The Tycoon Report

Time to buy oil yet?

Imagine for a second that you’re at the track and the biggest loser there, the guy always a day late and a dollar short, shuffles up to you and gives you a tip on the horse you were about to put money on. Would it give you pause? You bet it would!

The big Wall Street firms have been telling the investment public for four years that the move in oil was a fluke, that it was unsustainable. Now all of a sudden they've gone gaga over oil. Now don’t get me wrong, I am a huge bull on oil long-term but the old grizzled trader in me always gets nervous at the sight of such an enthusiastic crowd. Long story short, I’m looking for oil prices to come in a bit, maybe even as low as $57/bl.

If it happens, it’ll be a huge buying opportunity and one that I intend to take full advantage of. Seventeen years of Wall Street experience has taught me to sell mania and buy panic. In the late 1980’s, it seemed that every prospect I spoke to just had to own bank stocks. They were bank stock crazy, especially for the regional S&L’s.

Even as an 18-year-old broker trainee, alarm bells started going off in my head. Eighteen months later, the Junk Bond market and the real estate market fell apart, Saddam Hussein invaded Kuwait and the entire US banking system collapsed!

Those were dark days, let me tell you. It was a tough time for a kid my age to make a buck. Many of those S&L’s went out of business, and even Citibank got as low as $9 a share ($2 a share on a split adjusted basis!!) Now that’s panic!! This was a defining moment in my career. I didn’t have the luxury of rolling over and hiding under my desk like every other broker I worked with.

You see, I had left home at the age of 16, departing from England in 1987 to seek my fortune in America. I was now 19, broke and a rookie stock broker during the largest financial meltdown since the 1929 stock market crash! Mum and Dad were 3,000 miles away and I was well and truly on my own. . While everybody was prophesizing gloom and doom, I shut out the outside world. I stopped reading the financial papers and politely told any broker that tried to spew negativity in my ear to get lost.

I started assessing the situation using logic; and logically it struck me that there was no way Citibank was going to be allowed to go out of business.

I realized that the stock may be very volatile, but the then current price of $9 was so low that I couldn’t see it going materially lower than that. I figured that if Citibank were allowed to go out of business, it would mean America was out of business, and I knew in my gut there was no way that was happening. Additionally, it made sense to me that the Fed would aggressively lower rates to bail out the banks and as such, bond prices should rally very strongly.

What I did next had a profound impact on the quality of my life and catapulted me to the upper levels of my profession. All I can say is that sometimes it pays to be young and have nothing to lose! I picked up the phone and called every single client and pounded the table that they buy Citigroup stock and 30-year zero coupon bonds (also known as “strips” or “zeros.”)

This was an incredibly leveraged play. Thirty-year zero coupon bonds are the most interest rate sensitive bonds that you can buy. Minor fluctuations in interest rates account for massive percentage movements especially because you only needed 10% margin to buy them!

That meant that for every million dollars I had under management, I could buy TEN MILLION dollars in bonds!! A 10 percent move up in the bonds would lead to a 100% move up in my clients’ investment dollars. In retrospect, we were way over-leveraged, but that’s the beauty of buying panic. I learned that the time to go wild with leverage is when prices are at their lowest, not their highest.

I guess I’ve been thinking about that experience a lot lately as I’ve heard everybody from my mailman to my car washer ask me how to play oil. The alarm bells are ringing again, and while I don’t see a massive crash coming, we could see a very healthy pullback.

“Let the game come to you”