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IOC; a titanic struggle

April 8th, 2008 · No Comments

While Liverpool and Arsenal are struggling it out on the pitch, there was another titanic battle going on. The shorts and the longs were battling on the base of AMEX, and here, as on the pitch in England, the colour was also green.

In a wave of frantic buying, IOC suddenly shot up in the last half hour of trading. Once again. But, as so often, just when things were looking to become really interesting, the shorts stepped in and threw everything and the kitchen sink to stop the rally in its tracks.

And they were right on time. IOC was on the verge of breaking it’s 50 day moving average. If we would have done that, the rally would have gotten real legs. Instead, it was stopped in it’s tracks. At least for now. We still think that there is every chance IOC will double at least.

With 9M shares sold short, these shorts have much to lose. However, we have some question marks concerning their strategy. In a couple of weeks, IOC will have the final results of the well they are currently close to finishing, Elk4.

These results, as we argued earlier today, will be either excellent, good, or disappointing. Only in the latter case the shorts will be vindicated (and we believe the chance of that happening is pretty small). Why shorting more, as they obviously did today to stop the rally in its tracks? If the results are disappointing, the price will fall anyway. And if the results are good, as we expect, there is little they can do about it.

The only argument we can think of is that if they let the rally run, IOC might easily move up significantly even before the results are out. The whole trading range might then shift upwards, no matter what the results are.

This doesn’t seem logic from a valuation point of view, but there is some evidence for such an ‘anchoring’ effect from behavioural economics. Price can form it’s own anchor. In a famous experiment (described in the book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely), people were asked how many nations were member of the United Nations.

Curiously, their answer was quite heavily influenced by spinning a wheel of fortune just before the answer. The higher the number indicated by the wheel of fortune, the higher peoples estimation of African nations being member of the UN.

In another experiment, people had to write the last two digits of their social security number, and then write the maximum price they were prepared to pay for a couple of items on that same paper. The higher the last two digits of their social security number, the more they were prepared to pay.

The difference was surprisingly large as well. For people who’s social security number ended between 00 and 19, the average maximum price they were prepared to pay was $67. For those ending between 80 and 99, that increased to $198! Three times as much.

Price seems to determine itself, to a large extent. It explains otherwise inexplainable phenomena like Starbucks coffee..

So, perhaps these shorts are on to something. By keeping the price as low as they can, they might shift the whole range lower whatever the outcome of that crucial drilling.

But they pay a price, they have to short more. If the results are good, those are more shares they have to buy back…

Tags: IOC