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I'd like to fill you in on an interesting wrinkle I've uncovered dealing with the ongoing saga of why oil prices are so low…
Certainly low oil prices have to do with supply and demand. Yet, there's one thing pushing the price down that has nothing to do with the oil itself.
The truth is there has been a concerted shorting strategy underway…
And while the money involved is being sourced from other places like Asia and the United States, this game is being played out through surrogate companies made to sound European, with the trades taking place on European stock exchanges.
A Viable but Dangerous Strategy
Consider the news that hit over the weekend about Tiger Global.
This $15 billion hedge fund has been shorting European stocks through shell companies located in the Cayman Islands. These surrogates have European-sounding names with Gmbh (German), N.V. (Dutch), and other designations to make them sound as if they are based on the continent.
But that is not the case. Tiger Global is a New York City-based entity with the trades coming out of the Caribbean.
Recent revisions in European trading regulations were introduced to make the disclosure of operators like this more transparent. And, at a minimum, what Tiger has been doing is against the spirit of those changes, if not the letter.
Now don't get me wrong. Shorting is a viable strategy during times of high volatility when the dominant trajectory seems to be pointing downward.
Yet, it also is a very dangerous investment approach, because theoretically there is no limit to how much money can be lost.
A short position essentially works this way. An investor who believes a specific stock is going to decline (or continue declining) borrows shares from a broker (usually paying a small premium), and then immediately sells those shares on the open market.
However, the caveat is this. Later the same investor has to then buy those shares back on the open market and return them to the loaning agent.
If the investor is correct and the stock moves down, a profit is earned on the difference in price.
For example, let's say a stock is trading at $10. If I short it and the price goes down to $8, I can then buy it back at the new market price, return the borrowed shares to the broker, and pocket a $2 profit on the spread.
On the other hand, if I'm wrong and the stock increases in value, I have to make up the difference. If the same stock from my example jumped to $20 a share, I would incur a 100% loss in a brief period of time.
The most dangerous approach is to run "naked shorts," a practice discouraged or prohibited on some exchanges. In a naked short, the investor places the trades without actually having control over the shares being shorted. You can lose the farm quickly if the strategy backfires and the stock advances during the period in which the short is held.
Because of this uncertainty, I do not recommend my subscribers short stocks, and certainly would never recommend they use naked shorts.
Nonetheless, times like these have made some companies prime candidates for short activity.
Any stock in question would require enough market capitalization, adequate daily trading volume, and enough accessible shares (a traded company having most of its shares owned by holdings keeping them long-term would provide too much uncertainty).
Oil Prices: Hundreds of Billions in Big Bets
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.