Sand Companies Dealt Instant Death

On Thursday evening, EMES withdrew distribution guidance. On Friday, shareholders were treated to a one day ~30% drawdown. HCLP and SLCA fell ~10% each, in sympathy pains. The whole sector was flayed.

The weekend has offered no respite, as HCLP and SLCA are both down another ~8% and EMES is off another ~12% on Monday.

Here’s a preview of what’s to come.

All three are going to slash their distributions. Of course they are…they’re yielding like 20% and it’s an industry freeze. They’ll walk it back to ~10% yield, those of us who’ve been here from the start will be back to what we were making two or three years ago, and all three companies will be better off for it.

Now things are getting out of hand. I cannot speak for SLCA or EMES, because I don’t own either. I never wanted to own either. But I do speak for HCLP when I say a great company is going for peanuts.

Now, I am not adding to my position. I restructured back in December, I ended up with about 1/2 my account in cash (after factoring in losses into this year) and it has been single handedly responsible for keeping me alive. My losses have been horrific; without that restructuring they would have ended me (and that is not an exaggeration).

So I’m not buying until the recovery is already well underway. If I had been so fortunate to be outside this fire, looking in, then I would be nibbling incrementally, every couple of weeks. But that is not a luxury I personally get to enjoy.

So far for the year, I’m down about 15% – that’s about 40% peak to trough if I’m counting from when this process all started a little over 12 months ago. I guess if I’m looking big picture, I’m fortunate that’s all that’s happened. There are people out there who have lost 70% because of this oil catastrophe.

For the moment, I am more than content to sit on lots of cash and wait this thing out. I’ve dug into my companies and am very confident they’re going to make it. But not everyone gets to say that.

There are vast expanses of the oil and gas industry that are about to be swallowed whole. We have a backwater culture that still crucifies people to thank for this.

I bought Orchids Paper Products Company and Subsidiaries (TIS) earlier this year, back when I had just raised a large sum of cash and was looking for some new ideas to get away from the oil kill zone.

The company stood out as being a very solid business – good cash flow, strong sales, steady as she goes growth, boring business with few new competitors – you know, the kind of company that nobody wants to own.

Here, TIS is holding up very well, and I am quite surprised it is still down at $26 a share.

TIS is relatively small with only $210 million in assets, but it’s a good enough target for me. The shares are worth about $10.42 apiece by my estimation, and are currently going for $26. In the first six months of the year, we’ve seen a big increase in share value, even after issuing new shares, up from about $8.62 as of December 2014.

The companies operations are rewarding shareholders richly as of late. Net sales climbed 40% from the first six months of 2015 over the first six months of 2014. Basic income per share rose to $0.55, up from $0.40 period over period – 37.5% increase, matching the sales growth. Cash from operations is up 59.5%. It looks to me like this is real; not just a financial gimmick.

I had purchased this company in part because I saw an off radar business with solid fundamentals. But I also guessed that TIS would have the opportunity to make a lot of above average returns in the near future, thanks to all the meltdowns in South America leading to scarcity of basic paper products.

I still need to confirm where TIS is shipping product to, but even if that isn’t exactly what’s happened, I seem to be getting a pretty big payoff anyway. The company has a focus on US markets, but there is also some elusion to “Away From Home” sales, following the acquisition of Fabrica in Mexico. Regardless, TIS is growing at a 40% clip for the moment, and management seems eager to keep a fast tempo pace going.

It might be harder to materialize windfall gains than with a bigger company, since it’s unlikely institutional shareholders will come in and bid up the business. But that’s alright, I can get paid with distributions just fine.

Believe me, it crossed my mind. But I’m not going to bite here.

Part of that is because I have quite enough to contend with already in terms of volatility. But besides that, this isn’t a clear buy, even with the price of Volkswagen paper down 50%.

I tend to love playing the distressed buys, but my preferred environment is different than this. I make investments in names like Anadarko Petroleum following a major accident where I could reasonably conclude there were legal protections they could hide behind that the market wasn’t factoring in. Or in companies like Ruger after some kids get shot at school and investors vastly overestimated the influence of the anti-gun lobby to spin that straw into gold.

