The Goldman Sachs Group Inc. (NYSE:GS) is out with a new report highlighting the firm’s “fears” that investors are missing out on oil’s latest rally. Ostensibly, they’re offering guidance to every retail investor out there with the implicit assumption that Goldman’s got your best interests at heart.
Not true.
History suggests the firm may have a far more nefarious agenda.
Today, I’m going to tell you what that likely is and how to play the situation for profits.
Let’s set the stage first, though.
Goldman Sachs and other firms with large trading operations periodically release research reports and commentary on a wide variety of investments and, in doing so, attempt to sway your opinion regarding the subject at hand.
In this case, it’s oil.
Jeffrey Currie, Goldman’s global head of commodities, wrote in a client note that the oil “rally likely has room to run, particularly from a returns perspective (meaning the firm’s quantitative analysis of current price action against statistical data).”
At the same time, Goldman Sachs noted that its commodities index will return 8% over the coming 12 months, an upward revision from a previous estimate of 5%. Then, of course, comes the zinger.
This is where most of the investing public gets tripped up.
CNBC reported that Goldman Sachs is warning that investors could miss out on further gains for the year’s best performing asset class.
In my best Dr. Evil voice… riiiiiight.
Goldman Sachs is fully aware that its comments will make news and that supposedly independent research released anywhere on Wall Street really isn’t independent at all.
There’s a good case to be made that the firm is probably “talking its own book,” meaning making comments and releasing research that supports trading positions Goldman’s already got established. In fact, I’d be willing to bet that at least a few of Goldman’s traders probably went long oil in February, 2016, when it was trading at a low of $26.21 per barrel.
Assuming I’m correct, those very same traders are hoping you’ll buy because that will provide them with the exit they want and the profits they need for year-end bonuses. Goldman’s trading operations resulted in a staggering $4.286 billion last year, so what I am describing is hardly inconsequential.
It’s a very deliberate – and very well-laid out – trap that pits you against Goldman’s trading desks. Worse, if you’re a Goldman client, that also puts you and your money in the unenviable and untenable position of having to trade directly against the firm that is charged with your best interests.
Naturally, Goldman Sachs denies the charges associated with trading against clients every time they surface, but I cannot imagine how they can with a straight face. Nearly all of Wall Street is in on the “con.”
The situation is far more widespread and a lot worse than you’d think.
A recent study from the University of Cambridge and Stanford, for example, concludes that well-informed insiders at 497 major U.S. banks benefited from 2005 to 2011 thanks to advance knowledge and relationships that were often directly contrary to the interests of their clients.
The Economist even went so far as to deem that the conduct – meaning specifically the tip-offs, insider knowledge, and particularly connected firms – exploited [for profit] a consistent and “significant information knowledge” advantage over the uninformed and unconnected.
Other data from Abel Noser, an institutional investor data firm tracking trading costs, shows that large investors are likely to trade more during periods ahead of important announcements. That’s simply not plausible unless they have unusually good information or are busy creating said information, as I believe may be the case with Goldman’s missive.
Sometimes, a firm’s efforts are particularly blatant.
That was the case in 2015 when the SEC charged ITG, an electronic brokerage firm, with trading more than $4 billion worth of U.S. shares each month with running a secret trading desk that “misused highly confidential customer order and trading information for its own benefit,” according to a source at Business Insider.
Late last year news broke via a class action lawsuit filed in a Manhattan federal court about a how Wall Street banks used online chat rooms to rig auctions in the $14 billion U.S. Treasury markets. Plaintiffs alleged that traders at a “cartel” of operators including Goldman Sachs, Morgan Stanley, BNP Paribas and other major banks shared supposedly top-secret client-confidential bids as they tried to buy Treasuries. The traders would then use that information to develop a comprehensive understanding of what the markets were which would, of course, allow banks to sell bigger positions at still greater profits.
No doubt you’re latching on.
I wasn’t surprised in 2011 when The New York Times Co. (NYSE:NYT) ran an excerpt from William Cohan’s book, Money and Power: How Goldman Sachs Took Over the World, quoting a private equity investor who laid the situation out in black and white, noting that…
“information gathered from [Goldman Sachs’] client businesses as free for them to trade on … it’s as simple as that. If they are in a client situation, working on a deal, and they’re learning everything there is to know about that business, they take all that information, pass it up through their organization, and use that information to trade against the client, against other clients, et cetera, et cetera.”
And, I’m not surprised now.
The traps being laid out for you are very sophisticated and are hidden in plain sight.
Forget about whether or not oil will run higher or lower. Let well-capitalized Wall Street traders duke it out as prices bounce around.
What you want to think about – and concentrate on in the name of profits – is the fact that oil has to continue to flow no matter what the cost.
Pipelines are one of the best plays here.
I’ve recommended a number of ’em over the years because they’re a great choice for investors who want to capture both income and appreciation. Especially when prices are contentious, like they are at the moment.
My favorite is Energy Transfer Partners L.P. (NYSE:ETP).
ETP operates approximately 61,000 miles of natural gas pipelines, 146 BCF (billion cubic feet) of working storage capacity, and more than 60 natural gas facilities.
The key to midstream pipeline companies is building out new capacity which can then be turned into revenue by exploration companies that need to move product from the wellhead to a final distribution point.
The only way that capacity can increase is by spending money, which in the oil and gas space is referred to as capex (capital expenditure) – and ETP boasts the highest planned capex of any serious industry player in 2018, at approximately $4.8 billion to $5.2 billion for the year.
The stock is off 63.14% from its November, 2014 highs which scares a lot of investors but which I happen to think represents a huge bargain. What’s more, ETP is trading at a PEG ratio of just 0.31 (anything under 1 is a bargain), the price to sales is just 0.74, and it reflects a staggering 12.00% yield.
Energy Transfer Partners is a Master Limited Partnership (MLP), though, so you’ll want to consult with your tax professional before you buy. Generally speaking, you’ll want to put shares in a taxable investment account rather than a tax-advantaged account to avoid unrelated business taxable income – UBTI for short – that pipelines can generate.
As always, I’ll be with you every step of the way.
Until next time,
Keith Fitz-Gerald
Source: Total Wealth Research