The domino is starting to fall.

[Guest]

the big banks are different than the big oil. some of the big banks and brokers in US and EUR were actually totally insolvent and needed a handout from taxpayers just to be able to hobble along until they could stand on their own.  some of the bed rock of the financial system was toast. aig bac fannie freddie morgan stanley. huge banks had to be closed up and merged with stronger players. I don't see anywhere near the same threat to the system with a commodity bust.

 

 

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either.

[Uccmal]

the big banks are different than the big oil. some of the big banks and brokers in US and EUR were actually totally insolvent and needed a handout from taxpayers just to be able to hobble along until they could stand on their own.  some of the bed rock of the financial system was toast. aig bac fannie freddie morgan stanley. huge banks had to be closed up and merged with stronger players. I don't see anywhere near the same threat to the system with a commodity bust.

 

 

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either.

 

Very few saw it coming.  Fairfax, Michael Burry, the other guys in the Big Short.  Most value investors got killed along with the rest. 

 

 

[Guest wellmont]

the big banks are different than the big oil. some of the big banks and brokers in US and EUR were actually totally insolvent and needed a handout from taxpayers just to be able to hobble along until they could stand on their own.  some of the bed rock of the financial system was toast. aig bac fannie freddie morgan stanley. huge banks had to be closed up and merged with stronger players. I don't see anywhere near the same threat to the system with a commodity bust.

 

 

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either.

 

true nobody saw it coming. but by October of 2008 they had TARP and had totally backstopped the financial system. At that point they understood the gravity of the issue. they knew who was swimming naked. The commodity bust really took hold in late 2014. by early this year oil had fallen 50%. It's not a matter of predicting any more. It's here. We know we are in a bust. At this point, the doomsayers should be able to go down the list and start crossing names off the list. Start at the top of a list of biggest market cap names and they should be able to tell us who is swimming naked. the bust is here. time to start naming names and being Specific.

[Uccmal]

 

I've asked this to a lot of people and nobody has an answer. name one oil and gas company of consequence who is in danger of going under even if this oil price stays down. nobody is naming names. they use the proverbial "some" or "they". I continue to believe that there will be small and maybe a few medium sized o & g go under. they will quickly be restructured with absolutely no harm to the system or even the industry. there is an immense amount of capital waiting to come in to help restructure North American Oil and Gas.

 

 

Of the price comes back quickly most will be fine.  If it stays down or drops further a bust will happen.  Capital will dry up for years, especially in the "New" shale arena.  The bigger, better capitalized companies will be taking this respite to get hedges in place at the new lower price.  The ones who are now negative cash flow, and have no cash left to hedge, will die.  Its too early. 

 

That being said, I have one small new/old position - Arx - T.  They just did a private placement last week.  Very small position in a company that has weathered  two busts at least. 

[Guest wellmont]

still no names.... and your thesis is 100% reliant on oil prices staying down for a while. so you're playing the same game the oil bulls are. trying to predict the future price of oil.

 

but here's the thing. unless demand down ticks, somebody has to produce that oil. and oil is a depleting resource. if you are predicting a collapse in demand that's one thing. that's a global depression. and you can make a lot of money for yourself if you are right about that. but outside that, we pretty much know the demand picture of the next 5 years for oil. that oil has to be produced, and I don't think all that oil can be produced if prices are under $70.

[Uccmal]

the big banks are different than the big oil. some of the big banks and brokers in US and EUR were actually totally insolvent and needed a handout from taxpayers just to be able to hobble along until they could stand on their own.  some of the bed rock of the financial system was toast. aig bac fannie freddie morgan stanley. huge banks had to be closed up and merged with stronger players. I don't see anywhere near the same threat to the system with a commodity bust.

 

 

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either.

 

true nobody saw it coming. but by October of 2008 they had TARP and had totally backstopped the financial system. At that point they understood the gravity of the issue. they knew who was swimming naked. The commodity bust really took hold in late 2014. by early this year oil had fallen 50%. It's not a matter of predicting any more. It's here. We know we are in a bust. At this point, the doomsayers should be able to go down the list and start crossing names off the list. Start at the top of a list of biggest market cap names and they should be able to tell us who is swimming naked. the bust is here. time to start naming names and being Specific.

 

I think the market has done the Specific for you already.  Just go down a list of those whose stock prices have been cut to a fraction of where they were.

