MAY MONTH END PERFORMANCE SUMMARY AND REPORT
May Performance: +6.44% May S&P 500: -6.29% YTD Performance: +21.09% YTD S&P 500: +4.19% *There are some portions of this report that are for investors only so I cut them out. It may seem choppy because of that fact. May performance was led by a combination of good stock picking and disciplined money management. The very simple act of cutting out losers, while allowing winners to ride without any preconceived targets in mind paid off during May. In particular, the investment in SYNC (originally initiated in March) has blossomed into the first 100% gainer in the portfolio for the year. Small-cap strategies, at their essence, seek out opportunities like SYNC because of the potential for this type of return. To get in the way of such an opportunity simply because you are paranoid about the possibility of a profit disappearing is an amateur's game. My philosophy with respect to investing keys off of building gains early in the year, in order to be able to leverage those gains as the year progresses. The attitude of pulling back once a respectable target is achieved should not be considered within the framework of this philosophy. Instead, a responsible attitude towards risk is taken that allows the fund manager to take on concentrated positions in well thought out investments. What is important to realize about the gains in May is that they were achieved within a portfolio that was in a 75% cash position for the majority of the month, ending the month at an even more conservative 50% invested of capital. The possibility remains reasonably high that before the end of June the portfolio could move to a 100% cash position should current market weakness persist. My long-term trend indicator is fairly close to turning negative, joining the intermediate and short-term indicator on the bearish side. These are essentially volatility guards or risk cushions that allow me as a money manager the peace of mind to know that regardless of the market situation there is a mechanical side to the portfolio that simply overrides my feelings for a stock or an entire portfolio of stocks. This is an important component that is unfortunately missing from the repertoire of a majority of fund managers today. With respect to opportunities in individual names, over the past week especially, a number of companies have popped onto my radar screen that I would be allocating money into right now if market conditions were solid. Given the unstable environment, I am putting these names on ice, so to speak, for enjoyment at a later date. Through the journey of professional self-discovery I am finding that the more I ignore the macro picture,...
A TECHNICAL LOOK AT SYNC AND AUTH
A look at two of my current holdings. click chart to enlarge
HOW GUYS WITH USELESS DEGREES AND AN INEXPERIENCED RETAIL INVESTOR ARE CREATING A BUYING OPPORTUNITY IN FACEBOOK
I have resisted putting up a dedicated post about Facebook. I didn't want to add to the already crowded field of Facebook and social media experts postulating about the future of the company as if they were sitting right beside Peter Thiel when he threw down the $500,000 that would eventually become billions. But today I had enough. I witnessed a sour-faced attitude towards the stock today that was completely one-sided, with very few individuals, analysts or responsible professionals looking at the contrary angle. I don't know how deep this hole that it is in will go. I do feel that anywhere in the 20 range is a good buy for the stock. With the mid-20s being extremely attractive. I'm not in the business of mega-cap names. If I choose to play social media I will likely gravitate back towards YELP, which thanks to the gods of risk aversion, I cut out of the portfolio weeks ago with a manageable loss. What follows are a couple illustrations that demonstrate how the financial markets have a difficult time initially valuing names that are impossible for those touting useless degrees and credentials to model a valuation. Their valuation models for names such as FB will always point to absurdly overvalued because these individuals, through their years of schooling, having learned that having vision...actual raw vision...is a liability and gets in the way of facts. When facts rule your life it is impossible to have vision about any subject, whether the future of a company, the economy or whether you will ever have sex again without pulling out an Andrew Jackson. So in one corner you have the useless degree types and in the other you have the typical retail investor who only got involved with Facebook because they saw the movie Social Network and spend an hour on Facebook revealing intimate personal details about themselves, like what kind of cheese they hate on a turkey sandwich or how the colors of the cake at a 3 year old's birthday party didn't match her mother's dress. With these two concrete pillars supporting your investment thesis, how can one go wrong? Here's how: The stock falls under the weight of both of these groups right from the onset and doesn't look back. I didn't realize how heavy the weight of the casual investor would be in Facebook until I, like everyone else, witnessed the free fall the company has taken part in since its inception. The guys with the useless degrees are putting together models that are calling Facebook overvalued. Meanwhile, you have a core group of inexperienced investors causing havoc with the...
