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I Am Betting On The Status Quo

This has been a very difficult past 12 months for me. It’s not just the losses from the oil markets cratering like that. The other issue is that I am looking around, now 6 years since the end of the last recession, and I just cannot quite figure out what comes next.

I usually have a pretty good handle on which way the wind is blowing. Some sort of overarching theme about what the next 5 years have in store for them. That thesis was the emergence of an American oil powerhouse that shattered old regimes. And that has sort of played out, albeit not like I expected.

But what else is going on? European countries seem keen on not burning down EU administrative buildings, which is what it would take to really break up that bureaucracy, seeing how no party in Europe appears to have the balls to hold referendums. But you can’t necessarily bet on Europe either. In my 401K, I’ve been nibbling on European indices and mutual funds since at least 2011, but there’s nothing in particular I would invest in. Nothing worthy of iBankCoin.

And what else is happening? Technology continues to undergo a multi-decade of fast paced evolution. The thing about evolution; it’s a violent, messy process. Not conducive to buy and hold at all. The consumers get rich with wonderful goods while the investors get ground to bits by emerging players and turnover. There’s only a few walls in that village, and they have a high premium attached.

My biggest reservation is that I once mapped out frequencies of recession in America, and we are fast coming due for one.

So what are your thoughts? What will the second half of this decade bring?

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Good Showing Today

Not bad all things considered. CCJ, HCLP, OMAB and TIS all went higher, with HCLP up more than 4%, OMAB up more than 3%, and TIS up more than 2%. BAS was down 1%, but this is a process.

BAS just recently announced their rig count numbers. Utilizations are way down, from 67% at the beginning of 2014 to 56% today. 4% has occurred just since the start of the new year.

Well? We’ve seen that these methods are more expensive. Now let’s see how cheap they can be. And who’s going to be around next year. My guess; BAS are champs.

If oil prices run back to $100 now that Russia has decided to play nice, I will die from laughing. The days of global competition are done; the USA is the victor. I know you defeatists want to apologize for our might – it’s nothing but luck of course, and that is somewhat true – and rekindle the “peaceful” yester-years of blood thirsty despots butchering the peasants for land and spoils, never ending. Save your breath.

Someone was going to win this game sooner or later, and it looks like that someone is us. Rather than wishing upon us another 1,000 years of savagery, suck it up and move on. You could hardly ask for a more genteel ruler than America, no? What other nation has ever spent this much time self-reflecting and prostrating over the vanquished?

Our President’s order is about to smote tens of thousands to ruin. And when he is finished, he will give a long, sophomoric lecture on the importance of civility and equal opportunity in the global marketplace. Could you imagine the look on the faces of Genghis Khan or Alexander the Great, if they could see such a spectacle? I imagine they would have both cast down their arms and retired to spend their final days as hermits.

What comes next is very important. The crowd is skittish, but today surely helped. We need Brent to breach $60 soon, and it would be very constructive if bond yields of the safe havens could, you know…yield something again.

The people are very scared of the Eurozone breaking up…for why, I could not possibly tell you. The euro has brought nothing but suffering on the nations of Europe. It was as if a spattering of intellectuals across the continent tried to trick Germans, French, Greeks, Italians, Spaniards, Finnish, Austrians, Belgians, Irish, Dutch, and Portuguese people into thinking they were all from the same place, like they wouldn’t figure it out.

It seems that way because that was exactly what happened. Such a brainless ploy. And almost set up to fail, from the beginning. The number of American economists, almost uniformly and unanimously across all walks of life, that laughed at this idea; it is incredible.

I will spoil the ending. Greece is going to walk away from the Eurozone, and nobody will care.

Did creating the Eurozone destroy the global economy in the first place? There were many currencies that were trading one day that didn’t the next. The euro came out and life went on. Reversing the process is no different, except at the end of the rainbow, Greece defaults and ruins their credit rating for a decade, and a bunch of banks get whacked (what else is new?). Then voila! we have a brand new example of what not to do when managing a country, as Greece becomes the butt of jokes for a half century (see France as to fighting wars or Venezuela as to not being filthy animals, for reference).

I remain cash heavy for now, but am looking for that moment when people start getting excited again.