 

  I will re-iterate that no one on this board was buying banks in any significant amount until very late 2010/11.  When we started the thread for BAC - there is one earlier than the BAC warrants thread - enthusiasm was muted including outright disdain for the idea.  Do you think that wont happen again with oil stocks. 

[Uccmal]

still no names.... and your thesis is 100% reliant on oil prices staying down for a while. so you're playing the same game the oil bulls are. trying to predict the future price of oil.

 

but here's the thing. unless demand down ticks, somebody has to produce that oil. and oil is a depleting resource. if you are predicting a collapse in demand that's one thing. that's a global depression. and you can make a lot of money for yourself if you are right about that. but outside that, we pretty much know the demand picture of the next 5 years for oil. that oil has to be produced, and I don't think all that oil can be produced if prices are under $70.

 

I am going to turn this around on you Wellmount.  If you are so certain name some that will survive where you wont lose 50% of your capital along the way. 

 

And Who says oil cannot be produced for under $70.  It was done for most of producing history (inflation adjusted).  I am not willing to wade into this scrum right now.  Too much is based on speculation. 

[Guest wellmont]

it doesn't really matter when people here started buying banks. this forum is not the arbiter of fundamental value. :) most simply took their cue from Bruce Berkowitz who gave the all clear. cloning ftw!

 

buying stocks and many financial stocks in late 2008 was a home run. especially the debt of financial companies. the market has already cut the stock prices of many oil and gas names. but there is no calamity is there? there is no threat to the system. no great destruction of wealth. it's a very normal commodity cycle. everybody is bearish at the bottom of cycles. go back and read boards from early 2009. end of the world stuff.

[Guest wellmont]

still no names.... and your thesis is 100% reliant on oil prices staying down for a while. so you're playing the same game the oil bulls are. trying to predict the future price of oil.

 

but here's the thing. unless demand down ticks, somebody has to produce that oil. and oil is a depleting resource. if you are predicting a collapse in demand that's one thing. that's a global depression. and you can make a lot of money for yourself if you are right about that. but outside that, we pretty much know the demand picture of the next 5 years for oil. that oil has to be produced, and I don't think all that oil can be produced if prices are under $70.

 

I am going to turn this around on you Wellmount.  If you are so certain name some that will survive where you wont lose 50% of your capital along the way. 

 

And Who says oil cannot be produced for under $70.  It was done for most of producing history (inflation adjusted).  I am not willing to wade into this scrum right now.  Too much is based on speculation.

 

I am not the one predicting gloom and doom because commodities are down. I see a muddle through. I asked the doomsayers to get specific because to get a big bust you need BIG wealth destruction from big names. I will keep asking the question hoping somebody will get specific so that I can act on it. :)

 

if you listen to oil producers and industry analysts they will tell you that the world's oil can't be supplied for very long at under $70. people need to be able to stay in business and finance production with cash flow. if people can't stay in business, then we don't have enough production. when we don't have enough production we can't meet global demand.

[ni-co]

it doesn't really matter when people here started buying banks. this forum is not the arbiter of fundamental value. :) most simply took their cue from Bruce Berkowitz who gave the all clear. cloning ftw!

 

buying stocks and many financial stocks in late 2008 was a home run. especially the debt of financial companies. the market has already cut the stock prices of many oil and gas names. but there is no calamity is there? there is no threat to the system. no great destruction of wealth. it's a very normal commodity cycle. everybody is bearish at the bottom of cycles. go back and read boards from early 2009. end of the world stuff.

 

I don't know whether buying banks back in 2008 was smart or a crap shoot. In hindsight it appears to be smart. Yet, could you see the FED stepping in like they did at the time? Risk means more things can happen than will happen.

[Guest wellmont]

with that definition of risk no value investor would ever buy anything. we're supposed to be the ones buying on bad news. not wringing our hands over it. buffett wrote his op ed in mid oct 2008, which was way too early in hindsight. but guess what. anybody who followed his advice is one happy camper.

[Guest]

still no names.... and your thesis is 100% reliant on oil prices staying down for a while. so you're playing the same game the oil bulls are. trying to predict the future price of oil.

 

but here's the thing. unless demand down ticks, somebody has to produce that oil. and oil is a depleting resource. if you are predicting a collapse in demand that's one thing. that's a global depression. and you can make a lot of money for yourself if you are right about that. but outside that, we pretty much know the demand picture of the next 5 years for oil. that oil has to be produced, and I don't think all that oil can be produced if prices are under $70.

