The Icarus Prediction: Betting it all has its price

by RD Gupta

  The sergeant looked at the computer screen, then at the passport, and then at Basayev.

  “The photographs in the database and on the passport do not look like you.”

  Matsil glanced at Basayev as he casually replied, “I have a beard now. I did not then.”

  The sergeant typed on the keyboard. “Place of birth?”

  “Baksan,” he replied easily.

  “Purpose of travel in leaving Kabardino-Balkaria and entering Georgia?”

  “Freight hauling. Picking up a load in Tbilisi.”

  “What kind of load?”

  “Machine parts.”

  “What kind of machine?”

  “I believe it is used for some sort of automobile part manufacturing.”

  “What company?”

  “It will be on the freight bill of lading we pick up in Tbilisi. Now, if you don’t mind, sergeant, my colleague and I are in a hurry.” He put his hand into his left jacket pocket and withdrew two gold ingots, placing them on the desk in front of the soldier. “One for you, and one for your private, in return for your trouble in expediting our paperwork.”

  The sergeant looked down at the equivalent of two year’s salary. Basayev couldn’t help but smirk as the Russian licked his lips. The price of vodka—real vodka—had gone so high that it was outside of his reach. All he could afford was the bathtub variety, which was little more than water mixed with lighter fluid, and it took every kopek he had. With this, he could buy cases of the real stuff.

  With a rapid-fire movement, he stamped the two passports and swept the ingots into his pocket. Then without a word, Basayev picked up the documents and left with Matsil.

  Once they were gone, an awkward silence filled the hut until finally the sergeant took one of the ingots out of his pocket and slid it across the desk to the young private, who smiled as he picked it up. Now he could marry his girlfriend.

  CHAPTER EIGHT

  New York City

  Jarrod Stryker entered the trading room showered, shaved, and sober, and with an intensity in his eyes that bespoke the clarity of his new mission. He went straight to Sergei’s office and motioned for him to follow. Gwen joined them and closed the door.

  “Where you go yesterday?” asked Sergei. “We wait but you disappear.”

  “I had a dialogue with William, then had to do some self-actualization therapy.”

  Sergei shrugged his shoulders slightly, looking quite puzzled.

  “It means I got blind drunk, but then sobered up—fast.”

  “So, how did it go with William?” inquired Gwen.

  “In a nutshell, shock and awe. With greater emphasis on the shock side of things.”

  “Meaning?” asked Gwen.

  With meticulous detail, Jarrod walked them through his encounter with William, how he had hocked everything he owned—and a lot that he didn’t—to make a play for some CDOs that turned out to be a mirage. To the tune of $850 million.

  After the stunned silence, Sergei said, “So we are on a platform burning?”

  “To put it charitably, a gasoline-soaked platform.”

  “So we’re done for,” observed Gwen. “It’s curtains for the firm. For us? For our families?”

  Jarrod looked at her, and she detected a twinkle in his bloodshot eye. “That’s what I thought. But then I remembered an old Russian saying.” Jarrod smiled. “If you are trapped in a tunnel and the exit is blocked, what do you do?”

  The Russian cocked his head. “Burrow in deeper?”

  “Exactly. Gwen, assemble the team. We’re going to double-down and climb out of this hole William dug for us. But we are going to need to keep this quiet.”

  Twenty minutes later, the energy trading team was ensconced in the Nimitz conference room, and everyone was abuzz about the abruptly convened meeting. Usually these were done after the Chicago commodities exchange was closed.

  Without preamble, Jarrod zeroed in on Chet Delaney, his Wharton wunderkind, asking, “Where’s West Texas Intermediate?”

  “81.25 as of ten minutes ago, down from 81.75 at the opening.”

  “The Tribeca tankers?”

  “Approaching the Strait of Hormuz as we speak. They’ll start taking on their loads at Ras Tanura terminal in three days.”

  “Saudis are starting to place put contracts on that load,” Sergei chimed in. “I think we are at turning point.”

  Jarrod turned to the wunderkind. “Chet?”

