Having spent many years listening to the recommendations of investment analysts wanting to believe they have some insights that the rest of the world does not, Goldman Sach’s reminded us this week that analysts, like traders, love following trends.
Goldman Sach’s as far back as 2008 predicted that the world’s insatiable demand for oil could see the oil price possibly rise to $200 a barrel. They have consistently, during a period of rising oil prices, been “ a bull” of the commodity in terms of price expectation. This week after the recent correction they threw in the towel and announced the bull days are over and expect oil to fall to $75 a barrel in 2015. The change in oil price expectations is predicated around the shale gas revolution. Shale gas production may be increasing but this is not an overnight phenomenon, the technology that is required to extract shale gas has been known about for quite some time. It would appear that Goldman never factored in their research the possibility that shale gas will reduce the demand for oil and impact the price. Over the years it has been our experience that analysts can be better at reacting to events than anticipating them, by which time its to late and the price has adjusted.
Analysts are like risk managers, when the sky is clear they often see no prospect of rain clouds, and when it is raining they forget sunshine could possibly be just round the corner.
In June new regulation was brought in that states investment funds will now have to justify in detail what they spend on research to regulators. Traditionally a broking house provides its research to a client who pays for it via commission paying orders. This in turn means it is the investing client who pays for the research, not the fund manager directly. The hope is that if the investment bank now has to pay directly for their research they may pay more attention to what they are buying.
One prediction that did come to pass was the Federal Reserve announcing the completion of QE3 on Wednesday. The initial reaction from equity markets in the US was a muted one, US Ten year treasury yields that have been creeping higher since the flash crash a few weeks ago now trade at 2.32%.