Date: 3/01/2021
Author: Kent Moors, Ph.D.
Note: On two occasions last week, I indicated to Sigma Trader members that my network was investigating the politicization of shorts against renewable energy in the wake of the Texas power crisis.
Today’s Classified Intelligence Brief is the first of what is likely to be several reports on that investigation. In what follows, I have decided to avoid using specific names of brokerage firms or politically connected individuals we believe involved in this move.
However, we have begun the process of transferring what we have learned to the requisite authorities, including the enforcement arm of the SEC and in two cases to contacts in US Attorney Offices fraud divisions overseeing the locations in which short sales were introduced. This story is ongoing and will weave a large net before it is over.
On February 10-11 and then again on February 13-17, historic winter storms and cold snaps hit Texas. Within 24 hours of the first wave, millions were without power as the state’s electricity system buckled and nearly collapsed. At its height over five million Texans lost power and at least 51 died.
A full-blown calamity was far closer than most realized. The Electric Reliability Council of Texas (ERCOT), the state agency responsible for most of the electricity network, declared that the Texas power grid was just “seconds or minutes” away from a catastrophic and complete failure. That grid underwent numerous partial shutdowns in the days following.
The damage has been extensive and the knock-on problems are ongoing as I write this.
Republican state officials from Governor Greg Abbott on down very publicly blamed renewable energy – specifically frozen wind turbines – for the crisis, arguing that the increasing usage of wind and solar power were producing less reliable power.
The political emphasis was apparent. Despite generating more of its electricity from wind than any other state, the Texas economy remains founded on crude oil and natural gas. This was all about a push back against the energy “interlopers” and the new Biden administration in Washington supporting them.
It was also flat out wrong.
As soon as the state officials started making their charges, a number of folks in my expert network began expressing skepticism. Within a few days the real culprit was found. The inescapable conclusion from my contacts pointed in one direction. The primary reason for the grid failure came from frozen natural gas lines and related equipment.
That was mirrored in media accounts in short order. As Veronica Penney noted in her excellent February 19 New York Times reporting (I have added the emphasis):
“All sources underperformed expectations,” said Daniel Cohan, an associate professor of civil and environmental engineering at Rice University in Houston. “But far, far more than everything else combined were the shortfalls from natural gas.”
During the blackouts, the grid lost roughly five times as much power from natural gas as it did from wind. Natural gas production froze, and so did the pipelines that transport the gas. Once power plants went offline, they were not prepared to restart in the below-freezing conditions.
Demand for natural gas to heat homes and businesses also spiked, contributing to shortages. And high gas prices further disrupted generation, as operators who could not turn a profit took their plants offline.
Several coal plants and one of Texas’ four nuclear facilities were also knocked offline by cold temperatures.
The usually-balmy state does not require power plants to be winterized — “as we’ve painfully come to find out,” said Joshua Rhodes, a research associate at The University of Texas at Austin Energy Institute.
Just as generation was dropping from the grid, demand for electricity in Texas hit a record high for winter, rivaling demand seen during some of the hottest summer days. [ERCOT] reported that demand peaked at 69,000 megawatts on Sunday [February 14], surpassing its planned worst-case scenario.
Shortly after, the grid operator instructed utilities to begin controlled power outages to avoid longer-term damage.
The depth of the crisis in Texas was exacerbated by the Austin central government’s insistence on severing connections with the two main interstate power grids. The rationale was to insulate the state from federal government interference (DC regulates interstate commerce in everything including energy). But what it accomplished less than a month ago was to make it very difficult to attract additional electricity from across state lines.
In addition, after a similar, though less serious, power shortfall a decade earlier, the state had decided not to improve the winterization of its entire system. It agued that Texas rarely would experience the cold temperatures to justify the taxpayer-borne price tag of refurbishing the system.
That is, until February 2021.
I expect the political charges and counter charges to continue as Texas officeholders play two typical games in such situations: (1) shift the blame, sometimes referred to by my people as the SODDI defense (“Some Other Dude Did It”); and (2) “kick the can down the street,” the tried-and-true political machination to avoid the costs of repairs until the current guys are out of office.
However, something else was happening in parallel to the political attacks on wind power. Several energy traders in my network immediately recorded unusual signals of large short moves against renewable power providers, renewable energy exchange traded funds (ETFs), and spreads between renewable and traditional sourcing of electricity in futures contracts.
