Morning Thoughts – Berkshire Bonkers and more Mean Reversion

First off, Berkshire Hathaway has bought a 25% stake in Domion’s Cove Point LNG export facility. What? Seems like I heard something about this months ago, but ignored it. This article from Platts is stating they are to become the “operator” of the facility?

https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/110220-berkshire-hathaway-takes-over-operatorship-of-cove-point-liquefaction-in-us

The link will open in a new tab, and its a short read for those interested. Now Berkshire has full access to a freight train system, and an LNG export facility? Is this Warren’s lifelong dream of having his own train set and playing oilman? I don’t know that those two pieces of the puzzle will fit together; it just seems a bit odd to me for anyone to get into LNG exporting. It may very well be worth the risk. We’ll only hear more news about it, if the whole thing turns to flop.

Natgas production has returned and should remain fairly stable for a while? Hurricane season isn’t completely over, but it’s on the way out. Freezing temperatures and pipeline disruptions should be about all that disrupts production numbers for a while. Neither of which are generally much concern for me; they may provide a surprise bump in pricing for entry/exit.

Bluegold had shared on Twitter a shock to Demand year-over-year. Last year, gas demand spiked, and this year at the same time, demand will be down for the week due to bearish weather. This really just makes for an interesting statistic. Prices are moving appropriately down, but I’ll be slowly increasing my UNG position. Demand will turn around; also the market is still swallowing up the storage surplus as compared to the 5 year average. This will continue to be my bias for a while. Simply put, production is weak, and LNG is insanely strong once again. Until one or both of these factors change, storage will continue to be drawn at a much faster pace against the 5 year average. And… The only reason prices haven’t gotten to $4 yet, is because of the large surplus in gas. It’s going to happen even with a mild winter (barring any major bearish changes to the storage dynamic).

I’m going to add another share to UNG. Like now, at $11.97… I missed a great opportunity to exit both UNG and KOLD on Friday. There will be bigger moves to come.

My positions as of 11/3/2020 premarket

KOLD is already moving against me this morning. I had considered covering the share Friday in after hours trading, and holding the short put. But this is just inviting hazards that I don’t need to be dealing with, so I’ll hold for the next chance to cover.

SLB is looking far better. I feel like my 17 strike call is worth rolling forward now without rolling down. UNL will still hang in there, waiting for $9.5 to $10.

I feel like today would be good for the SLB roll. The election is getting heated up, maybe for some more chaos in the market tomorrow? If Biden wins, will oil prices slide for a short time, dragging SLB along for the ride? If the momentum continues with SLB, the best time to roll is when my call is closest to ATM (at the money). To me, the conservative route would be to go ahead and roll forward now. I’ll have to make up my mind to what date to roll out to, but I know I’ll keep 17 strike, as the premium for this call is once again satisfactory.

SLB is showing to be up in pre-market trading, so I’ll wait and update this post after I’ve rolled SLB forward. I hope to get that chance at market open. I’ll wait a few minutes if SLB is trying to move higher.

Real quick, I’ve built a simple, but not arguably great, strategy to do some continual back-testing in Tradingview. This strategy is using Bollinger Bands (standard deviation) with the principle of mean reversion to theorize a trading pattern. It’s only right 50% of the time… With trailing stops set to the correct sizing, the strategy is winning. Normally I set the strategy to trade 10%, as I wouldn’t want to be misunderstood in claiming that anyone should trade any one strategy with more than that amount. If dealing with other people’s money, I would probably not even trade 10% at a time.

For simplicity sake, I’ve set the strategy to trade 100% of $1000 account with every trade. The reason for trading 100% of $1000, is the “buy and hold equity” option at the bottom of the Profit/Loss chart. The profit/loss chart is the bottom third of the screenshot below. This is a good comparison to show how your account would have performed if you had just bought UNG at the same time the first trade was made. On this chart, the first trade would have been 7/20/2020. The blue area is the profit made/loss, and the pink/orange from the top of the Profit/Loss chart is drawdown. Drawdown is the amount you would lose over a consecutive number of trades and it shows how much you would lose until you make it back. This chart shows nearly 15% max drawdown, that means at one point the strategy was loosing 15% of the account value from the highest point. This is a good enough reason to NEVER trade 100% of your balance on 1 strategy. It could just as easily lose 30% in the next 3 months, because strategies are not always right? I wish I could share more, but I’m out of time. This is just a back test, I’m NOT TRADING THIS. I want to track this and just see how long it takes before it loses, eventually it will lose. Volatility will change and it will lose. Let’s watch and learn together.

UNG on 2 min chart, running my mean reversion strategy (showing 11/2/2020 above). click image to enlarge

I’ll update once I’ve rolled SLB forward. If momentum carries SLB higher, it might be a while, as I want the underlying price to be as close as possible to 17. I’ve bought 1 share if UNG, and I’m sitting on the rest. Good Luck

Oldinvestor

SLB is dancing around, so I decided to roll my 17call forward to 12/4/2020 for an additional 44c in premium.

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