Some of you may say this carnage is contained in the energy sector. It is not. The selling is across all fronts of commodities, currencies, and being sustained by a rally in bonds. It’s time to stop dicking around and call it like it is.
The market is pricing in another recession.
The past week has been the most painful I have ever experienced. The idea that just a week ago, I was flat for the year is preposterous to me. But it is true. In one week, the market has gone completely insane. Or perhaps it sees everything clearly and I have the blinders on.
Let’s create a hypothetical recession and talk about it. What would it look like? I think it’s safe to say that it would be much less severe than 2009. Every recession cannot be the worst recession ever, that would defy the statistics. I would also say that the central banks would step in much faster and more forcefully. We are watching the total dismantling of business right now. If you aren’t winning, you are losing…badly.
If we catch a recession, I am guessing it would last no more than 8 months and set us back just a few percentage points in growth. A mild trough, setting up for a quick recovery. This is the best guess I can offer, looking at the historical distribution of other recessions, as no data has yet presented itself that the US is in a recession.
As for cash, I have decided not to raise any. But…and this is a big “but”…I do not trade for a living. I have a job. The money I manage on this site is my own money and I can afford to watch it go through 50% swings. My demise is spared simply by not having any margin and picking positions that don’t fold.
My greatest fear is that BAS gets dragged into bankruptcy. That would be tragic. Understand that I am betting against this, knowing full well it could happen. I do not want to marginalize the risks here; this is GKK all over again (a company I once rode from $32 to $3). If you are mindlessly following me, you are in severe danger.
I’m probably right 60/40. That means I’m still wrong 40.
CAPEX budgets have started to reflect realities, for oil and gas development. That makes sense. If 20% reduction is to be extrapolated, no question we are about to watch many many names fold. The question is, are any of mine amongst them?
If the CAPEX cuts are handled skillfully, then producers will rally around a few favorite services firms, passing tough love judgment on the others, ushering about their ends. This is a normal occurrence, which we see in many industries that rely on suppliers/services firms.
If the CAPEX cuts are handled daftly, the entire E&G sector gets plunged into a black hole, and they don’t recover for a decade.
Let the game of chicken commence.