The initial three waves of these shorts were curiously timed to coincide with the political statements made by Abbott and others and before the arguments had been picked up by wider conservative media outlets Breitbart, Fox News, Drudge Report, The Blaze, the Glen Beck Program, One America News Network (OAN), Newsmax, and even The Wall Street Journal who then ran the political statements as the truth of what had taken place.
Other non-conservative sources like CNN, CBS, ABC, The New York Times, and Reuters mirrored those reports in the initial aftermath, although in these cases the stories were largely confined to what Texas officials had said and later corrected reporting when evidence of what had actually happened emerged.
In contrast, our review of conservative site commentary through this past weekend has shown continuing reference to the Abbott et al statements as the prevailing or only explanation provided for what happened with little or no reference to the natural gas freezing as the cause.
According to my network, the first short moves came from brokerage houses located in Fort Worth, Dallas, and Houston, TX, Alphareta, GA, and Delray Beach, FL. The shorts were processed at the same time or within minutes of the initial Texas political statements. These included unusual transactions in the ultraconservative MAGA Fund and in ETF holdings associated with major conservative investors in each brokerage location.
We have the names of the brokerage houses, the specific traders who placed the shorts, as well as some of the swaps associated with the MAGA Fund and other conservative “umbrella” vehicles, along with high-net-worth individual investors involved. All of this has been turned over to the appropriate enforcement officers.
This is fundamentally different from the recent long v short position battle on shares of GameStop (GME), AMC Entertainment (AMC), and others. The plays against renewables were orchestrated, political in nature, and known to be based on fraudulent information.
As I have explained in the past, shorts involve bets that a stock or commodity will be declining in value. The following is how I explained the process in an earlier CIB:
The player borrows shares from a broker, immediately sells them, returns to the market later to buy back the shares, and then returns them to the source. If correct, the investor makes money on the difference.
Take the following example. You believe stock ABC will decline in value. It is currently trading at $10 a share. So, you borrow it from a broker and sell it, realizing the $10. Later ABC declines to $8. You go back into the market, buy it back, and return it to the broker. You pocket a $2 profit (minus whatever fee you paid for the original borrowing of shares).
If, however, you have guessed the direction of the stock price incorrectly, you are in trouble. Because you still must go back into the market and rebuy the shares to return them. If ABC does not decline but instead rises from the $10 received initially to $20, you have a 100 percent loss. If it has risen higher you may be looking at a nasty margin call.
You need to buy the shares and return as soon as possible to minimize the loss. This is known as a “short squeeze” and will always further increase the price of the stock.
Theoretically, there is no limit to how much money can be lost by shorting. This is the reason I never recommend it to any of my service subscribers. Essentially it is an attempt to profit by introducing an artificial element into the trading of stock.
I would add at this point the following important disclaimer. The risk involved in shorting is largely overcome if the following occurs, either of which is likely to land you in federal prison if you are aware of the manipulated source upon which the short is based.
First, you are in trouble if the short is run following the release of intentionally misleading information that you know is intended to manipulate or weaponize market moves and you then act upon it anyway. This is a “moving forward a poison pill” version of investing on inside information.
Second, you are in further (and potentially even more serious) difficulty if, as a broker, investment advisor, or fund manager, you then entice other individuals to invest in the short vehicle based on the known manipulated information. You have liability here whether or not you were a party to the initial release of the information upon which the short plays were based. This is “spinning a Ponzi scheme web.” Think here of a Bernie Madoff ploy on syndicated steroids.
Let us see what transpires here. The next shoe to fall is when the short positions have to be unraveled. Unless there are continuing unrelated pressures in the renewable sector that allow a rollover of the shorts, they will have to be redeemed.
And at that point the perpetrators will stick out like a sore thumb. The share packages will be too large to avoid scrutiny…if the observer knows where to look.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
After moving through the inner circles of royalty, oligarchs, billionaires, and the uber-rich, he discovered some of the most important secrets regarding finance, geo-politics, and business. As a result, he built one of the most impressive rolodexes in the world. His insights and network of contacts took him from a Vietnam veteran to becoming one of the globe’s most sought after consultants, with clients including six of the largest energy companies and the United States government.
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