Goldman says buy the banks

Robosigning and euro fears be damned. Goldman Sachs is bullish on the bank stocks.

On Wednesday the investment firm released its top five trading ideas for 2011. The ideas – two each in equities and fixed income, and one in commodities – aim to help clients cash in on what Goldman expects will be an accelerating global economic recovery.

Consolidating at lower levels

The top idea, shorting the dollar against the Chinese yuan via a derivative known as nondeliverable forwards, is not exactly one your discount broker is likely to be able to execute for you, and Goldman says it only expects to make 6% on that one anyway.

But the No. 2 idea should be easy enough to try at home, if you are so disposed: It calls for nothing more complicated than buying the BKX, the KBW banks index of mostly big U.S. commercial banks, ranging from Bank of America (BAC) and JPMorgan Chase (JPM) on down.

Goldman (GS), which is classically identified as a broker-dealer and isn’t part of the BKX, said it expects the index to rise to 57 next year from a recent 45, which is up 2% in a broad market rally Wednesday. Holding the position to this outcome would yield a nice 25% return.

“The improving US outlook, stronger loan growth, declines in credit losses and a gradually steeper yield curve should all be supportive,” the firm said.

Of course, given Goldman’s uncanny success in avoiding the worst carnage of the financial crisis and its habit of playing both sides of the odd transaction, there is always reason to take its recommendations with a grain of salt. And while some of last year’s top picks clearly worked out — Russian stocks, for instance, are at two-year highs — the firm’s prediction that going long Ireland while shorting Spain is not exactly holding up right now.

But the bets at least look consistent with Goldman’s macro view. The firm said earlier Wednesday it is boosting its growth forecast for the United States over the next two years, reasoning that a private sector recovery has taken root that will result in inflation-adjusted economic output rising at a 4% clip in the latter stages of 2012.

Goldman sees a coiled spring

The firm is also suggesting that clients bet on an economic recovery by betting that high-yield credit spreads are too wide, by buying Japanese stocks (it expects a 20% gain in the deeply depressed Nikkei average), and by purchasing a basket of commodities that it sees as least exposed to bubbly risks.

It says clients might expect to make 28% buying a basket of crude oil, copper, soybeans and cotton, and platinum – this despite the near parabolic action in some of the so-called soft commodities lately.

“After a decade of high commodity prices, we are most positive on these markets as they exhibit the largest structural supply constraints,” Goldman said.

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