  “I concur. Refineries are shopping for the best deals to ramp up for the summer driving season. With Iran’s capacity off the grid, Nigeria and Venezuela have been putting more put contracts on the market the last few days, as have the Brazilians. With the added capacity of the Tribeca tankers hitting the market, I think the refiners see a buyer’s market shaping up, despite saber rattling by the Iranians. Looks like we’re at the crest of the downward slope.”

  Jarrod turned to the Poindexter. Pete Coggins didn’t have an MBA. He came out of the Woodrow Wilson School of Public and International Affairs at Princeton. He was the geek sent over from central casting who carried three phones and looked like the cartoon Poindexter without the mortarboard. In the petroleum industry, there were a gazillion newsletters, industry analyst reports, government reports, academic monographs, trade association bulletins, and e-news alerts. Coggins read them all, never slept, had his nose struck on a tablet 24/7, and kept up e-mail correspondence with his Princeton classmates who were now sprinkled around Washington on congressional committees, think tanks, cabinet departments, and the White House staff. Basically, Coggins had no life, but if anything was happening in Washington that might impact oil prices in the near term, the Poindexter would know it.

  Jarrod asked, “Poin—er, Pete, anything coming up on your radar that runs counter to this outlook of a downward trend?”

  Coggins looked up from his iPhone and said, “Nothing on the horizon inside the Beltway.”

  Jarrod nodded and said, “Thanks.”

  Poindexter went back to his screen.

  Over the next hour, his team rehashed refinery capacity, stockpile trends, gasoline demand forecast, tanker manifests, auto production in China, and even the weather outlook. Nobody talked about terrorism because that was a constant overhang that was already “baked into” oil pricing.

  Jarrod then turned to his quant. “Your view, Doctor Dobrinin? What does Icarus say?”

  “Da, I run sensitivity analysis on all the reasonable inputs to our pricing models. With high and low points to the inputs, models indicate pricing as high as it can do—barring anything unforeseen—and downward trend is forecast. Probably to the tune of 9 to 10 dollars per to the downside.”

  Jarrod took a moment to absorb everything that had been said. Bottom line was that it really looked like they were near the crest of a hill, looking down the back slope of the whipsaw.

  With probity, he made his decision. Then he inhaled deeply and was about to issue his orders when Poindexter sat bolt upright.

  “Whoa! Hold on a sec,” he exclaimed, while tapping like a madman on his phone.

  “What it is?” asked Sergei.

  Poindexter didn’t answer at once. He continued tapping, hit the send button, and froze like a statue as he waited for the reply.

  When the envelope icon came up on his screen, he mashed a button and read intently, then he looked up at Jarrod. “A classmate of mine works on the China desk at the State Department. He said he heard a rumor from a Chinese chargé that the Saudis are going to bring the Khurais field online in the next few days. For real this time.”

  Jarrod asked the entire group. “Can anyone confirm that?”

  Silence.

  “So this hasn’t hit the street yet?”

  Poindexter scanned all three of his mini screens. He looked up and said, “Nothing.”

  The Khurais oil field was the last great petroleum find on the Arabian Peninsula. Estimated at 27 billion barrels, the Saudis had invested $10 billion, hired 28,000 construction workers, and c
onsumed enough steel to build two Golden Gate bridges in order to tap and bring the oil online. But it difficult to exploit the field, for the oil resided underneath five thousand feet of solid desert rock.

  When oil prices had spiked at $140 per barrel a few years ago, Saudi Arabia was pumping about 10 million barrels a day, and the Khurais field was earmarked to goose that number by 1.2 million barrels per day. But just as the spigot was turned on in June 2009, the Great Recession sunk in. Oil demand and prices plummeted. Saudi shipments shrank to 9.7 million barrels per day, and the Kingdom couldn’t push it further because it would collapse the pricing. In other words, it would be counterproductive to increase oil exports. So the Khurais field was mothballed except for a trickle to keep the pressure up.

  Jarrod’s mind raced. “These food riots must have spooked Riyadh even worse than we thought. They’re willing to kick up production to harvest more revenue—even at a lower price. ”

  “That it must be,” agreed Sergei. “No other explanation.”

