Folks,
Well, we’re in it now.
It seems clear to me – now – that the SVB bank blow up was the tipping point of the supposed ‘monetary/free money/reckoning’ stock market and economy ‘disaster’ that all the media economists and big-shot hedgefunders/commentators/really-rich-white guys have been warning about for so long.
Does this look like the ‘big one’ to me? Heck, no. There’s no credit shortage, no deep leverage on the major banks’ books, no craze on any sector of the stock market that has 300+ P/E valuations that virtually everyone is exposed to. There’s none of that. In fact, I don’t see any of the systemic risks that I saw in 2008, or in the S&L crisis of 1990, or even in the Longterm Capital Management 1998 debacle. Yes, there are VC funds that are grossly overextended into what are charitably called ‘start-ups’ and their debentures, but unless those bonds are capitalized more through JPMorgan and Goldman Sachs and Morgan Stanley than they’re letting on (and believe me, that’s where everyone looked FIRST this time), then this is a relatively controllable contagion between some regionals and Credit Suisse (who already have their backstop in place).
In oil, there is no good fundamental reason for prices to drop below $70. Heck, I can’t make a case for oil to be below $90 a barrel. The world’s first largest producer of natural gas and third largest producer of crude oil is under economic siege for their aggression in Ukraine. Their production capabilities have been greatly hampered by the departing of every Western technology company that had been developing new oil and gas resources with them for the past decade. Their markets in Europe have been in collapse, and the Europeans are steadfast in keeping the doors shuttered, perhaps ever – or at least putting a cap on what they’ll pay for the ‘blood oil’. There are already dire warnings about shortages for NEXT winter in Europe. US oil production is past it’s shale peak, except perhaps in some very prime areas of the Permian and won’t have the same ‘swing barrel’ influence on energy markets, also perhaps ever again.
None of that matters – investors are in the grip of this, including us. The next few months are going to be rocky. That’s the nature of these things when they hit — there may be all the fundamental economic news in the world pointing in one direction, but the markets won’t listen to any of it for a while.
You’ve seen it before. And if you haven’t seen it before, rest assured, I’ve seen it before.
I won’t go so far as to say I saw this coming, but we did structure our portfolios keenly to deal with this possibility. We bought high quality, well-capitalized energy companies for the most part, with a bias towards blue chips that were already paying great dividends (and will continue to). We supercharged those stocks with call option premium sales that were bought specifically for short-term gains and long-term protection. We kept a strong amount of cash on the sidelines and refused to push more than 75% of our working capital into the markets. We stayed away from high beta, speculative shares (except for a few small investments, most of them now retired).
We’re in a great place to wait this out – and even more, take advantage of the great value in other energy stocks that are sure to emerge in the next several weeks and months.
We’re going to manage this – we’re already positioned to minimize our losses by the way we’ve structured our portfolios, and I’m going to devote the next several webinars and newsletters in how EXACTLY to keep the positions we have generating returns, even if they’re destined to drop in price some more first – and then look for the signals on when to push some of that sidelined capital back IN, taking advantage of this perhaps overdue, but certainly not fundamentally catastrophic drop in the general and energy markets.
No sugar-coating here – I think things are going to be rough for a while. But don’t panic.
And join me for the webinar this Monday March 20th, if you can.
