With this post, I am starting a new theme in Caps, and, starting from tomorrow, in my real-life account. Yes, folks, it is time to short this ridiculous oil and gas bubble. The intrinsic value of 90% of companies in this sector is zero.
I will hedge my risk carefully so that I could ignore all the Goldmans and J.P.Morgans in the world even if they decide to produce one last dead cat bounce, but I don't think they will. Because, let's face the truth, the bull market in petroleum is over, and they know it.
Yes, it's over now. I am shorting the oil bubble at the right time.
You don't have to call the top accurately to make money on the short side. You say the best time to short was 2 years ago? You are right, but there was no way to determine that it was the top back then, except by a pure stroke of luck. But getting married to a cost basis is a mistake, as the market has proved again and again. Was it such a bad idea to short builders after the subprime crisis made them "cheap"? Would you red-thumb HGSI after a 50% drop from the peak, or would you kick yourself for missing the first act and wait for a second chance to short it at the peak?
The real market price of oil is $8 a barrel, and Obama is not going to lift a finger to save this bubble from popping. Yet these companies trade as if GS is going to be selling $60 contracts to bagholders forever. This is simply a rerun of the dot-com era, only this time instead of online pets it is decomposed dinosaurs that they are selling.
Now, consider a huge leveraged business like XOM, with $150 billion of debt and $95 billion of cash and investments, and what do you see? A new GM, in the best case. I say, in the best, because the real GM at least returned a good part of its market cap to shareholders through its 8% dividend before giving up the ghost.
But if XOM, COP and CVX might eventually survive as small-cap penny stocks assuming some generosity on the part of Uncle Sam and bondholders, things are even worse at the midsize oil companies and especially nat gas companies. Overleveraged, overinvested, accustomed to bubble prices and lacking the most productive oil wells of Saudi Arabia which alone can generate a profit at a time of TROUGH OIL, these companies face total extinction once the music stops playing.
And the music is getting quieter and quieter. The supply of believers in Peak Oil is dwindling, and the talk about limited supply of oil will soon become a mauvais ton. On the demand side, the Chinese economic miracle is ending with a most spectacular bust, leaving bagholders with pockets full of contracts and futures for oil that nobody will need in the next 20 years. And the smart speculators are getting ready to ride the price all the way down to $8 where it will find a bottom and stay at that bottom until 2035 or so. When they openly discuss $10 oil on CNBC, you know that the game is up and that most specialists have already left the market.
It will be a long and profitable ride, at the end of which all the money made by commodity bugs will go to its rightful owners - the shorts who have the discipline and patience to stay the course, fixing the profits, and avoiding short squeeze situations. And each time commodity bugs will get aboard the sinking ship, attracted by cheap valuations...only these valuations will just keep getting better and better.
So let the game begin. First it will be a dozen of red thumbs, then 20, 30, 50, and eventually my Caps portfolio will become one big sector bet. We are entering the era of trough oil. Position your portfolio accordingly.