April 23, 2010
Energy Plays: The Next Great Short?
As we’ve seen, in light of the SEC complaint against Goldman Sachs, picking against the market when it is about to go bad can be just as lucrative (more?) than getting into the market before it booms. Any time a market gets hot, there will be those who think it’s too hot and will bet against it. In fact, it’s essentially required; there need to be two sides to any transaction.
Now comes news that energy deals (mergers and acquisitions) are trading “above market,” much like the mid-2000s real estate market, with acquirers often bidding over the asking price to reduce due diligence, keep other bidders out, and shorten the time to closing the deal, which avoids the chance that volatile oil and gas prices will slip during the auction process.
Energy sources like oil and gas are especially volatile in the market almost all the time, in part because the discovery, extraction, and delivery of the commodity are all complex and interrelated processes. And none of those parts of the process are especially transparent. As such, whether we are discussing the commodity itself or the resources that provide (or hope to provide) the commodity, we are talking about a market that will fluctuate, often wildly. (Side note: this is yet another compelling argument for non-fossil fuel energy sources.)
It may be that, in the long run, these energy investments are strong enough to make the purchase prices proper, but in the relative near term, you can also be sure that some people will make a ton of money betting against those who made these investments. You can be sure some people (including some stockholders) will call foul if the market tanks, and the short sellers make a subsequent killing. Then, like 2008, we will probably have another round of complaints about energy speculators ruining or inflating the market.
I’ve said it before, and I will say it again: There is a difference between speculation and market manipulation. Speculators are trying to make money based on their read of market trends; market manipulators are trying to guarantee they make money by ensuring the market does what benefits them. If and when energy prices soar, then crash again, we need to look for the latter, and not the former. Otherwise, we are investigating the market itself.
April 23, 2010 | Permalink