You May Wish To Consider

Crude oil feels that we have more downside left.  Something to consider before allocating cash on “the dip…”

Life is good in the land of Thaler, as a paper I have been recently drafting just hit a good moment of progress yesterday.  I was able to derive a fairly simple proof for a point I had been failing, up until then, to make.

So I’m in a pretty good mood, despite my recent performance sink in the market.  I can always make the money back; research, on the other hand, leaps in only one direction.

With my usual staples of entertainment (gardening, walking, swimming, etc.) isolated from me by my home state’s chilly weather, I am finding myself bored from my state of retirement.  There is only so much one can do in a house.  Unless it’s music, reading, or sitting out in a hunting shack on the off chance a deer might venture onto my property, I am without course.  And, the simple truth is I’m a bundle of pent up energy; those actions don’t offer much in the way of exhaustion.

I need to work again.  I’ve already started making the calls.

Cain Hammond Thaler shall once more rule the fires of industry from his 9^th floor.  And not as an actuary…

Look for my New Year predictions in the coming days.  Look for my rise in the coming months.

I spent this morning opening a position in SCO for $12.54 and then went off to conduct some research.

I checked back in on the market a little while ago and decided to lock in my gains on the position of NRP I purchased a few weeks ago; about 3.5% before the dividend I was paid out last week.

At this time, my hedges and reduced margin are still not behaving as innately as I would like.  So I’ve made a few more adjustments, and will see what it looks like going forward.

Other than that, I’m not much interested in the market.  There is no clear indication to me as where to posture.  That, in and of itself, tells me that much of what is occurring is just noise.

For instance, the precious metals have dropped substantially, yet the well being of the dollar is still in question.  Does a collapse of bonds justify a complete collapse of the PM’s?  I would argue no.  Even in the event that much of this collapse is a paper right off and there is little money being turned over, selling precious metals isn’t warranted when compared to the state of equity prices or condition of the world currencies (the other major alternatives).

I would think a lot of this mass selling across the board is then simply bids which cannot find offers.  That will change eventually, and when it does, you need to plan ahead for where the money will be going.

Meanwhile, it will be very bad for equity when state governments and municipalities start to get hit.  I’ve known that for a long time.  Ironically, commercialism does not like it when a country’s people suddenly discover they have no retirement savings because their “trustees” lent out all the money to asinine government programs.

Surprise, that sweet, free, public park that the township put in two years ago wasn’t so free after all.

So I’m fairly skeptical of my equity at this point; especially since my equity is highly specialized in the commodity and industrial spaces.

However, I don’t like any form of equity as an alternative, so I’m going to conduct myself with grace, hold my positions, and “get to even.”

I’m about there, in two weeks making a very large debt position disappear.  The remainder of my debt is from my silver acquisitions.  I will hold until silver prices rebound as I can maintain that debt load.  Then, look for me to make my move.  Silver at $30 would please me, for there I could use half of my holdings to extinguish practically all of that related debt.

It really is a rather beautiful thing, only giving back half of what you truly borrow.

My portfolio is significantly safer, after taking strides to cover debt, mainly through a sale of APC, which was my absolute largest position.  It represented almost 25-30% of my positions, and itself made up just under half of my wealth (there was significant leverage which needed to be addressed, to say the least).  Cleaning half of it off of my books, in conjunction with the sales of PM and (partial) MGM, has left me considerably safer.  However, I still have a decent chunk of margin (equivilant to about 20% my core equity) and a decent balance on my silver holdings (I’m not to worried, silver would have to get cut in half to put me underwater; I’m deep in profits on that transaction).

So, I’m about where I was on the other side of the year.  I’m tired of owning volatile flaming garbage betting on the big pullback, but, not being sure of what’s to come, I don’t want as much of my neck out there as is right now.

Since my new largest position is NRP, a partnership whose key business segment is coal royalties, I decided to hedge against a pullback in the price of coal to cover my backside.

I shorted KOL, a coal ETF, today for $42.33 a share.  I’m not going to hold this too long (betting against coal in winter is a poor decision, when considered alone), but if we do get a pullback, this will minimize the largest risk to my portfolio right now.

I let go half of my Anadarko Petroleum shares, with great reluctance.  If you’ve been following me for very long, you know that back when the Macondo rig exploded, I jumped in and made some fairly large purchases, first in the low $40 range, and then more in the mid $30’s.  I’ve held through, and APC now makes up an enormous part of my allocations.