TWO SIMPLE METHODS OF RISK-CONTROL EVERY INVESTOR SHOULD LIVE BY
This forum is constantly evolving. It started out as a means of finding undervalued micro-cap stocks that are involved in a "special situation." Over the months to follow, the website began morphing and I decided to simply allow it to take shape without any preconditions. At one point I began posting more short-term swing trades, eventually deciding to stick to what I do best -- researching and investing in small-cap stocks without the noise of much else attached to it. I want this over the years to become a specialized forum for sharing investment ideas, as well as general market thoughts. I'm not in this to gain tens of thousands of daily visits so that I can begin attracting advertising revenue, followed by appearances on CNBC and FOX News. What I do here on a daily basis has a niche. That niche is where I want to focus my efforts. Providing the best information possible so that over a significant period of time, everyone will gain. Those gains will come if there is discipline attached to what you do. I can provide top-notch analysis here on a daily basis, but if you choose to invest in a manner that only looks at reward without assessing risk then you won't benefit from what I am doing here. In fact, you won't benefit from any analysis whatsoever, regardless of its brilliance. Focusing on reward only without looking at risk is a disease for investors. Not having a strategy to get you out of the markets when the ground beneath you is disintegrating is a severe liability. One leads to the other. Meaning that those who focus on reward only won't have the sense to begin evacuating the premises once the ground beneath them begins to disintegrate because they fear missing out on the potential reward. This type of thinking needs to be abolished from your mental Rolodex of ingrained thoughts. In a month where the markets are down substantially, the current portfolios I manage are more or less unchanged. That is with the fact that I came into the month 100% long in volatile small-cap names. And the method for getting there is as simple a method as possible. It involves two distinct risk-control strategies that every investor should live by: 1. I have allowed trend-driven indicators to take me into a higher percentage of cash as the markets have weakened. This effectively cushions the blow of any downtrend. And if followed correctly, this type of method will take you to 100% cash ahead of calamitous market falls such as 2008. 2. I have kept the strongest names in my portfolio and sold...
RISK MANAGEMENT AND WHALE RIDING
During the trading day I tweeted the following: A difficult choice to liquidate GSIG. It's a company that - barring an economic meltdown over the next 12 months - will be well above current prices. It came down to a question of the maturity of the trade, as well as how much influence the general market would have over the company. By maturity I mean that the company is well past their restructuring stage and has resumed normal operations. They do not have the same concept edge that SYNC and AUTH have. And they are not in the midst of an activist promotion in the same manner as ATNY. I also chose to keep SYNC because it has been my best performer of the 2nd quarter thus far. Holding onto winners is imperative. I'm surprised at how jittery traders get when they catch a fish in these oceans. Being afraid to get bit and releasing the fish back in the water will only get you so far. GSIG will be at the top of my list for a rebuy should my trend indicators turn back up over the next few weeks or months due to the outstanding fundamentals, cheap valuation and management team involved. Now it is all about SYNC, ATNY and AUTH. The worst performer among the bunch is ATNY. Wouldn't you know it, from a purely fundamental standpoint, ATNY is also the most attractively valued. I have no plans on adding to the position. I am perfectly comfortable holding here despite the poor showing thus far. The research on ATNY is here. AUTH I have been pleasantly surprised with given the weak market conditions. It is only a matter of time before the type of mobile security concept that AUTH produces catches on with consumers and investors. It is the type of stock that can easily create a buzz if the right set of conditions comes into play. A concept company with some very solid fundamentals much like SYNC. The research for AUTH is here. If my trend indicators were pointing upward I would be looking to add to my AUTH position on further strength. Unfortunately, I'm stalled out from adding any risk for the time being. SYNC is coming along as expected. I understand that the volatility can be unnerving at times, but it comes with the territory. What is going on with SYNC is not at all a classic pump and dump scheme as some seem to think. The concept of a pump and dump takes place with a company that wouldn't otherwise merit investment if not for the promoters creating a false demand for...
SPIDER-DEMONS
During the trading day I tweeted the following: SYNC was initiated on March 29th. While I believe the upside remains substantial from here, my intermediate term trend indicator flipped to sell today. My job isn't to fall in love with companies based on my analysis. But rather to manage risk appropriately based on prevailing market conditions. I am in the process of liquidating and will have more reports tomorrow before the close. Currently, I am nearing a 50% cash position. It is always a difficult proposition to pick and choose between companies that you deeply believe in with every ounce of your analytical soul. I have, however, seen it too many times. When the market gets into THAT mode, it doesn't care about anything but devouring the hearts and minds of believers. It will take whatever faith you have in rational analysis - whether technical or fundamental - and turn that faith into your very own living nightmare. While we could very well be nearing a bottom for this move down, we are also nearing a point where things get dangerous. When that danger approaches you had better be sure you have a fortified plan in place to deal with the repercussions of a market that moves swiftly and takes no prisoners. I hate to bring up the Facebook IPO because it has become the only topic of conversation amongst every blogger, analyst and pundit since the IPO. I must, however, comment as there are some very real consequences for investors. First of all, I will say that I believe Facebook as a company will flourish in the years ahead. Their revenue models are literally in the first inning of development. They bring together 500 million people per day that spend more time on the website than any other. Whereas Google is a tool that you use to discover information, spending no more than a few minutes at a time on, Facebook is a destination. The uses of this virtual gathering place for all peoples of the world is just being tapped. It will take vision to understand and stick with the company as an investment. All those analysts who are attempting to gauge the company using traditional earnings models may look like geniuses now, but I assure you that they will look like fools in the coming years. Over the short to intermediate term what has occurred over the past few business days is nothing short of a disaster for both the market and the company. An already jaded retail investor that literally considers the stock market a playground for demons with suits and ties was gang-raped by them...
