Back To Business

It’s so fortunate that the markets are back open finally. Some of us were starting to lose our minds.

I’m getting lit up in BAS. The entire position is being crushed. My losses stand at about 22% from my first purchase. Net losses are lower from averaging in.

That’s what happens when you push into distressed positions. Most of the time, you’re early, and get treated to another 20-30% of downside. You have to know you’re where you’re supposed to be, because if you’re wrong, there’s no coming back.

But the rewards can be tantalizing when you’re right. I laid out my reasoning for a huge resurgence in BAS’ stock price mid to late next year at the earliest. Sooner if speculative money gets interested in natural gas prices reflating.

I offer a hat tip to Po Pimp, who told me I was early to the trade. This one’s to you, sir.

Meanwhile, not all is bad. CCJ is running much higher, in a way that makes me think somebody talked. They’re supposed to be issuing earnings today.

AEC is flat and CLP is getting a nice bid from some positive spin off their earnings release last week. The irony that CLP is more expensive than AEC, while CLP continues to receive more hype, is not lost on me.

And silver is back above $32.

But I have no cash, in large part because I’m betting that the world can be just as irrational this year as it was last year. Or the year before that. There is no buffer between me and a drawdown, and only limited ability to buy in if we get a big selloff.

Hearing market commentators launch into explanations of the dangers coming out of Europe, or developing economies; my exact position this time last year before the huge run; is aggravating.

If this is the year that facts matter, so help me, I will be pissed.

Good evening. You find me tonight enjoying a small dinner of mostaccioli with a side of bread for taking up a delicious red sauce prepared with a mild citrus flavor and a nice red wine pairing.

I spent the day in retreat, as the market was closed and I had very little to preoccupy myself with.

I did want to address the November 1 effect of all “speculative” naked credit default swap positions being banned in Europe. How, precisely, one can ban all speculative positions in a counterparty relationship is beyond me. Logic dictates that there always has to be at least one “speculative” position set to make money without a covered stake (we all know the European banks don’t have the money to cover their liabilities because that’s not how fractional reserve banking works).

I suppose I understand that what the EU really means is “no buying CDS coverage unless you’re one of our ‘preferred citizen’ lenders”. That’s fine.

It won’t work.

The EU is only delaying the inevitable. Besides, the CDS market had largely collapsed before now anyway; not from the potential restriction, but from fear that any bond bet could be destroyed in seconds by ECB intervention or EU government bail outs. Or from a Greece like event where the core government ends up strong arming the CDS committee from declaring a technical default while still subjecting unwilling bondholders to a haircut.

For the moment, distressed debt of EU nations is subdued. That’s a large part of the reason I am long.

In a few months though, I could see myself getting very bearish on Europe and global growth again.

BAS is off 4% this morning on earnings which were, in my opinion, both very bad and very well known. After reviewing the case, I broke my own rule and increased the position by 25% around $10.80, slipping into the old habit of borrowing money to bet on prosperity.

But just a few percent so not too badly…

This isn’t some kind of shock here, like with Apple. We’ve known the entire gas well service sector was sucking wind for 8 months now.

BAS took the hits and issued more bad guidance, but that’s no reason to take them at their word and sell – because the stock is dirt cheap.

Please, come in further and I’ll get out of this chair and show you.

You see, the troubles in BAS have been industry wide. The management of BAS admits personally that they were suckered into the surge in demand for gas drilling. And at that time, so were dozens of new competitors who entered the market trying to get a slice of the pie.

And right around that same time, natural gas prices went into a total tail spin, forcing well owners to curtail spending and leaving all these new business out to dry.

The results have been predictable, really. The companies all slammed into a barrier as hard as these stone walls you see around you.

Thus, utilization rates for the services firms have been plunging, and in order to try and stay in business, margins have come under intensive pressure.

The company has planned for more of this sort of action in guidance, for the fourth quarter of 2012, and the first quarter of 2013.

But, here’s where I’m intrigued in continuing to buy and hold BAS.

For starters, I think that the energy revolution here in the US is just getting started. I think politicians on both sides of the aisle are going to foster this growth for a myriad of reasons, and I think alternative energy sources, like nuclear or oil, are pricey enough to keep the natural gas revolution humming.

So the trend and development is intact.

And, when I was looking through the space, what I noticed was that BAS’ peers are really total garbage. I had to LOOK to find a company that had any cash on their books. BAS has enough to run their operations on no revenue for a third of a year. So BAS has the chickenpox, but these new competitors aren’t quite up with their antibody game, if you follow 14th century disease proliferation references.

So lots of BAS’ competition, which has really been putting the stress on their profit margins, is about to go away, in my opinion.

Which brings us finally to natural gas prices. They’ve been going up.

Now, I don’t know if the natural gas pricing recovery is legitimate, or if it’s merely a product of some speculators who haven’t been respectful of the storage issues that were causing the problems. But I do know higher natural gas prices can’t hurt to coax some money back into well exploration and development.

So, I see a situation where BAS has caught a cold, and for that the markets are pricing in $0.16 quarters for eternity.

As I look out this window, I can see clear skies on the horizon. I think this ship turns back around sometime next year – maybe the year after that.

And in the meantime, BAS will just have to bide their time by buying out some key competition and watching the others go under.

If BAS can manage to average $0.25 a quarter over the next year or so, the immediate issues notwithstanding, this company is going to $18. I think that’s reasonable. They’ve already made more than that in the first 9 months of 2012. This is a rut, not a canyon.

Now get the door while I put on my coat. I’m out for the day.

Truly, this is no bull market. Today’s epic bloodbath will have no rivals in history. The great minds of Twitter, bless them, were able to foresee this calamity in their grand wisdom. Today, they have saved us all a great deal of money, by lighting up the feed in a fit of madness, lasting approximately from the hours of eleven to one.

As we move into the final hour of trading, I see that the losses are just mounting.

Why, my AEC position is only up one and a half percent. CCJ can barely maintain its scream higher into the close. And the rest of my portfolio is only trying to close flat.

Commodities are flagging this as a deflationary environment, no contestation.

Spanish and Italian debt is in the immediate process of tearing apart a civilization, and American yields are only higher than they’ve been since August.

This has all the marks of the end of an era. Should none of us wake up tomorrow, I would be forced to tell you, “I told you so.”

God save the Queen.

CLP followed its’ brother, AEC, in reporting earnings this morning before the bell. The theme is the same.

Earnings look bad, cash available to shareholders continues to swell, and FFO blows out.

AEC’s management is scared at the moment, most likely of Fannie or Freddie getting raided by the GOP in a Romney victory, which I can see from them raising a few hundo-million and bunkering down in the third quarter.

CLP doesn’t seem to care.

They’ve continue cycling their operation throughout the third quarter, completing more purchases and sales to bring their costs down while taking advantage of struggling competitors. This multi-billion dollar business (much larger than AEC), at the moment is enjoying a 96.7% occupancy rate.

Rents are rising at a 6% clip this year, uninterrupted. And looking at the state of affairs for Americans, I don’t think that’s changing. I have placed my bets on a major shift in sentiment of US citizens away from home ownership and to renting. Two years in, all data coming from multifamily properties continues to validate this. Even a surge in housing prices, I do not feel, will significantly alter the occupancy rates of quality multifamily apartment REITs.

>90% booked is here to stay, in my opinion.

Here’s my favorite highlight, from their earnings release today:

Development Activity

During the quarter, the company completed construction of Colonial Grand at Hampton Preserve, a $52.2 million multifamily development with 486 units in Tampa, Florida. As of September 30, 2012, the property was 93.8 percent occupied.