 

I am going to turn this around on you Wellmount.  If you are so certain name some that will survive where you wont lose 50% of your capital along the way. 

 

And Who says oil cannot be produced for under $70.  It was done for most of producing history (inflation adjusted).  I am not willing to wade into this scrum right now.  Too much is based on speculation.

 

if you listen to oil producers and industry analysts they will tell you that the world's oil can't be supplied for very long at under $70. people need to be able to stay in business and finance production with cash flow. if people can't stay in business, then we don't have enough production. when we don't have enough production we can't meet global demand.

 

That sounds good but is it true?

 

Industry analysts predicted that we wouldn't have a nationwide housing crisis. What if we really do go through a severe recession and demand drops?

 

What is Saudi Arabia's cost of production? Didn't someone say around $25-$30? I want to say it was Pabrai but I could be mistaken there.

 

The other day I was reading about traders buying up oil and putting it into storage. They're doing it because the same trade made a lot of money in 2008. I wonder if the story will end the same way.

[Guest wellmont]

don't look at what it costs SA to produce oil. look at what it costs to finance their society.

[Uccmal]

it doesn't really matter when people here started buying banks. this forum is not the arbiter of fundamental value. :) most simply took their cue from Bruce Berkowitz who gave the all clear. cloning ftw!

 

buying stocks and many financial stocks in late 2008 was a home run. especially the debt of financial companies. the market has already cut the stock prices of many oil and gas names. but there is no calamity is there? there is no threat to the system. no great destruction of wealth. it's a very normal commodity cycle. everybody is bearish at the bottom of cycles. go back and read boards from early 2009. end of the world stuff.

 

Your history is revisionist. People weren't touching banks until the tarp warrants started coming out.  Spring 2009 was bad.  I was investing, and its recorded on this board somewhere, at the very bottom.  Were you?

 

Much later, It was actually Francis Chou who got me interested in the Warrants. 

 

Of course is a normal commodity cycle.  And very possibly right now anyone investing in oil company stocks will be handed their heads.  Oil cycles can take months or possibly years to turn.  Its too early. 

 

[alertmeipp]

it doesn't really matter when people here started buying banks. this forum is not the arbiter of fundamental value. :) most simply took their cue from Bruce Berkowitz who gave the all clear. cloning ftw!

 

buying stocks and many financial stocks in late 2008 was a home run. especially the debt of financial companies. the market has already cut the stock prices of many oil and gas names. but there is no calamity is there? there is no threat to the system. no great destruction of wealth. it's a very normal commodity cycle. everybody is bearish at the bottom of cycles. go back and read boards from early 2009. end of the world stuff.

 

Your history is revisionist. People weren't touching banks until the tarp warrants started coming out.  Spring 2009 was bad.  I was investing, and its recorded on this board somewhere, at the very bottom.  Were you?

 

Much later, It was actually Francis Chou who got me interested in the Warrants. 

 

Of course is a normal commodity cycle.  And very possibly right now anyone investing in oil company stocks will be handed their heads.  Oil cycles can take months or possibly years to turn.  Its too early.

 

Did u sell all your Pennwest? I remember you were pretty bullish last year on it.

 

 

[alertmeipp]

still no names.... and your thesis is 100% reliant on oil prices staying down for a while. so you're playing the same game the oil bulls are. trying to predict the future price of oil.

 

but here's the thing. unless demand down ticks, somebody has to produce that oil. and oil is a depleting resource. if you are predicting a collapse in demand that's one thing. that's a global depression. and you can make a lot of money for yourself if you are right about that. but outside that, we pretty much know the demand picture of the next 5 years for oil. that oil has to be produced, and I don't think all that oil can be produced if prices are under $70.

 

I am going to turn this around on you Wellmount.  If you are so certain name some that will survive where you wont lose 50% of your capital along the way. 

 

And Who says oil cannot be produced for under $70.  It was done for most of producing history (inflation adjusted).  I am not willing to wade into this scrum right now.  Too much is based on speculation.

 

if you listen to oil producers and industry analysts they will tell you that the world's oil can't be supplied for very long at under $70. people need to be able to stay in business and finance production with cash flow. if people can't stay in business, then we don't have enough production. when we don't have enough production we can't meet global demand.