HAUNTING EMOTIONAL CONSEQUENCES
What started as a mild flu has officially turned into the beginning stages of a financial black plague. Looking through my various daily research points, there is literally not one thing to hang your hat on if you are bullish. All of my support areas have been broken. The most important generational trajectory of all in the Dow has been obliterated. The Facebook IPO came and went, resulting in thousands of articles, tweets and clever quips. But nothing of substance. All of the above mentioned dark clouds hanging over each one of our heads is absolutely 1o0% necessary in order to see that elusive bottom that everyone has been searching for. But hold on one second my fellow poopy fingered, bottom pickers. Just because the worst may be close to being over doesn't mean that a future of Sunny Delight, Raisinettes and juggling clowns awaits us. I published an important study just two days ago with respect to the velocity of fear. The study basically tells of relatively flat trading conditions with the possibility of further negative numbers over both a one month and three month trading period when fear develops as quickly as it has in recent weeks. And it makes perfect sense. Gradual fear built up over several months has the potential to be thought through, analyzed and ultimately dismissed as the data develops. As human beings, when there is a sudden onset of extreme fear, we are less likely to perform the proper analysis or dissection of pertinent facts, simply choosing to act on emotions alone. It is the difference between a burglar breaking into your home at 2pm, in broad daylight, while you cut carrots in the kitchen and see him crawling through your daffodils and a burglar breaking in at 4am while you are fast asleep. Both are frightening experiences. However, in the first case you have the opportunity to slowly build and analyze your fear, as well as your options, in order to come to viable conclusion as to what the best course of action will be. In the second case, the sudden spike in fear you experience will lead to more drastic and emotional decisions. Equally as important is the long-lasting emotional trauma that comes with a sudden spike in fear. What we have now is the equivalent of the 4am burglar. The residents of the bull market have waken up and will soon have the burglar hog-tied. However, the emotional trauma resulting from such an experience will remain with them. And this is confirmed by looking at the chart of the study into the velocity of fear. Here is the point...
MEASURING THE VELOCITY OF FEAR DELIVERS A CURIOUS MESSAGE
By traditional standards it has become accepted practice to look at the wide variety of sentiment based indicators that exist, designate a number based on historical relevance that tells of optimistic or pessimistic feelings and then attempt to construe whether a market should bought or sold. While this may seem like a potentially profitable practice, I am here to tell you that it only gives you a slight edge. Possibly no edge at all given that we are all now contrarians and we are all looking at the same data to develop contrarian-based ideas about the market. I am here to tell you that the competent investor seeking a greater edge must delve deeper. You can't simply look at arbitrary statistics and deem that it is time to buy or sell. Tear those statistics apart by finding new, innovate ways of measuring them. I attempted to that with my series titled "A Fascinating Interpretation of the Put/Call Ratio: Volume 1" posted in January. And followed up with a couple more ways of interpreting the put/call. If you read the articles, you will see how spot on the studies proved to be. On January 14th, I proclaimed the following as a result of my findings from these studies: If this study holds correct, then we can expect a top to approach around the April-May time frame, with the Dow seeing 13,000 and the S&P 1350 before all is said and done. Tonight I decided to reveal another study given the crucial space in time we are currently in with relation to the financial markets and the macro-events that are influencing the day to day volatility. In this study, I looked at the influence that a parabolic rise in pessimism as measured by the put/call ratio has on the markets over a 1 month and 3 month time frame. I am using the 2 day and 5 day moving averages of the combined put/call ratio for the data and MACD to measure the velocity of the increase. Over the past week we have experienced an extremely rare event. So rare that it has only taken place 3 times prior to now over the past 5 years. That event is a rise in pessimism that has so much velocity behind it that it drives the MACD reading on the 2/5 day put/call ratio over .08. In the chart that follows, I measured where the S&P 500 was 1 month and 3 months after such an event. A small sample size here doesn't take away from its significance: click chart to enlarge While I do believe that we will be significantly higher than...