You may have noticed that I’m barely exercising any risk management at all, now down almost 25% year to date thanks to a combination of events which include:
1. A massive rally in oil after I increased my short exposure at the bottom of the range.
2. A failed short in MGM.
3. Huge unrealized losses in BG and CCJ.
As a point, I’d like to address these things, because I would never – ever – suggest that someone follow my lead in the way that I have toed it.
After absolutely nailing the oil trade on the initial move lower, I confess I never dreamed that oil could be flirting with $100 so soon afterwards. I still don’t believe it, to be honest with you. I keep thinking this is some sort of nightmare where I will wake up and see crude hanging out at $30.
But that may lead some of you to question: why haven’t I covered?
The answer is really simple. Ask yourself, what do you think will happen to the U.S. economy if oil spikes back above $100 a barrel?
Right now, gasoline prices are fairly tame compared to crude oil itself, which leads me to believe that crude is a massive distortion of pricing. However, if crude stays at these prices, then eventually the cost of gasoline will necessarily rise…dramatically.
At that point, most predictions of continued U.S. economic relief go out the window. The effect of crude on the country is simply too great; so there exists a sort of overhead “elastic barrier” not quite as sure as a floor, but definitely pretty good.
If I’m already waiting around at $100, why not hang out at $110? Or $120? I’m short leveraged products, so the only consistent losses I’m booking are in interest payments.
MGM doesn’t really need to be addressed as I sold it to manage risk; I was overzealous and needed to cover to get back to my core position. They are most definitely done for, but it could be years before they collapse and shorting them just wasn’t a central theme. It was an ancillary play trying to scalp free money which went awry.
But as for losses in my core positions, I have been refusing to let those go as well. With CCJ, the purchase was a distressed asset play, which has yet to reap rewards. However, I believe in the underlying market, which makes CCJ attractive even as it punches small holes in my vessel.
And BG is just unrealistically cheap for a company that has been expanding to meet the growing food needs of the world.
So, because I so thoroughly believe in these remaining positions, I am allowing myself to overlook the terrifying losses that are manifesting in my portfolio. I have basic strategies to stay solvent, and am looking for a grand slam; I still have my margin abilities left, and may find that I add to my oil short, once I get some momentum in my favor.
However, I also appreciate that most of you would be vomiting at your desks if you saw the numbers I see. It takes a force of will to look down the road past the ugly skies that are plaguing you at the moment, to the sunshine that lies ahead.
This is why risk management is so important for the average trader; it staves off these spirit-breaking images that haunt you in the here in now.
I see a number of possible paths that I can generally say fall into one of two cases (depending on the exact path, I need to react in certain ways, with regards to timing exiting positions).
The first is we are on a road to recovery. I don’t buy this at all, but if it’s true, then BG and CCJ are very undervalued. In this case, if it looks like the worst is past I sell AWK, cover all shorts, and revolve all funds into my remaining positions, riding AEC, CLP, BG, and CCJ. Based on their previous highs, that brings my portfolio back to where I was at the beginning of the year, and I lose nothing but a few months.
The second is the path I fear most and am actively planning for. We are about to enter the next move lower, as currency related trauma upends the globe, and demand is regularly destroyed, leading commodities and business lower and causing a second uptick in unemployment. I don’t think the economy sheds jobs as brutally as in 2008-2009, but we could see a bounce to somewhere in mid-range. In this case, my entire core portfolio (and yours) will be hit aggressively with selling, and if I don’t have the shorts in place, there will be no quick redemption.
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I generally agree with everything you’ve said, Cain. Only concern re oil is geopolitical risks. Look at how oil markets reacted to the Libyan crisis. What happens if Israel invades Iran?
Oil goes way up.
Then it goes way back down.
Cain,
Have you asked yourself what if the move in crude is being driven by insider knowledge of imminent action in Iran? What happens to crude prices if Israel or the U.S strike Iranian nuclear facilities?
Depends on the retaliation.
But ask yourself; how reliable is “insider information” in these sorts of situations?
How many brilliant “insiders” annouced deals for Greece or Italy, and bailout funds, for all of last year and all of this one?
Now that we finally have some of those things 1-2 years later, does that suddenly mean those assholes, pushing their “imminent deals” and “agreements” are vindicated?
As a rule, people tend to think they know more than they really do.
That was an interesting look at the inside of your skull. We get into various positions and theses with our portfolios, it’s interesting to see how one trader is thinking and positioned. I disagree with you on a number of levels, but can’t really say you are wrong.
Cain, I am actively monitor SCO, I do not believe the bottom is that far away …
Bottom in SCO? Or oil (not that it’s ever corrected)?
the bottom of SCO, which is the equivalent of the top of UCO … just that I am more comfortable buying than shorting …
We all have positions in our portfolio that make us gag. Typically it’s those we hold on to way too long hoping that something might change. (See my MCP position) Why not sell a small portion of your losing positions so the climb back is less steep? Sometimes the hole gets too deep.
I’ve noticed the same thing with gasoline prices stabilizing here in Central New York at around 3.57 a gallon while crude has gone up. In general I think food prices have moderated and housing is cheap. Yes, we have a high unemployment but I guess what I am saying is that I think those of us who are employed and who have cash are starting to spend more. I have 3 kids so I am always spending.
great post you are very honest man everything u say make a perfect sense, but isn’t that the problem? its make too much sense to really happen that’s at least how it looks right now and dont figure me wrong i’m fully invested in shorting this market but really starting to think about exit spot