THIS DOW 12,000/S&P 1,300 THING
Never underestimate the power of round numbers on market averages and individual stocks. This is lesson I forgot coming into this week, as I wasn't expecting the type of upmove we have seen here recently. Round numbers act as a flashing billboard...it's the single best advertisement for the markets there is. It serves as means of getting sideline money to act. News reports that typically give 15 seconds to the market, devote a 3 minute segment to the markets and back it up with carefully selected fundamental facts that contradict what was said about the economy in an earlier segment. It's journalistic curve-fitting at its best. As all of you who have been reading the postings on this blog know, last year was magnificent on the upside with a greater than triple digit percentage gain for our accounts. This year, however, has started off with a thud, as our names have been slowly sliding back to Earth following the moon shot they had in the last six months of 2010. I added to our oil/gas spin-off play today at what I think will be seen as an absurdly attractive prices in 12 months. I am also looking at adding to our subprime/consumer credit restructuring play, as it has been very strong since we initiated the position in late December 2010. We have almost liquidated our technology bankruptcy reorg play completely after it has seen a gain of 400% since we first initiated the position almost exactly one year ago. Have a very small portion remaining. Once we fully liquidate the position, I will be describing the investment, thoughts behind it and analysis completely on this website. I feel it will be very educational for even the most experienced of investors. We are also getting set to release a new pick to all members in the coming days. I like to describe it as the safest 200% gain you can potentially have in a stock with a market cap under $50 million. It's heavily insider owned, has an activist angle at work and is tremendously undervalued. If you haven't tried our service and are looking for long-term investments that have tremendous upside, are well researched and have a very high success rate...give Zenpenny a shot. Click here to subscribe. That's all for now. Hope your day was a peaceful...
APPLYING POKER THEORY TO SPECULATION IN THE FINANCIAL MARKETS
Just to give a little background, after I closed down my hedge fund, I really didn't know which way to go. I knew I didn't want to go back to Wall Street type job. Those few Wall Street jobs that I would have considered, I didn't have the pedigree for. I had played poker in the past fairly regularly. I had studied it and been profitable playing. I had never considered playing poker for a job or to make a living. I gave it a shot, however. And for a period of some months, my only income came from the poker tables. It got tiresome very quickly, and I decided to start a company completely outside of the financial markets following my poker adventure. Nevertheless, over the years that I have been playing, I have learned that having a poker mindset is advantageous in the financial markets. I approach the financial markets with the same odds and probability mindset that I used in poker. It is a similar game, the financial markets, in that you are using imperfect information to make judgments about the future actions or intentions of your opponent. In poker, it is best to attempt to assign a range of hands to your opponent based on their actions as each card comes out and in reaction to your aggressiveness or passiveness. In the markets, you attempt to gauge the markets intentions by gauging the prevailing psychology and attempting to understand the deception that the market routinely tries to sell its participants. In both cases, you are reacting to an imperfect set of data that you must decipher in order to correctly assess your opponents true intentions. I also use the same method of "table selection" or "game selection" that I did in poker. But instead of a table or game to sit at, in the financial markets you pick a sector or market cap that you are comfortable investing in. Table selection refers to choosing tables that are littered with "fish", "donkeys" or "suckers", if you prefer. Game selection refers to picking a game where you have the greatest edge. The general theory of poker states that the better you are, the more hands you want to play with opponents who do not have your skill-set. Therefore, it is best to select games with perhaps 5 opponents, as opposed to 8. Or, if you are THAT good, choose a game with 3 opponents, instead of 5. And the best of the best, choose to play 1 on 1, as this is where they are able to demonstrate and profit from their edges the most. I have...
TAKING PROFITS HERE CAN’T HURT US. AND WHY BEING AN ALIEN IS PROFITABLE IN FINANCE.
So we're taking more of our technology bankruptcy (now well out of bankruptcy) play off the board here. It's moved down to a small - mid sized position. Not because I am bearish on the company at all...but rather it has become too large for us as our niche is companies trading under $50 million in market cap. This one is now nearing a $400 million market cap (was a $50 million company when we first took a position) and I believe it will be susceptible to market givebacks and instability going forward. We are also making room for additions to some current names and the purchase of a new name. Still working on the research...and it will be released to current members in the near future. Our portfolio, thus far in 2011, has been two stories: sideways or down. Not any violent downside in the least bit. Just some dull, mindless selling, as our holdings work themselves into sideways ranges, awaiting the next move forward. I can't say that this was unexpected, as the run of 6 straight up months that we had last year was due to hit some kind of resistance...namely in the form of profit taking in the new year, as taxes are always more fun when they are deferred for an extra 12 months. It surprises me the number of traders who are uncomfortable with simply sitting tight when the right opportunities do not present themselves. It's a function of inexperience more than anything else. Our nature as human beings is that if we're doing nothing we are lazy, worthless, wasting time etc. What people seem to forget is that the markets prey on human nature. What works as a human in everyday life and as you have been programmed to function in "normal" jobs doesn't work here. At times it pays to be lazy, it pays to do nothing, it pays to be fearful when everyone else is greedy and it pays to be greedy when everyone else is fearful. Be an alien...it's the only path to long-term success in the financial markets that I know...
CHART STUDY: THE PICTURE THE MARKET IS PAINTING IS ABSTRACT AT BEST
True to form, as this rally progresses it becomes more confusing in nature. We have a number of indicators and leaders in the market that are clashing with each other at the moment. Making it difficult to gauge whether we are coming up on a substantial period of trickery and mental mind games imminently or perhaps a little more far off that we suspect? Odds are tilted towards correction/consolidation/gut checks and mind games. Again, I wouldn't be loading the boat up here on the long side...better opportunities will present themselves in the months ahead. Here are a few charts of note: (click on charts to...