 

That sounds good but is it true?

 

Industry analysts predicted that we wouldn't have a nationwide housing crisis. What if we really do go through a severe recession and demand drops?

 

What is Saudi Arabia's cost of production? Didn't someone say around $25-$30? I want to say it was Pabrai but I could be mistaken there.

 

The other day I was reading about traders buying up oil and putting it into storage. They're doing it because the same trade made a lot of money in 2008. I wonder if the story will end the same way.

 

These traders pretty much have profit locked in already.

[Cardboard]

Oil IMO was the canary in the coal mine and we are starting to see it big time in China. Numbers tonight were not good.

 

Right now, this very low price for oil is a huge benefit to importers such as China, Japan and Europe.

 

While the U.S. still imports over half its needs, I remain unconvinced of the net benefit as 13% of all jobs created since the Great Recession were directly tied to energy. I would suggest that it is much higher than that when you add steel, pumps, electrical components and everything related. Quality of these jobs vs the others also matter.

 

However, besides numbers, IMO it is the psychological impact that is the biggest issue since it has been taken down much too far, way too fast by greedy shorts. Instead of just being a nice boost to the economy (say oil at 60-70$ to work out the oversupply), this dramatic sell-off is making people take a pause and asking questions. They now worry about deflation and a recession ahead.

 

Cardboard

[meiroy]

Do people actually play dominoes these days? 

 

There's a row of dominoes lined up on some sacred hill somewhere, since beginning of time just waiting for the right moment to start falling one by one?

 

Are you guys like having picnic around that hill and as the first piece falls you then run to a higher hill just so you could look at the dominoes pieces falling down on that little hill below?

 

Is this hill is also the home to the tree of knives？

 

 

 

 

 

[meiroy]

Oil IMO was the canary in the coal mine and we are starting to see it big time in China. Numbers tonight were not good.

 

Right now, this very low price for oil is a huge benefit to importers such as China, Japan and Europe.

 

While the U.S. still imports over half its needs, I remain unconvinced of the net benefit as 13% of all jobs created since the Great Recession were directly tied to energy. I would suggest that it is much higher than that when you add steel, pumps, electrical components and everything related. Quality of these jobs vs the others also matter.

 

However, besides numbers, IMO it is the psychological impact that is the biggest issue since it has been taken down much too far, way too fast by greedy shorts. Instead of just being a nice boost to the economy (say oil at 60-70$ to work out the oversupply), this dramatic sell-off is making people take a pause and asking questions. They now worry about deflation and a recession ahead.

 

Cardboard

 

1. If we are looking for drunk birds stumbling out of a coal mine than other commodities such as iron ore were tweeting long before oil. Harder to manipulate such commodities compared to oil.

 

2. Indeed some of the oil drop is due to decreasing demand in China.

 

3. Commodities will continue to crash of course due to that and decrease in oversupply in China.

 

4. Adjustment in oversupply is inflationary, not deflationary, in the longer run.

 

5. It has far greater benefit to the USA with a strong currency than to a country with weak currency.

 

6. Weak currency is not a magical solution to everything and for sure not a solution for Japan or China.

 

7. China importing mass quantities of oil is very speculative, keeping in mind the decrease in growth.

 

7. It's definitely all connected.

 

8. Obviously I can't count.

 

 

[original mungerville]

Honestly, I may be totally wrong on the direct oil price impact on the U.S. economy. However, I think that some do not remember how much of a saving grace this was to U.S. employment after 08-09. These jobs were not come back jobs but, totally new ones. It was even called the industrial revolution for a while. GE is one company that benefited tremendously from that trend and invested heavily to produce the equipment necessary for oil & gas. Steel producers benefited. All these plants are not located in the producing States. Rail roads such as Burlington got really busy because of the oil boom. I don't think that people realize how big this is. It did not exist before 08.

 

High oil prices used to be really bad for the U.S. when it was importing almost all of it. It was obvious. But, now that it is producing it and the kind of capital being spent to drill, collect, maintain and transport it, how big of an impact is it to the economy?

 

On the other hand, I am certain that the high USD will be a large drag on S&P earnings. If earnings forecasts are down along with uncertainty due to unpredictable currency movements and you have a recipe for a big down year. Then it hurts pension accounts, the rich, etc., confidence goes down and the economy suffers.

