To catch a falling knife

“Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place.”

- Peter Lynch, One Up on Wall Street

During the summer, the FT featured an article on Per Lekander, a hedge fund manager the newspaper say “profited handsomely from calling the 2018 rally in carbon prices,” and who was now “betting on the market falling sharply in the coming months.” Lekander, who is managing partner at the Clean Energy Transition investment group, is quoted, “I see coal and gas prices falling, and I think they are going to go way lower in the longer term. And the emissions market is going to collapse.”¹

At the time of the article the EU carbon price was trading a little over €85. The market peaked earlier in the year during February and into March, nudging past €100 on three separate occasions, but failing to break through decisively. Since the interview went to press in mid-July the EU carbon price has continued to slump, dropping below €70 per tonne in early December, and now sits at levels last seen in October 2022.

Lekander’s bet has been borne out by the fundamentals. However, as short interest has grown among other traders too, simple market dynamics could bring about an end to the current price slump. It doesn’t even need a change in fundamentals, just a change in perception will do.

Lets dive in.