What in the World Is Goldman Sachs Thinking?

In the annals of investment banking, Goldman Sachs deserves a chapter all its own. Seldom has a company been so reviled, admired, envied, and even feared.

Love it or hate it, there's no denying Goldman is a force to be reckoned with. When these guys predicted that oil would surge to $100 and beyond back in 2006, many Fools laughed. The laughing stopped when oil proceeded to do just that. And when Goldman followed up its $100 prediction with a call for $200 oil just two years later, no one laughed. Investors actually bid up oil futures, nearly helping Goldman fulfill its own prophecy.

For good reasons or ill, this banker's opinions remove markets. Even if you don't agree with Goldman, it's worth keeping an eye on.

All commodities, all the time
Because gasoline prices are so central to our lives, Goldman's petro prognostications grab an inordinate share of newspaper headlines. But in truth, Goldman spends considerable time tracking the trends of many commodities, including wood, fertilizer, grains, and non-precious metals. This week, we're going to highlight for you three trends the banker sees in three such less-sexy commodities.

Wood-a, could-a, should-a
Kimberly-Clark (NYSE: KMB  ) investors got a bit of a shock this week, when Goldman downgraded their stock all the way to "sell" on fears that investors have "misunderestimated" the damage that input costs could do to the company's profit in coming years. Goldman warns that wood-pulp costs are headed for $940 per ton, which threatens to add as much as $400 million to $450 million to Kimberly-Clark's cost of goods sold.

If and when this comes to pass, Goldman suspects we'll see a raft of downgrades from its brother analysts. Beating the rush, Goldman shaved a penny off its 2009 earnings estimate for Kimberly-Clark, then lopped a dime off of each of its profit predictions for 2010 and 2011.

Could Procter & Gamble (NYSE: PG  ) be next on the chopping block? Stay tuned. Meanwhile, consider the flip side of this equation, and the firms whose pulp ultimately goes into these companies' paper products. Plum Creek Timber and Weyerhaeuser may be worth a look.

I didn't seed that coming!
In other agricultural news, Goldman also took Monsanto (NYSE: MON  ) down a notch this week, arguing that "lower than originally expected acre penetration for RR2 soybean and SmartStax corn" could increasingly eat into earnings at the seed czar in years to come. Goldman trimmed fiscal 2010 estimates by a nickel, lopped a dime off its fiscal 2011 prediction, and subtracted a whole quarter for fiscal 2012.

The big question here, I suspect, is whether Monsanto's troubles are company-specific, or something a bit more contagious. If we're not seeing an aversion to Monsanto's seed products in particular, but perhaps a more general pullback in planting, that could mean bad things for fertilizer producers like PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) . It could even conceivably convince Goldman to abandon its previous bullish stance on the companies, and spark further downgrades.

Hong Kong phooey!
Last but not least, in a little-noticed comment last week, Goldman let slip that it's not quite as confident about the prospects for a global economic recovery as it previously let on.

Calling emerging markets in particular "not ... yet on solid footing," Goldman warned that last year's surge in copper prices in particular (up more than 100% on the London Metal Exchange, or LME) may have gotten a bit ahead of itself. Stockpiles are also up more than 100% since just last July, which has Goldman worrying about what a drop in demand from China might mean for the metal. (It might also spell trouble for big miners like Southern Copper (Nasdaq: SCCO  ) or Rio Tinto (NYSE: RTP  ) .)

Foolish takeaway
So is it time to panic? Not quite. In fact, at the same time that it expressed worries over the future for copper prices, Goldman predicted that the price on a LME three-month copper contract will rise close to 15% over the next six months. Even 12 months from now, it should sell for 10% more than it does today.

For the time being, the trend in rising commodities costs seems to remain on an incline -- for lumber, for copper, and until we hear differently, for fertilizer. Here's hoping the economy proves stronger than Goldman fears, and pricing as strong as it predicts.

Fool contributor Rich Smith does not own shares of any company named above, but Monsanto is a Motley Fool Inside Value selection, Kimberly-Clark and Procter & Gamble are Income Investor selections, and the Fool also owns shares of Plum Creek Timber and Procter & Gamble. The Fool has a disclosure policy.


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