concern the U.S. economic slowdown is spreading to other developed nations Bloomberg

Arjun Murti, Goldman's energy analyst is apparently digging his heels in however. In a rare media appearance in early June Murti called for oil to run up to $150 to $200 a barrel. The call, combined with a dramatic prediction from Morgan Stanley that crude would reach $150 by the fourth of July, lit the fuse on crude oil in June.

Regulators Wrestle with I-Bank Oversight

Looking for a bounce in the financial stocks? Don't hold you breath, the knuckleheads in Washington will not be settling the issue of regulatory oversight anytime soon, which might be an important piece in handicapping the puzzle. The ball is in the Beltway's court, but Congress is unlikely to act until next year. For the time being chaos will reign:

At issue is whether the SEC or the Fed has the best expertise and the right regulatory model to oversee these institutions.

There could also be a role for the Federal Deposit Insurance Corp, mentioned for its skills in liquidating failed commercial banks.

"There is now a mild tug of war going on between the Fed and the SEC, and sort of behind the scenes, the FDIC is involved," said Robert Litan, a senior fellow at the Brookings Institution. "The field is wide open." Reuters

Many of the bad actors in this drama are counting down their days before bolting to new jobs; without a plan it is tough to handicap the banks vs the brokers. Will Vikram Pandit get his wish for a level playing field?

Meredith Whitney, Michael Price Team Up To Snuff Out Rally in Financials

Financial stocks clearly cannot catch a break. Meredith Whitney will not let Dick Bove's negative call on Goldman yesterday go unanswered, and is slashing her earnings estimates on Goldman well below the Street's consensus numbers:

The firm lowered their 3Q08 EPS estimate to $2.15 from $3.54 (consensus $3.64), their FY2008 est to $14.32 from $15.75 (consensus $16.77), and FY2009 est to $14.90 from $16.30 (consensus $19.75). Firm says the primary drivers for these revisions are customer volumes, overall weak global equity markets, and weak advisory and underwriting revenues. They say that as GS revenues are relatively the most equity-linked of its broker peers, the fact that broad global equity market indices are all down double-digits will have a meaningful effect on the co's earnings. Briefing

Dick Bove beat Meredith to the punch yesterday in throwing cold water on Goldman's near-term prospects, and even legendary value investor Michael Price is getting into the act.

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