I could kick myself.  The last few weeks have been spectacular for APC, yet I was so hesitant to get on board the bull, I took on huge positions in VXX and FAZ waiting for “the pullback.”  Many a fortune has been squandered on “the pullback,” make no mistake of that.

I’d guess I missed out on 20% of upside in APC (which would have been close to 10% for my portfolio, thank you margin).  My holdings just held at par the entire time.  Still, for as bearish as I was, and the amount of VXX and FAZ I had, par is pretty impressive in and of itself, if you know what I mean.

Now, I need to clean some of this off the slate so I don’t get BP’d by the recent announcement that government agencies couldn’t find any activity which would classify as blatant misconduct.  That’s a pretty big change from the supposed criminal activity everyone was shouting about this summer, don’t you think?  Oh, what a difference a season makes.

I still like APC long term, which is why I will be retaining half my position.  They’re well postured for long term success; particularly their derivative portfolio, which gives them absurd borrowing rights for the next thirty five to forty years.  And, as for any judicial action against them in relation to the well, we’re still talking the 2020’s before a settlement should be expected.  I believe my exact prediction stands at no time before 2025.  We shall see.

In short, I just needed to re-weight the holdings.  This reduction of margin means I’ll be paying off my debt in ten and a half years, as opposed to the twenty-three something as before, barring continual results.

I can’t see where we’re going from here, I’ll be completely open about that.  Sometimes it’s obvious to me.  Not now.  I intend to conduct myself as I did at the beginning of this year, then, by cleaning as much margin off the books as possible (near zero would be sweet) and, in the event of a major correction, redeploying as I did before.  Maybe I’ll see some of these positions again?

Pleasant greetings from the 9th floor, as National Resource Partnership L.P. looks to be doing great.

Their net cash from the end of last year is down (a sign of competence, in the current environment), as are net current assets, the preference of which has been shifted to longer term investments.  I’m a fan, given the position they were in to engage in opportunistic buying.  Since this company was gobbling up at the bottom, that’s not even merger and acquisition.  It’s just free lunch.

Their total assets are up about $75 million, over all, while (and this is important, I believe) their intangible assets are actually down year to date by a couple million.  Nothing like cutting out the fat in favor of something a little more substantial.  Factoring in this honest assessment of management, I’d say real gains are more like $80 million so far.  Score one for fiduciary responsibility.

Liabilities have mainly bounced around, with little progress made to reduce them overall, yet short term liabilities are lower, meaning less pressure to procure huge releases of cash.  Given the liquidity/charade boost just orchestrated by the Fed, I’d say inflation with time play to this commodity vehicle’s strengths.  Ironically, on the debt side of things, the largest payments don’t seem to begin until 2013 (a.k.a. after the next election) at such time when I’ll already be critically reassessing this position anyway (for obvious political reasons).  None of their debt is due before 2012 and, even at this time, they have sufficient cash to completely cover those first year interest payments, plus about half of the principal of the 2012 notes.  Long term debt has been reduced in net.

A lot of NRP’s debt success can be traced to the two major agreements, which actually stipulate they keep their leverage in check or else get hit with a major, 200 point increase in interest costs.  Sweet.  I’m fine with that.  Let the good times roll, led by intelligent lenders who understand past history of loans which are growing in aggregate, however tended, is really just a mockery of judgement day to come.

It’s amazing what people can accomplish when they have to work for it.

But the best development, in my mind, was the absolving of specialty shares of the partnership.  No more bullshit preferred stock awards to the company executives giving them first rights.  They now wait in line, like the rest of the holders.  Holders of incentive distribution rights have been completely eliminated.

This company has been diversifying its commodity base, notably buying a paper company in the earlier part of the year.  I commented on such activity in The PPT.  However, its bread and butter remains a strong (perhaps one would argue overbearing) exposure to coal royalties.  While typical bias about overexposure would cause one to pause, in this environment where climate legislation is so improbable and with coal being one of the cheapest and most abundant sources of energy when left free from regulation, I can’t help but think NRP stands to do very well.

That is the miracle of not being screwed with.

I doubled this position at the perfect time on Friday, just before the weekend.  Not only has it exploded to the upside since then, but I secured the latest dividend payment, which should be added to my accounts shortly.  And, on top of that, I receive this beautiful masterpiece of a quarterly statement.  I’m in a terrific mood.

That being said, any adverse outcomes in the coal space will result in terrible suffering on my part.  Vigilence is an ever important attribute, friends.  Always keep on your toes.

Now I bid you good night.

Silver for $27 an ounce?  Ha!  That is so “12 hours ago.”

The new, trendy price is $28, thank you.