 

Cardboard

 

Gundlach from Doubleline said something like the oil boom produced ALL the jobs since the recession. I have not double checked that for accuracy though.

[Cardboard]

Regarding names, I would tend to invest with a restructuring mentality in the energy space. So quality of assets matter, not a hedge book that will expire in 18 months or a clean looking capital structure.

 

Sam Zell mentioned that he was looking and investing in bonds of energy producers since they all came down by a similar percentage if the enterprise was seen as weak with little regards to the quality of the assets backing these bonds.

 

The same is true for common shares of producers. Higher debt than average and a small hedge book = share price down 70 to 90% since June.

 

PWT is great IMO since they have great assets and are now very well managed operationally. When you start looking at metrics such as Entreprise Value per BOE produced, EV per BOE in the ground and netbacks, you realize quickly how crazy cheap it is. No need to be highly optimistic about the oil price.

 

Nawar at Investor Village makes a solid case.

 

Cardboard

[original mungerville]

with that definition of risk no value investor would ever buy anything. we're supposed to be the ones buying on bad news. not wringing our hands over it. buffett wrote his op ed in mid oct 2008, which was way too early in hindsight. but guess what. anybody who followed his advice is one happy camper.

 

Sure, if I roll the dice and hit it and make billions I'd be happy as well but that in no way makes it a good bet. To bet big on banks in 2008, you had to bet that essentially the entire US financial system would be bailed out in relatively short-order and the common shares would not be totally wiped out. If you were sure of that, you could place a big bet. If you were not so sure, maybe you wait for the bail out, and place the bet once attractive asymmetrical risk-reward instruments were available - ie the warrants. Or, like Buffett, you buy more senior preferreds with warrants attached - so you are protected beyond what the common offered you.

 

 

[original mungerville]

Oil IMO was the canary in the coal mine and we are starting to see it big time in China. Numbers tonight were not good.

 

Right now, this very low price for oil is a huge benefit to importers such as China, Japan and Europe.

 

While the U.S. still imports over half its needs, I remain unconvinced of the net benefit as 13% of all jobs created since the Great Recession were directly tied to energy. I would suggest that it is much higher than that when you add steel, pumps, electrical components and everything related. Quality of these jobs vs the others also matter.

 

However, besides numbers, IMO it is the psychological impact that is the biggest issue since it has been taken down much too far, way too fast by greedy shorts. Instead of just being a nice boost to the economy (say oil at 60-70$ to work out the oversupply), this dramatic sell-off is making people take a pause and asking questions. They now worry about deflation and a recession ahead.

 

Cardboard

 

Also, its not like its just oil. Last time I checked all metals (except gold) were down over the past year or so. European bond rates are negative, US 10-year below 1.7%, Euro and Yen down a lot, Canadian dollar tanked.  There are a lot of markets pointing to something. 

[original mungerville]

I never advocated "betting big" on the banks in 2008. I said buying some of them in 2008 would have been a home run. even though they bottomed out months later. this is the problem when we don't deal in specifics. I don't consider buying a share in a good business "rolling the dice"....

 

Nobody will disagree with you there. Its not possible to disagree because its obvious. Indeed, if you bought some of them in 2008, you would have hit a home run for whatever portion of your portfolio you put into them. Nobody can disagree with that statement. But that statement is of little use to this discussion - which is my point.

[original mungerville]

with that definition of risk no value investor would ever buy anything. we're supposed to be the ones buying on bad news. not wringing our hands over it. buffett wrote his op ed in mid oct 2008, which was way too early in hindsight. but guess what. anybody who followed his advice is one happy camper.

 

Sure, if I roll the dice and hit it and make billions I'd be happy as well but that in no way makes it a good bet. To bet big on banks in 2008, you had to bet that essentially the entire US financial system would be bailed out in relatively short-order and the common shares would not be totally wiped out. If you were sure of that, you could place a big bet. If you were not so sure, maybe you wait for the bail out, and place the bet once attractive asymmetrical risk-reward instruments were available - ie the warrants. Or, like Buffett, you buy more senior preferreds with warrants attached - so you are protected beyond what the common offered you.

 

Value investors are NOT the ones who are supposed to be buying on bad news. That is what contrarian investors are supposed to do. It can work well IF, on that bad news, the stock falls far below the intrinsic value of the company. The job of the value investor is to make that determination and not just go around buying on bad news.  Anyway, you and we all know that already.