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2015 Looms

What I am seeing is disconcerting. As the second issue of the Income Investment Report prepares to launch and the stocks that fill its pages are added, I am seeing only the occasional position that I want to own.

Much of what is cropping up consists of companies that have gotten beaten down spectacularly and are preparing for hard times. The problem here is that, outside of a basic initial cut (looking at companies with dividends greater than 5%), I do not check the yield after that. Everything else is based on a combination of fundamentals disconnected from yield.

And what is creeping to the surface is still offal.

But what is more interesting is the number of well connected financial companies (insurance, investment, etcetera) which are raising as much cash as they can.

This is not the rosy type of behavior I hope for after an entire industry gets taken at the knees, down 20-30% in 90 days. This looks like preparing for more hurt.

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The Damage Was Done

Oil is bouncing nicely. God, almighty, take it back above $70.

But for oil and energy names it was too little too late. I am already at my 20% loss limit, getting carved up by those same energy names and down another 5% today. Oil did the trick; you don’t have energy services companies cut 50% in a single, short holiday trading session and not have follow through.

The margin calls are flooding in. If you were out in front of me, there is a very good chance you are already dead. If you’re alongside me, make no mistake I am afraid. It is only through sheer force of will that I haven’t buckled yet, watching a +25% year twist into a -20% year in the span of a quarter. Actually, I am not watching it too closely.

If oil can prove to have bottomed, we will correct sharply higher. I have been through pages upon pages of research reports, and all calls for further downside predicate on price action, whereas all fundamentals predicate on a return to higher pricing. However, if the oil price should be prolonged from recovery, the situation shall become most dire. For now, hedging and reality, I pray, show up in time.

As for those of you on the Twitter, talking about how obvious this move in oil was and how your service just absolutely nailed this move…choke.

I have the list of traders I follow that actually called this collapse, or at least have been on it from September. My name used to be there, but has since been scratched off. The list has dwindled to a small select number. You are probably not on it.

There was nothing easy about this move. Nor was it obvious in any way. It has spun far past rational into erratic. It has destroyed fortunes in the blink of an eye. It is deceptive by its very nature.

I implore you, if you follow such a person, making half-ass lazy references to such a move as this, to “fire” them. They are a dark voice in your mind, that will lead you to ruin. This move was hard; very hard. It was painful and emotionally draining. I may appear calm, but that is an illusion, spun from proof reading everything before I post. In fact, in the moment, I am nervous and weary.

Demeaning this truth with cheap talk is insulting. There is no method on Earth that could have absolutely caught the extent of this decline. People I know with barely a toe in the sector have lost 5%, just because. If you were diversified but enthusiastic, you’re down 10%. And if you were anyone actually invested in the US fracking boom, you lost 20-40%, inside of 3 months.

But if you can talk about that without batting an eye, you aren’t invested at all. And I know it.

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Get Ready For The Second Leg Down

I had thought, before Thursday evening, that we were preparing to end this correction. I cannot in good faith believe that now.

The sheer level of devastation – and devastation is in no way hyperbole – that hit the tape Friday does not just flutter away. We are in pure panic mode, based on an as of yet still unseen enemy.

That I can’t see what is causing all the panic frightens me more. The only thing – the only thing – that even comes close to setting off alarm bells for me is the EURUSD and reports out of Europe. The market is trading like it’s 2010-2011 again. That actually makes sense to me. I had figured Europe’s troubles had been masked but not addressed.

But there’s not much data here to back up the fear. It’s not like European yields are blowing out again. The EURUSD is the only visible piece to the puzzle. There’s some churning GDP numbers as well. How can I sell out based on a single indicator and what is still just noise?

The oil blowout itself doesn’t make any sense. I spent the weekend reading through research reports analyzing the situation. The main takeaways are that oil could go a lot lower, no one thinks oil can stay a lot lower for long, no one saw this coming, everyone is pretending like they aren’t surprised by it, and sell everything just in case.

That’s crazy. I can’t follow that kind of logic. And that’s exactly why every worry presented is going to happen.

We are so far past logic on the road to crazy at this stage, it’s almost illogical bringing up logic at all. We just blasted oil 40% based on 5% excess capacity, the only second largest supply build in five years, a conspiracy theory, and a sneeze.

How can you possibly hope to plan for that!??