But here everything smells wrong. The company is down big for a reason; yes the idea that governments can mandate improvements in something like engineering is fucking stupid, but they took it a step too far.

Maybe they’re not the only ones either…

We need to let this shake out. And understand that with Volkswagen, there’s no front stage guy who’s going to get the blame. No legal barrier tap and dance that slips them out of harms way. No secret save coming here.

The German government will probably protect them to some extent, but this is a big blow to them. The Germans have been huge on this green crap, public sector financing of it and all. Now, their native sons have taken a piss on the front door.

Sit it out, grab a bag of popcorn, and watch the environmentalists desperately try and erase any lines drawn between this and their regulatory initiatives.

From the heights of the 9th Floor office, Cain Hammond Thaler glares out across the sky. I tear the shirt from my back and roar out with fury, the sound of my rage crashing against the landscape, echoing back at myself, carrying meek messages to my ears.

Cain mocks the gods, and dares them to continue this beating!

I was going to post some real bearish doomspittery …I’m talking about some seriously depressing DOW 0 lamentations. I was going to strip you of all hope and send you into the barren dessert on a 40 year pilgrimage of woe. Self-flagellation and tears were to be in the plentiful supply; cheer and optimism nil.

And then I looked up the DOW going back as far as I could. I looked up the S&P going back as far as I could. I looked up the NASDAQ too.

How weak are we!?

What is this selloff, next to seven years ago? We are having a little bear market because we get a bear market about every seven years with very high confidence. I know this, because my initial strategy from a few years ago was to be in cash by now…before I got ultra greedy making 200% in oil stocks and charged head first into my own demise. I’ll find the posts later where I laid this out and link to them.

The prophesiers of doom keep reading those burned entrails, more insistent than ever that their last 1,000 failed prophesies are just circumstantial. Not evidence of anything.

In 2014-15 yes it is true that the wall of our home has sagged in. In 2009, the roof of our house collapsed on our heads. Tell me, what terrible unforeseen disaster has the market missed which equates to that? Why am I expected to run screaming from a little wall which needs propping up when I already experienced the whole thing coming down on top of me?

Black swans happen to comfortable people in states of sloth. This market has been hyper alert, looking for the next BIG ONE every day for seven years. How afraid can I be that we’ve missed something huge when everyone is constantly looking so hard and so diligently?

BIG ONE happens when you aren’t looking. When practically no one is looking. When rules of thumb become adopted as incontrovertible LAWS OF THE UNIVERSE. Where is any of that happening?

Even such staples as “don’t fight the Fed” are questioned daily. There is an entire 24/7 cottage industry dedicated to fighting the Fed. Nothing they say is taken seriously and we have had frequent periods of high short selling going back to 2008.

With so much energy dedicated to inspecting the structure and so little commitment one way or another in terms of outlook, how do we have the potential to collapse?

I took a 67% loss on VOC…(vomits)

This was on the books from last year, and I’ve held it now for about 12 months. I’m going to retain HCLP and BAS, but VOC was just too ugly to keep around right now.

I want the tax deductions this year, to start the clean up process. I like VOC but it’s an ugly pure play on oil prices. I would have thought buying this thing after a 50% drop was a pretty safe venture, but really who saw the extent of this fiasco in oil prices?

In November, I’ll take another look at VOC, after the write off is locked in.

Real life beats out professional economists. Again…

Of course the Fed isn’t going to raise rates. Have you taken a look outside, of late?

I had been previously sold on the idea that the Fed might have made some symbolic gesture today; a fractional point or something to that effect. But there is no serious merit to any argument involving meaningful interest rate hikes, either imminently or accretive for the span of some years more yet. There never was.

The Fed needs you to believe they still have any control left. This is how confidence games work.

If I say “cross me and I’ll abduct your first born”, well maybe that will hold power over you for a while.

But the day you say “abduct my first born and what stops me from beating your head in?”…well that’s the day I stop being a meaningful threat.

The Fed is quickly approaching “un-meaningful threat” territory.

Now, will we rally again? That is not so clear.