TALK OF A BULLISH SUPERCYCLE UPON US?
Minyanville today posted the following research detailing the vast amount of fundamental data (provided in a link within the article) that supports an economic supercycle. The report itself cited everything from demographics in the BRIC and Sub-Saharan African countries, to demand for commodities, to modernization of infrastructure within countries that are catching up to their western counterparts. The report itself is very compelling and I would recommend taking the time to go through it in detail. This type of contrarian view of the economy and all the possible things that could go right globally is exactly what is lacking in today's world of depressive, backward looking research. I have detailed on this site, in the limited number of weeks I have been blogging, how bullish I am on the US financial markets over the long-term. Here are a couple of examples: - 6 reasons to be long term bullish - Rule of thirds I am a big fan of simplification. There is indeed genius in the act of simplifying seemingly complicated questions. The question of where the market is headed and why has a very simple answer. Since the markets are driven by psychology first and fundamentals last....we must look at the psychological component of the market to gauge where its headed, what its intentions are, who its trying to fool etc. The market has built this massive wall of worry into what amounts to nothing more than a sideways consolidation range for the markets over the past 10 years +. Check out the yearly charts below for a clear picture of sideways: It has built up this wall of worry through the dot com bubble bursting. It built up a further wall through 9/11 and the wars that followed. It built up a further wall through the banking, credit and corporate crisis that we faced as the real estate bubble burst. All the meanwhile, with each successive crisis, trust has eroded...faith has vanished and talk of a sustained bull market is looked at with a great deal of skepticism. This massive wall of worry equates to bidders who will drive the market forward as psychology shifts. Large moves in the financial markets happen because there is an abundance of participants who wish to participate, but were fooled into sitting on the sidelines at the most inopportune time. Guess who is sitting on the sidelines? Most people. There is an abundance of global liquidity out there looking for a home. Guess where it's not? In equities. Guess where it will end up? In equities. Bottom line is that there is an abundance of liquidity, an enormous wall of worry,...
THE THOUGHT PROCESS BEHIND A NEW STOCK WE’RE CONSIDERING
Given that we're in the midst of researching a potential new stock for investment, I thought now would be a good time to detail some of the thought process. As any of you who read this site in detail know, our stock investments come in the form of special situations. Special situations, for those of you who don't know, do not simply imply that we think our stocks are special because they sell a cool product or are going to go up 500%. Special situations is a term used to describe stocks that are undergoing a special or unique situation. This mostly comes in the form of some type of restructuring. These companies become special situations, a majority of the time, due to the fact that they are distressed. We have been researching a potential new stock for the past few days. The company, we believe, has potential upside of some 200% from its current price. Everything seems to be falling in line. It's undiscovered, undervalued, has been troubled in the past, has an activist investor stepping in, market cap is below $50 million, management is competent. Everything seems to be in order. However, there is one thing that I am slightly bothered with. While there is an activist investor stepping into the scene here, which provides somewhat of a catalyst going forward. There isn't the type of restructuring or sense of immediacy that comes with a fight. The beauty of restructurings - when a companies management and its primary activist investors are in court fighting it out, or restructuring debt in a number of creative ways, or considering different ways of bringing out the value of a company- is that it gives volatility and a sense of urgency to the stock price. It serves as a catalyst. That's so important. Within the micro-cap sector, there are tons of stocks that simply float sideways...some for years on end. They do absolutely nothing. They are undervalued, under-appreciated...but it doesn't add up to anything. These are classic value traps. The restructuring angle turns a sideways floating row boat into a yellow cigarette boat, with all 4 engines roaring. My primary concern with our newest possible candidate for investment is not whether it will eventually end up going up the 200% we expect...it will. It's not if we'll end up losing money in the stock over the long run...we won't. It's whether the stock will sit sideways for a year or longer, as the restructuring angle is not as defined as it should be. Either way, we will be looking into the stock further today and if we do decide to release...
10 CHARTS THAT TELL US WHAT TO EXPECT IN THE WEEK AHEAD
Click on the charts below to enlarge:
PORTFOLIO UPDATE
Had a nice push on our oil/gas spinoff play, with it ending the day up 5%. Volume was light, however. Our technology restructuring play, biotech restructuring play and subprime restructuring play were more or less unchanged. Yawn. Sideways was only fun when it was made into a film. Glad its the weekend. Tennis, gym, friends, family and sunshine...that's my recipe for contentment. I hope you find yours, as...
OPTION EXPIRATION USED TO BE FUN
Option expiration Friday's used to be fun. Actually, they still are fun once in a great while. However, the fever with which it used to whip traders into a frenzy is for the most part gone. A function I think of institutions having a better handle on it than individual investors, who have become a smaller population of the current financial market demographics. It seems that the powers that be are perfectly content keeping prices around the unchanged level for today. Short of a panicked institution being on the wrong side an option max pain point, I wouldn't count on much out of this market for the rest of today. I think next week, however, will be a different story as the volatility will pick up and the market will demonstrate that it is not yet done with its reckless, rebellion against all the bulls who seem to hardened believers. Again, the long-term is very bullish, but we are in need of a recalibration of the bids and offers in order to see this market have fuel for another leg up. It could take some months. In that time, it will play with your head...make you think you are seeing things that don't exist and cause you to question what you believe in...be forewarned! Our portfolio remains a demonstration of how micro-cap names can indeed function as a market neutral strategy...as we are more or less flat once again. We had about 6 up months in a row coming into 2011...and were due for a break. I am not at all disappointed with this behavior and think it serves to preserve the uptrends in our major holdings. Sitting tight on this option expiration...