  Sergei fingers furiously drubbed away at the keyboard as he re-ran the predictive analytics program as he took into account this new information.

  Jarrod couldn’t stand still as the seconds elapsed. “What is the confidence interval to meet our target price?”

  Sergei continued to drub away at his keyboard.

  Jarrod raised his voice a few decibels. “Sergei?”

  Sergei stopped typing. The silence was deafening. He looked up and cracked a wry smile. “Boss, Icarus is predicting 93% success, highest I have ever see. Ever!”

  At that, any hesitancy Jarrod had on rolling the dice vanished. Jarrod had been using Icarus for the last 4 months with decent success but had never seen a success prediction above 74%. Moments ago, Jarrod felt his strategy was likely to work but now it had to work. The forces were in alignment.

  “All right, people. Here is what we’re going to do.” He turned to Delaney. “What is the firm’s capital position on the energy trading desk?”

  Without hesitation, Delaney replied, “Nine million, five hundred and twenty-three thousand, eight hundred and two barrels at a purchase price of $68.50. At current sell pricing of $81.25, that puts the positive position at approximately $121,428,000, less transaction fees.”

  “Very well,” said Jarrod. “Close out the existing position. Execute sale at current pricing ASAP. Upon completion of the transaction, move the cash from the trading account to the general partner admin account.”

  This caused a flurry of raised eyebrows.

  “Uh, Jarrod,” asked Delaney, “I thought we were going to take a put position and ride the trend downward?”

  Stryker cracked a wry smile. “You have no idea. What is our position on the client discretionary energy accounts?”

  William Robert Creager was a native of Hickory Flat, Mississippi. He’d landed at Blackenford after playing defensive back at Mississippi State and knocking down a Fulbright Scholarship. He would be leaving Blackenford in the fall to attend Stanford’s business school. People knew that some serious intellect was behind that southern drawl.

  “Discretionary client accounts are at 522 million, with 83 puhcent on futures contracts, 17 puhcent on call opshuns.”

  “OK,” said Jarrod evenly. “Here is what we are going to do. Close out all discretionary client positions and place it ALL in put options” Jarrod took a quick look at his watch. “We don’t have much time until expiration, so the clock is ticking. I’m making the call right now. Stagger the buys so we stay under the radar of the sharks.”

  As if choreographed, all jaws dropped in unison, and everyone’s eyes widened.

  “Uh, Jarrod,” ventured Delaney. “Did you mean futures as opposed to options?”

  Futures meant the ownership rights to an actual barrel of oil. In other words you could get something tangible for your money. Options meant only the right—but not the obligation—to purchase or sell a barrel of oil at a certain price. Options were an order of magnitude more risky than futures. In other words, if you were wrong, you could lose everything in a blink of an eye.

  “No. Like I said, 500 mil total in put options”

  Delaney cleared his throat. “But Jarrod, uh, if the price of oil doesn’t drop at least a few dollars a barrel, or worse, if it goes up, we’ll have pissed away a half a billion dollars in client money.”

  “Tell me something I don’t know, Chet. Your concern is duly noted, but the decision has already been made. The directive is coming from the highest ranks.”

  “But Jarrod,” countered Delaney, “this isn’t firm capital. It’s client money.”

  The rest of the crew remained silent, waiting to see how this challenge to the alpha male would play out.

  “Chet,” said Jarrod in a paternal voice. “What is the current price of West Texas Intermediate at this moment?”

  Delaney tapped on his laptop. “Just went down to Eighty-one even. Down from $81.25 at the start of our meeting.”

  “So at 500 million in put options, a quarter-point drop during the time we’ve been dicking around, our clients have already missed out on, what? Almost 50 million dollars? You want to piss away another 50 mil to discuss it further over tea and crumpets?”

  Delaney shook his head. In the battle between greed and fear, greed often won. But Delaney had to ask, “What about a hedge position, to make sure we don’t lose it all?”

