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Jumbo Shrimp Indicator


While energy might be over-traded, it is still under-owned.

I vividly recall oil at $12 because it was not that long ago. Many predictions had it going lower, even in the crude-loving corners of Houston, where I scribbled from back then, as I do today. It was the same year we designed our "Jumbo Shrimp Indicator" based on years of carefully examining the most important table at any conference. We were able to isolate a strong correlation between the size of shrimp at a meeting to the likelihood we were in the wrong room. Big crustacean = Leave the station. If it's called Ebi and paired with its fancy raw friends of the sea, pick up your pace.

Back then we couldn't even find small shrimp at energy conferences, but there were plenty of open seats. Around that time, you'll recall Time's Man of the Year was selling books online, and technology conferences were standing-room-only. We were lonely in the "other room" discussing distillates instead of digitals. We started a double and eventual triple-overweight of energy in our portfolios. We are not brilliant geologists (although it helps to know some), but we are pretty good at drilling for apathy. Depew's fantastic Derby diary this weekend speaks to the importance of analyzing the crowd-setting of the prices at least as much as the horse running the race. Finding uncrowded ideas is as important as the ideas in our business. The market (and many of our partners) laughed at our interest in energy back then and the S&P 500 invested only $6 out of every $100 in energy in 1999.

This past week here in Houston, a 24-year record was broken for the highest attendance ever at the Offshore Energy Conference, hosting almost 60,000. My Jumbo Shrimp Indicator, along with slightly more scientific measurements, leads me to believe that this trade is simply more crowded than it was seven magical years ago. Sometimes I think it really can be this simple if we turn off our radios, TVs, Bloombergs, flat screens, and treos. Instead, maybe just have a little Mozart or Hendrix (or Harrison if you're lucky) remind you this has a lot to do with a rhythm and patterns and crowds. I had dinner with one of my energy aces last week during the conference to ask him if he wouldn't mind measuring a few shrimp for me at the conference. "We don't even go to that anymore, way too many people now," he told me.

So, I am torn. I think one of the reasons a very few of us in this business love to write is self-examination and self-imposed vulnerablity, requiring the most careful of thought at the risk of humiliation – a wonderful exercise. In doing just that I see all the reasons to take profits, Jumbo Shrimp included. But, there are far better traders in the 'Ville than I. Much of our work takes longer to know if we are right. We were looking at 6% of the S&P 500 in energy expanding substantially when we set up our positions that are still on. Yes, the odds have changed. But some might be surprised to learn that there is still only 10% of the S&P 500 in energy (even less in the small-cap index). Even if we only go back to half the allocation energy received in the 80's, we still have a long way to go. It is a different but related room I see as too crowded. Right now there are reportedly more energy hedge funds in Houston than energy companies. While energy might be over-traded, we believe it is still under-owned. Perhaps it is an ideal time, as Toddo suggested, to consider the differences between the commodities and the companies. Either way, a bad time to be a shrimp down here.
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