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Squeezing The Cards On Carbo Ceramics

|Includes: CARBO Ceramics Inc. (CRR)

Carbo Ceramics (NYSE:CRR) has made a nice upward move, more or less in sync with the rally in oil. At least for now, the price of the stock seems firmly tied to the price of the underlying commodity. Certainly there is a logical relationship.

By way of analysis, I did a scatter chart of CRR's share price against WTI, using data from mid 2008 to the present. Here's the chart:

The software provides a formula for the regression. R2 at 0.57 demonstrates the connection, but is not particularly impressive. Applying the formula, Friday's price of $51.69 for WTI implies CRR at $37.57, close to the actual close of $36.19.

Looking at futures, February 2016 Crude traded Friday at $60.86. According to the formula, CRR would be in the $47 area. That's a 29% gain from the current share price, and sufficient to justify the assumption of considerable risk.

Upside vs. Downside Risk

Looking at the downside, the biggest risk is getting a panic attack and selling at the bottom. Over the past ten years, WTI has closed under $35 a total of 7 days, under $40 a total of 25 days, and under 50 a total of 133 days. I would wait for about a year before concluding there has been a paradigm shift.

On the upside, WTI has spent 458 days above $100 during the same time frame. So the odds, based on this line of reasoning, favor $100 oil over $50 oil. Patience is required.

After going over this for a while, I feel as if the upside:downside risk ratio is about 3:1, with the most likely outcome that CRR will be at or above $47 at this time next year.

Big Insider Trade

William C. Morris is a director at Carbo, after an extremely successful career on Wall St, at J.W. Seligman. Charities of which he is a board member sold massive amounts of CRR in the $150 area during 2011.

His wife recently spent over $1 million buying shares of CRR at prices averaging less than $35.

Who's to Blame?

BIS came out with a study, which was covered by both CNBC and the Financial Times, intended to analyze the cause of the oil rout. CNBC with their usual perspicacity claims the report blames the Saudis. The Financial Times, noting that BIS says oil is acting like a financial asset, connects the dots and adds some information about the size of the futures market compared to the market for physical oil.

I continue to read articles on oil, and have yet to see anything on who the big winners and losers were in the futures trade. Nobody is talking.

Paradigm Shift?

I don't think so. I see speculation and manipulation in the futures market, and mis-allocation of capital. Specifically, there was a lot of money attracted into loans to shale oil producers, some of which are not going to be repaid.

All of that is business as usual on Wall Street.

Disclosure: The author is long CRR.

Additional disclosure: No advice here, just talking shop.