Goldman as Bank Bear; Oil-Price Stock Strategies

Goldman Sachs is doing an about face on its May call to buy financial and consumer stocks.

In a note this morning, the firm's strategists said sell financials and consumer discretionary shares and continue to overweight energy and materials. (The contrarian view: The case for consumer discretionary.)

Portfolio strategist David Kostin and four other analysts also are overweighting tech but are neutral on everything else. In May, they had moved to overweight consumer shares and neutral weight on financials.

What happened?

The strategists say they had expected a tactical uptrend in the market. They said they had expected fiscal stimulus and bank recapitalizations to boost consumer and financial shares.

"Our theory was clearly wrong in hindsight: Financials slumped 18 percent and consumer discretionary fell 7 percent while S&P 500 fell 5 percent. We are now back-tracking and again suggest an underweight in both sectors," they wrote.

Inflation is one culprit. So is the weak consumer.

Goldman's commodities research forecasts average 2008 prices for energy, industrial and agricultural materials will be 50 percent above 2007 averages. During periods of rising producer price "crude materials" inflation, operating margins fall, multiples shrink and there are low equity returns. The analysts said in past similar periods, telecoms and financials were the worst performers, and energy and materials posted high returns.

Fear of Financials

Goldman financial sector analysts last week issued a report saying a turnaround in financials is not imminent; credit deterioration will not peak until 2009 and that capital raising is getting harder. The strategists said the financials are 15.1 percent of the equity cap of the S&P 500 and they recommend now underweighting to 13 percent.

Consumer discretionary stocks are 8.4 percent of the S&P, and they recommend weighting at 7 percent.

Goldman has recommended overweighting energy for four years. They recommend a 17 percent weight vs. 14.3 percent for the S&P and for materials they are at 4 percent vs. 3.9 percent.

In technology, they recommend an 18 percent weight vs. the S&P's 16.7 percent. "In terms of the key macro themes in the market -- inflation, consumer weakness, global growth and fiscal stimulus -- technology benefits from continued growth outside the US and it has historically outperformed in high raw materials inflation environments because its margins have been less sensitive to these input costs," they wrote.

Energy Earnings

Like other strategists, Goldman's analysts warn that earnings estimates are too optimistic for the most part. But one area where earnings are not expected to be cut are the energy and materials sectors. They note that during the year, analysts have actually revised energy estimates upward by 13 percent.

Oil: The Wild Card

JP Morgan today issued a note on what stocks might do in three scenarios for oil prices.

-If oil remains in its current range, they say 25 years of daily trading data show that financials would be a place to be. They say financials fell 63 percent of the time when oil rose. Financial stocks though outperformed the S&P after each period. (JP Morgan strategists recommend being long financials.)

-If oil rises $30 per barrel, obviously energy stocks and materials are the clear winners

-If it falls $30, airlines and financials are buys.

JP Morgan's note was based on the findings from its Quant Research department which produced a global oil correlation model that analyzed 2,700 stocks.

Questions? Comments?