  “We’re going into this unhedged. It would cut our upside in half.” And preclude us from digging out of William’s hole, he thought.

  Delaney’s voice squeaked above the whispers and shuffling. “You’re taking a half-billion-dollar-unhedged position?”

  “That’s correct,” he said evenly. “We’re doubling down.”

  Delaney took a long pull on his Diet Dr. Pepper, wishing it were something stronger. “Jarrod, either you are totally insane, or you have the biggest set of stones on Wall Street.”

  Some nervous laughter rippled through the room, and Stryker couldn’t help but crack a wry smile. “Maybe a little of both, Chet. You can tell your grandkids you were there.”

  “One last question” Chet interjected. “What are we calling this trade? You know the drill. For this trade threshold, we need to give a codename for the audit records.”

  Jarrod responded, “OK. Let’s go ahead and call it Icarus. In honor of the supercomputer that better make us a billion dollars”

  Chet couldn’t help but chime in, “Isn’t Icarus also the dumb Greek kid who flew dangerously close to the sun and then his wings came off and he drowned?”

  Jarrod quickly brushed him off, “Chet, spare me the mythology. Now you have your orders. Make it so.”

  Chet exited first and then the rest of the room quickly emptied, leaving only Jarrod and Sergei. Jarrod turned to the Russian and said, “I always loved it when Captain Picard said that.”

  CHAPTER NINE

  Tbilisi, Georgia

  It was past midnight as the Skoda truck cruised by dilapidated warehouses in the rundown section of Tbilisi, the capital and largest city of the Georgian nation.

  Elbruk Matsil was weary from the long and tension-laced journey and from being an audience of one to the likes of Shamil Basayev. Between catnaps, Basayev would regale him with tales of how he outwitted the foolish Russians at every turn, to the point of making the FSB believe they’d killed him.

  Elbruk was genuinely curious about that and probed with a gentle inquiry. He received a wave of the hand and an over-the-shoulder response that the body the Russians claimed was Basayev was in fact, “A distant cousin with a terminal illness. A hero who gave up his leg for the deception.”

  Elbruk let his passenger drone on because just the fact that Basayev was alive would mean a huge bonus from his American case officer. Anything he could add would be icing on the cake.

  Basayev had been sending and receiving text messages on his cell phone as they weaved through the city. Finally he said, “Turn in up ahead.”

  He was about to ask whe
re to turn when an overhead door rose and a light from within a warehouse was revealed. Elbruk wheeled into the building, and the overhead door closed.

  Basayev exited the cab and was surrounded by eight burly men who closed in on him with an enthusiastic group hug. Rapid jabbering in Chechen and Russian was followed by backslapping in a terrorist’s version of a class reunion.

  As the classmates caught up, Elbruk looked around the dimly lit chamber. Yes, it was surely a warehouse of some kind, with crates stacked here and there. But there was also a string of cots, a table with some chairs, a workbench with a computer, and a makeshift kitchen. Over in the corner was some video equipment with some kind of lights rigged overhead.

  Basayev was ebullient as he introduced Elbruk as his “brother” who’d brought him safely out of Russia. Elbruk acknowledged the welcome while concealing his desire to get the hell out of there, for this crowd looked meaner and crazier than the Chechens he typically hung out with. And he hadn’t thought that was possible.

  Basayev turned to the dude Elbruk figured was on-the-scene commander. “Has Lemontov reported in?”

  “Da,” replied the understudy. “He says all is in readiness.”

  “Excellent.” He looked at the video equipment. “It appears I will go on the air like an American film star to announce our great offensive against the infidels.”

  Hearty laughs all around.

  “But tonight let us break bread together and then sleep. The days to come will have excitement aplenty.”

  With the rest, Elbruk nodded his assent, hoping he could sneak out during what was left of the night.

  *

  New York City

  For the second time in twenty-four hours, Jarrod was at the Guilford Bar, but this time he was nursing a San Pelligrino sparkling water with lime while Sergei was on his third shot of Finlandia vodka.

  The Russian tossed it down and shook his head. “Half a billion in an unhedged position. Got to be some kind of record.”