The Year of Living Bullishly
and the
Oil Superspike
by
Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
April 11, 2005
These commentaries began a year ago quite accidentally
with a piece entitled "The Bull That Will Not
Die." That commentary was met with derision in the various bear
dens out on the Web (not to mention bloggers in pajamas.) Well, a year
later, by any standard measurement, the bull is still alive. It may not be
as perky as I imagined that it would be, especially in the technology
sector—the main reason for that being the high price of oil—but I have
a few items of housekeeping to attend to before I return to that topic.
My sporadic posting of commentaries has been wildly
unpopular, so I am returning to a regular schedule, just not as frequent
as before. New commentaries will appear the 2nd the 4th
Mondays of every month except December, when I will skip the second
commentary to celebrate the holiday season. My first commentary of every
odd month starting with May will an updated version of my new column,
"Capital Notions," that will appear in Financial
Engineering News.
As always, I will try to have the title and topic of my
next column available in advance to spark curiosity. Sometimes, however,
as is the case with this commentary, I will bump a commentary when special
circumstances arise. This commentary was scheduled to be my rant against
finance textbooks, but I am putting that one on hold indefinitely.
While some people's mothers told them that if they could
not say anything good, that they should not say anything at all, mine did
not, even if I sometimes jokingly say that she did. The problem is not
that I have nothing good to say about finance textbooks—some of them do
have pretty covers—but that I have so much bad to say about them that it
would fill several commentaries. It would, in fact, be easier for me to
write a good finance textbook, not that there would be anyone who would
adopt it, than to enumerate adequately the flaws of the existing ones.
Now back to business. What I really want to write about
is Dana Carvey. During his Saturday Night Live days he played a
number of great characters and among the most memorable was the Church
Lady. Her famous tagline was "isn't that convenient" or
something like that. I thought of her immediately when Goldman Sachs
issued their oil "superspike" research report that hit the
newswires on the morning of March 31, conveniently the last day of the
first quarter.
Goldman Sachs is said to be the 800-pound gorilla
of the energy market and was rumored to have been carrying a large long
position of late. Since its positions are marked to market on a daily
basis, getting a pop on the last day of the quarter would be most
convenient and even more convenient if it was looking to establish a top
in the market broad enough to "lighten up" its position.
I would quote copiously from the superspike report;
however, unlike many other research reports emanating from Goldman, this
one is strangely unavailable on their website. (A full ten days after the
report appeared, Google searches for "superspike" and
"super spike" on the gs.com domain yield nothing as does a
direct visit to their research report archive.) Hence, I am forced to rely
on the media's accounts of this report, which may be all that matters
anyway.
The gist of the report appears to put oil in a $50 to
$105 range with the possibility of a superspike to $105 if something
really bad happens. (It is unclear why $105 and not just $100.) Hey, given
the inelasticity of demand for oil, if something bad enough happened, the
price of oil might go to $505.
I do not believe that the analyst in question got a call
from whoever's running Goldman these days until he is properly seasoned to
serve in the forthcoming Spitzer administration to issue a report that
would run up energy prices. Things just do not work that way. On the other
hand, analysts do not just spit out reports and have no idea that they are
doing so on the last day of the quarter.
My commentaries are so much better (and more accurate)
than those of the likes of Bill Gross and Byron Wien not just because I am
smarter than they are and have a lot more hair than they do, but because I
am not required to get everything I write vetted by my bosses, a legal
department, and other "interested parties." Now a good lawyer
would look at the superspike report, see that it was scheduled to appear
on March 31, and delay things by a single day so that there could not be
the slightest appearance of inappropriate behavior beyond that associated
with pushing up the price of commodities that Goldman held an interest in
(assuming that the rumors are true, which they might not be.) On the other
hand, for all we know, the report was slated to appear on March 21, or
March 23, or even March 30, and it is just happened to conveniently sit on
someone's desk just long enough so that it would end up being released at
the perfect moment, the morning of March 31. This certain someone would
also make sure that the report did not appear on Goldman's website.
So, what does it all mean? This is only the first shoe
to drop. At this point I am about 80% certain that oil, gasoline, etc.
have topped. The second shoe will come when Goldman releases its first
quarter numbers and soundly beats the estimates because the superspike
report did its job too well. This will push the probability of a top (or
the first of a series of nearly equal tops) up past 95%. This will be very
good news for the stock market and will be very good news for Goldman
stock (and out-of-the-money call options) for a brief period of time and
then it will become very bad news for them. (As practice for a possible
future career as a textbook writer, it suffices to say that how this comes
about and how to trade it are left as exercises for the reader.)
Since these commentaries are not vetted by a lawyer, let
me make it clear that I am not accusing Goldman of any impropriety or
illegality whatsoever. On the other hand, if the SEC (or CFTC, if they are
still around) opens an
investigation into them later this month, I will not be surprised. You
see, according to the principal of Occam's razor, the best explanation for
what happened is that someone, somewhere was trying to prop up energy
prices based on the observation that the report was released at the
optimal time to do exactly that. While Occam's razor provides a close and
comfortable shave under a variety of circumstances, I doubt that the legal
profession considers it, in isolation, to be admissible as evidence. And,
as I have written in my novel, Rigged,
it is entirely possible for such things to come about as "emergent
properties" of their environments without any conscious wrongdoing.
Anyway, I think the folks at Goldman are really groovy and it is nice of
them to provide such a clear buy signal for stocks and sell signal for
energy whether they intended to or not.
So, the bull lives on for now. Next time, expect another
of the never-ending adventures in retailing. I will brave Muzak and paper
cuts to cover the wonderful world of office superstores.
Copyright 2005 by Miller Risk Advisors. Permission
granted to forward by electronic means and to excerpt or broadcast 250
words or less provided a citation is made to www.millerrisk.com.
