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March 11, 2013


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The Year of Living Bullishly
and the
Oil Superspike


Ross M. Miller
Miller Risk Advisors
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 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