Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

Advertisement disguised as forecast or analysis

Some time ago I noticed that few weeks before the end of a quarter analysts of prominent equity brokers tend to come up with unexpected downgrades with justifications like “Downgrading Nokia because people are using less cell phones next year”. Retail investors sold Nokia believing that the reputable brokerage with large research staff knows more than they do. In surprising development few weeks into the new quarter same analyst issued an upgrade for the same company. Retail investors bought Nokia.

I have a hunch why the brokerages did that in environment of very low commissions. Since I can not prove the “why” I’ll leave it up to the reader to connect the dots for him or herself. Nothing illegal though, everyone can voice their opinion and change their mind as frequently as they like. Just don’t be fooled by the “advertisements” with the sole purpose of improving the broker’s business. If you can’t resist then better don’t trade equities they follow. Lost opportunity is always better than lost money.

In commodity futures markets everything is supposed to be only about supply-demand balance. Let see if that actually held true on an example of last years dramatic swings on crude oil and its derivates markets.

We have to look these markets combined because crude oil demand is only coming from refiners to produce the real consumables. Among them gasoline, heating oil (diesel fuel), and jet fuel are by far the largest. The data for this little study is from Energy Department weekly publications available to everyone at

http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

The graph shows NYMEX crude oil futures closing price at the last day of each month on left scale. On right scale it shows 4 week average demand change for crude oil derivates relative to the same 4 week period a year ago. Since the absolute consumption is huge (gasoline around 9 million barrels, heating oil/diesel around 4 million) a 1% change is already significant.

crudeoilsupplydemand1

I included the data from earlier years because the trend of demand destruction started already late 2006 when oil prices were “only” around 60 (having peaked mid 70 during the summer). The vastly prevalent consumable – gasoline has been smoothly and steadily trending down since Feb 2007. Diesel and Jet fuel demands are choppier because their absolute volumes are lower and diesel/heating oil demand is also affected by weather. Yet, the downward trend is clear even for untrained eye.

Mid winter 2008 Goldman Sachs (the ultimate authority in commodity market forecasting) top oil analyst advised their clients that oil prices will reach $120 per barrel by May. Their clients include large institutional investors (pension funds, hedge funds, endowments etc.) with trillions of dollars under management. Their clients bought crude oil and the small speculators followed. Indeed, the market reached $120 per barrel by May.

In May Goldman Sachs came up with next target for oil market — $150 by 4-th of July. Other reputable investment banks and OPEC joined the fray predicting even further targets. The market got to $147 by 4-th of July. That is close enough to the target and Goldman Sachs issued next target — $200 by the end of the year.

Meanwhile, Saudis, in attempt to tame the market, held a summit with oil consumer nation’s end of June 2008. Departing to the meeting our government top energy expert – Energy Secretary Mr. Bodman said that there is nothing Saudis can do – its all only about supply and demand. Wow, didn’t he read the reports from his own department?

Do you think the Goldman Sachs vast research staff did not know how to read Energy Department’s weekly reports or they did not know how to plot price and demand number on a graph? Of course, you can not expect a government bureaucrat to perform any analysis not required by law.

So what is the lesson here? If your pension fund was Goldman Sachs client you may want to ask them how come they did not bother little due diligence on what their adviser was telling them to do. If you trade your own money don’t be fooled by the advertisement (advisories, infomercials, …) from sources that have their hidden agenda no matter how reputable they are. Do your own due diligence or rely on providers you know will not benefit from you. There is nothing wrong for a small speculator “going with the wave” as long as you are aware that you are on “thin ice” and have your emergency exit strategy worked out when the market starts to unravel

Why the history proved wrong Mr. Bodman, OPEC, Goldman Sachs and few other prominent investment banks that have faded to the history by now? Read next weeks post.


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Comments

11 Responses to “Advertisement disguised as forecast or analysis”

  1. [...] 2008 should have taught that investment demand for any commodity (oil, gold …) is artificial. (http://marketreflections.banyantree.us/?p=18) Once the bubble bursts Morgan Stanley and others will have again many billions to write down. Make [...]

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  5. Kelly Brown Kelly Brown says:

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  6. JaneRadriges JaneRadriges says:

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  7. Hi, gr8 post thanks for posting. Information is useful!

  8. GarykPatton GarykPatton says:

    Hello, can you please post some more information on this topic? I would like to read more.

  9. Raymond Raymond says:

    Hi GarykPatton. Thank for asking. You may want to look at “OPEC Increasing Production … ” http://marketreflections.banyantree.us/?p=69 to get a fresh version of the same chart. It was preceded by a “news release” from Goldman upping their average oil price objective for 2009. I’ll add the link to this “news release” once I find it and will have you wish in mind for future. Raymond

  10. CrisBetewsky CrisBetewsky says:

    It’s a masterpiece. I have never thought people can have such ideas and thoughts. You are great.

  11. CrisBetewsky CrisBetewsky says:

    Some of us even don’t realize the importance of this information. What a pity.