So here’s the deal; don’t follow me. I’m not your financial adviser, I’m a guy on the internet who’s trading his own net worth for real. And like a real person, I sometimes choose to do stupid stuff. Today, I’m deciding to hold my death basket a little longer. A wiser man, seeing the pack of lunatics closing in on him, might opt to retreat. But I just can’t; maybe I’m too tired of this nonsense to move.

When will I retreat?

I made (I can’t recall exactly) 25-28% last year. I’m down a little more than 15% right now. A complete retrace of 2013 puts me at (20%)-(22%) to breakeven. I’m willing to go there, back to last year, because that would be okay in my book. I’ve been buying most of my old positions back for far less than I sold out in August. Hell, I’ve been buying some of them back for less than I bought them in the first place…

Breakeven at 2013, and I’ll regroup. That’s actually not bad, considering I’d be way past that had I not sold down at the end of August. If we bottom between then and now, I’m still up for 2013, which would be kind of remarkable in and of itself.

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My Worst Day In Three Years

Last night, following the second round of feasting, I took a minute to flip open my phone to see how the OPEC meeting went. Looking at the price of oil, I hit a sudden case of indigestion. That was when I knew how bad today would be.

And it hasn’t disappointed. My entire book is down 10% right now. I’m down almost 15% for the year. The energy & gas sectors are solely responsible for this slaughter, taking me from +25% to -15% in a quarter.

Jim Cramer wins, folks. This is brutal. But I’m going to hold fast through it.

I can’t believe that Saudi Arabia is actually waging a price war against the USA. Why the hell would they? We don’t even export, and don’t use barely any of their oil.

If I were Russia or Venezuela or an Iran puppet nation, I’d be looking at the Saudi’s with crazed, lunatic fringe conspiracies ringing in my ears. I don’t know who Saudi Arabia is trying to kill off, exactly. But the most prescient answer may just be “tomorrow’s oil and gas projects”.

The projects that are online now are set for a few years. Hedging has been erected to support them. None of my positions have seen any change in business – that’s the only thing keeping me sane and focused right now. I want to panic, but I just can’t yet.

Check out this report on oil in the Permian Basin (page 14). Average cost per barrel has declined to $55 per barrel. The $80-90 number only applies to new projects.

The average cost per barrel of the Bakken, Eagle Ford, and Permian formations together is estimated at $60 per barrel.

Business Insider posted this graphic awhile back (by Morgan Stanley) that breaks down the extraction cost per barrel (presumably as of 2013-2014, BI is notoriously horrible about leaving off critical information). You can see the first victims of the oil price decline are Arctic drilling and oil sands (read Canada).

You will also notice that North American shale is not so different from so much oil and gas production elsewhere in the world. Yes, the “average” cost of production is higher. But look at the band; it is contained inside the same maximum range as so much else of the world’s oil and gas production. After Arctic and oil sands plays get cut in half, the next round of production cuts will presumably fall fairly even handed, across the highest cost developments, globally. That hardly spells the end times of the USA fracking boom.

Here’s a supporting set of data from Business Insider, provided by Citi. This post is more interesting, because there is a second graphic that shows the cost of every international oil and gas project, by location.

All this trouble for what really isn’t even a problem in the first place. The EIA short term outlook for crude consumption vs. production shows what can hardly be called an issue – a million barrel a day surplus in historical context. The largest gains in the oil supply surplus came from the first two quarters of 2014. You can hardly call those unprecedented; we experienced a much worse supply shock back in the first half of 2012.

Also look at the historic unplanned crude shortages from the Middle Eastern countries (page 15). In the past year alone, half a million barrels a day came back online after having been unexpectedly dropped off. You can see the effect of two separate war times breaking out in Libya. Saudi Arabia is suddenly popping up. Add another country to the mix, or an expansion in lost production from one of those already on this list, and pretty quickly the million barrel global surplus is absorbed.

But the best blessing of all may just be the effects of low oil prices themselves. Globally growth has been terrible and Europe has been our poster child. But with the euro so low and cheap energy prices coming, we may just finally see old mother Europe do something…anything.

This is going to hurt very badly. I was too quick to add back to positions and far to willing to take on margin. But I’m going to stay calm, and wait to see what comes up next.

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