April 1, 2016
YTD 1Q 2016
- 17 Mile YTD Gross: -55.1%
- 17 Mile YTD Net: -57.1%
- DWCFT YTD: .9%
- 17 Mile YTD Net Alpha: -58%
- Gross: -39.3%
- Net: -45.6%
- DWCFT: 8.2%
It’s been a lovely five months.
Early November 2015 Thru Year-End
At the peak of the market in very early November 2015 I was up almost 50% YTD, and stated in my Trading notes that I was getting antsy about locking in good performance for the year. But because I had long ago vowed to never worry about the calendar with regard to investment decisions, I largely decided to stick with my bullish Energy bets (WMB, BWP, CRC).
As the Energy patch – in all its forms – was taken to the woodshed into year-end 2015, I began to consolidate the portfolio around what I believed to be a fantastic set-up in WMB and BWP heading into the new year: tax-loss selling + credit-related shorting + CEF deleveraging…and with WMB, the overhang of the ETE deal.
With regard to market exposure – the long-term concerns I noted on 10/2/15 when I went back to full exposure were coming to fruition into year-end; but I believed sentiment was such that at worst we would muddle thru, but more likely rally, into a potentially vicious ‘sell in May’ season.
So, I came into 2016 at maximum exposure and big concentrated positions in BWP and WMB.
Clearly I was wrong on every front.
From 2016 Day 1 it was clear the nature of the market had changed; and within the first week I decided to reduce exposure and wait for more extreme sentiment readings to get in front of what I believed to be a likely rally into the ‘sell in May’ season. Unfortunately I did not reduce WMB, as I was lulled into the relatively strong performance in the face of a bad market the first couple of trading days.
As WMB and ETE declined in conjunction with the market, oil, and every boneheaded utterance from ETE’s now-former CFO Jamie Welch, I began to trade around the position(s) in order to limit the damage/position myself for maximum capitulation. I believed the bottom was in on the rally into 1/26 – as it came on massive volume with material amounts of call buying – but the stock soon began a slow bleed into the 2/5 weekend.
Early in the week ending 2/5 I cut the bulk of the ETE position and positioned for what I believed to be a final market and ETE bottom on ‘Jobs Friday’. I got the Friday jobs-related decline I was looking for, and re-initiated BWP and added back half the ETE position on weakness, as I believed ETE was ‘acting’ weak enough to where I could add more on further weakness.
After the market close on 2/5, ETE released an 8K announcing the ouster of CFO Jamie Welch. Given the vagueness of the 8K – and the fact that it was released after hours on a Friday – I knew the following Monday would be bad. It was just a matter of degree. But when the market opened Monday to the rumor of an impending CHK bankruptcy, both ETE and WMB plummeted more than 40% in the opening 30 minutes with the deal spread blowing out to more than 40% gross.
As painful as it was, I was ecstatic. I sold out of DISH and BWP, and made my final purchases of WMB and ETE, believing this was THE final capitulation moment I was looking for. But I boxed myself in, not leaving myself enough room (from a margin standpoint) to withstand a further decline in ETE. My purchases the morning of 2/8 were around $4.75, and ETE went on to close the day at $4, leaving me on the brink of a margin call. Due to trading restrictions at my day job, I was unable to sell non-ETE holdings for another 5-10 days or so; and admittedly mentally shaken by the continued liquidation of the stock into the 2/8 bell, I ‘forced’ myself to capitulate on ETE.
Given my apparent failure to navigate the exact situation I was looking for, the ‘locking in’ of horrific performance, and in all reality what would have been a ‘liquidation’ of an actual fund, I decided to shut things down. But the ‘shut down’ was merely on the surface, as I continued to operate behind the scenes.
I went into the 2/8 trading day with the mindset that I was at a ‘do or die’ time for my strategy. As I have explained ad nauseum, I run an aggressive strategy that is meant for 5% of a portfolio…not 100% of granny’s net worth. So, I knew that I needed to prove myself thru a time like this, and that if I could not, then it is not a viable strategy. In hindsight – while potentially overly aggressive, even for my strategy – my thought process and positioning was actually quite good…had I not committed the ultimate investment sin: turning temporary downside volatility into permanent impairment. But because I went into the situation doubting myself, I blocked the mindset I typically have: this is a massive buying opportunity; figure out how to survive.
I continued to operate behind the scenes, but due to the somewhat traumatic mental experience from 2/8, I began to over-trade in an attempt to make up performance.
After unsuccessfully trading around ETE and WMB into late February, I decided to do two things: 1) exit the ETE situation all together, but monitor closely from the sidelines; and 2) focus on positioning for a likely weak market for the duration of 2016.
ETE. Big July 2016 $15 put open interest continues to build in ETE; and with the stock behaving like death in the equity/crude oil run-up, I believe yet another big capitulation moment will arrive. Perhaps in the form of a deal close + dividend cut. Worst case scenario, the deal breaks, ETE rises, and WMB presents a big capitulation opportunity. But I believe it is rather apparent that ETE is locked into this deal, and more than likely it will need to cut in order to assuage the debt markets.
Market. As I outlined in yesterday’s post, I believe the weight of the evidence points firmly to a big cycle market top in the works. And even if I am stopped out of my bearish bet, activity on the long side will be limited to opportunistic trading (ETE/WMB, etc) and merger arb.
The great Ed Borgato said on Twitter today: “Being a good investor means getting through periods without any evidence that you are.”
After five down months in a row, and sitting on a massive decline, there is not one public shred of evidence that I have any business managing money. Not one.
But from a personal introspection standpoint, looking at my decision making around the 2/8 debacle and the subsequent performance of ETE sans my participation gives me great confidence. At the time I told myself to ‘give it one month, give it one month’. Had I been able to mentally give it one month, this would be a completely different post.
As I will outline in an investment letter, the lessons learned since mid-2015 have been numerous. If I can ‘get thru’ this period as Mr. Borgato says, I will be in good shape.