Restructuring

Something had to be done.

It is December, so I cleared my head and made some tough choices. I sold completely out of AEC, ETP, and BTU. AEC and ETP are the only two positions I have that have held up (made money, really). I don’t want to part with them, but it’s the best move.

There will be immediate cries about selling winners and doubling down on losers. This is nonsense. I’m not doubling down on anything.

The sheer magnitude of this calamity has left me with an enormous, outstanding loss for the year. It’s December – no way in hell I can absorb that loss in less than 30 days.

The only way I can view this is as a window of opportunity to cash out my winners tax free.

Cash now stands at 25%.

I’m sitting on the cash. My preference, obviously, would be to deploy into a sector not at all tied to oil and gas. But if my worst fears come to fruition, that may not be a real thing.

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.

The oil majors have begun responding. The question is, who gets the axe.

Dec 8 (Reuters) – ConocoPhillips said its 2015 capital budget would be 20 percent, or about $3 billion, lower than this year’s, the biggest spending cut by a U.S. oil and gas producer in dollar terms as oil prices hit five-year lows.

Shares of the company, which set a budget of $13.5 billion for 2015, fell as much as 3.5 percent to $65.50 on the New York Stock Exchange on Monday.

ConocoPhillips said it would “defer significant investment” on less developed projects in the Montney and Duvernay fields in Canada, the Permian Basin in Texas and the Niobrara shale field, which extends over Colorado, Wyoming, Nebraska and Kansas.

“The announced budget is well below our expectations of $15 billion,” Simmons & Co analysts wrote in a note.

ConocoPhillips, which is focusing on the Eagle Ford shale in Texas and North Dakota’s Bakken shale, said it would also spend less on major projects, many of which are nearing completion.

Global oil and gas projects worth more than $150 billion are likely to be put on hold next year, according to Norwegian consultancy Rystad Energy.

For me, the most pressing of matters is the fate that awaits BAS. This may seems odd, but even after cutting its position sizing from almost 25% of my portfolio down to 10% in August, this singular company has had almost comic effect on my positions. The 5% or so in purchases I made throughout its decline can hardly be called the tipping point, as the source of my fate has been without a doubt the move BAS made from $29 to $6.

It is almost idiotic to speak of. Am I blind to something the rest of the market clearly spots? I am human, after all. Barely. But I am human.

So I decided to go take a walk down memory lane, to the dark days of 2010. It was a horrible time, following the worst recession the US had witnessed in almost 100 years. Oil prices had fallen from $140 to (for a few short months) the $30’s.

I believed that looking at these two companies, the BAS of 2010 and the BAS of today, I might learn something. Can BAS survive this oil price rout? Am I even now venturing down the path of my own demise?

I will let you decide.

Here is BAS’ balance sheet in June of 2010 (when oil was trading comparably to where it is today).

And this is BAS’ balance sheet as of their most recent filing.

Go then, Slavs. Pass your judgment, if you dare. Argue that these are somehow different companies.

I raise the white flag. My losses are too appalling to speak of.

Watching the EURUSD, I just can’t sit idly by.

I let loose the entire SXCP position, for a small gain. It may not make sense to sell a winner while clinging to losers (don’t worry, that part comes next). But it really does if you dig down. SXCP deals in coke for metallurgical operations. It was a good value buy, but following the oil implosion (and all other commodities), I’m getting worried the entire market could tank.

Oil was very important to the US economy. You can only sell BAS for so many days in a row before you need to raise cash from something else. We need oil to stabilize at $80 and the EURUSD to stop falling or you are going to see some very serious fireworks.

In that spirit, I also sold positions down until I got the margin monkey off my back.

I’m 100% long, but if we collapse, I’m not going bankrupt.

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.