Monday, October 13, 2008

The Goldman Roll

When I first got started trading, I was taught about the Goldman roll. Goldman Sachs had one of the first long-only index funds for commodities. It was invested in a basket of commodities - but always in the front month. The fund would have to roll positions from one month to the next as the front month contract was about to expire. So folks would position themselves to take advantage of the roll - where Goldman had to sell the front month and buy the next month out. If they did this in size it could affect the spread dramatically.

Now, years later, Goldman is just one of many index fund market participants. But over the past several years, they have become more and more famous for their oil forecasting. They are no better at it than any other firm. The new "Goldman Roll" was present today, as they "rolled over" and accelerated their shift from being bullish on energy to being bearish on energy. Let me demonstrate:

In this article from May, they revised their estimates upward to $141 from $107.

In this article from today, they lowered their price forecast from $115 to $70.

A few years ago, I worked for an economist. He was fantastic. And well respected. And after watching him, I ascertained the three great characteristics that every good economic forecaster must have:

1) They write, speak, and present well. (Much like the weatherman...if they are right but incompetent they do not get credit for their predictions, but if they are wrong and smooth they are able to divert the blame.)

2) Many choose to follow trends. (If they make predictions against the trend which do not come to pass, they get called out much more easily.)

3) They make bold predictions. (A conservative prediction is forgettable, a bold prediction is gutsy, and much more easy to explain away if proven wrong..."Chinese demand did not grow the way we expected" or "No one could have anticipated the global economic meltdown.")

The crazy thing about economic forecasts is that they can move commodity markets...and it is not illegal for those who issue forecasts to hold positions in the markets they cover. This fact was not lost on any of the well respected houses that issued price forecasts in the last two years.

Now, Goldman has "rolled" over on their price forecasts of the oil markets. And T. Boone has lost billions for his customers. But they were bold, they caught a trend, and they were consummately professional and believable in their forecast presentations.

They learned the three rules early, and used them for incredible gains over the last 24 months.

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