JUNE MONTH END SUMMARY AND LOOKING AHEAD TO JULY
June Performance: +2.45% S&P 500 June Performance: +3.97%
YTD Performance: +24.06% S&P 500 YTD Performance: +8.31%
Portfolio highlights for June:
- Went from a 70% cash position during the first week of the month to a 25% cash position by the close of the month.
- Took a profit of 37% on AUTH position after initiating the position in early May.
- Initiated a position in SPRT during the middle of the month. Position showing a gain of over 20% in just two weeks.
- The largest portfolio position SYNC finished the month more or less flat. It is consolidating near all-time highs and looks poised for a strong month of July.
- ATNY posted a gain of 15% for the month of June, mitigating a substantial portion of the current unrealized loss.
Portfolio lowlights for June:
- Once again managed to get whipsawed within what has turned into a frustrating range for GSIG. Initiated a position in the stock on June 19th with the hopes that the value in the name will be realized in the months ahead. If poor performance continues this would be the first position to be liquidated. A strong market backdrop in July should, at a minimum, allow GSIG to remain above 12, which is roughly the current cost basis.
- A new research report was released on SPNS. The opportunity here is substantial based on the strong potential for increased spending on the IT needs in the insurance sector. There is also a value component and a restructuring component. All of this is detailed in the research report. Disappointingly, the position has suffered, showing a loss of roughly 8% currently. It is a very illiquid stock that is subject to excess volatility given the low float and tendency towards low volume/participation. SPNS is not a position that I would consider making into anything other than mid-sized given the liquidity constraints.
Looking Ahead
Going into July the current portfolio is roughly 75% invested, with a 25% cash allocation. A strong beginning to the month would turn my intermediate-term trend indicator bullish, taking equity allocation up to the maximum 100% allocation. I wouldn't mind and am, in fact, looking forward to increasing my equity allocation to 100%. I base this on a number of bullish drivers I see in the current market environment:
1. Seasonality/cycles - Since 1964, the 8 times an incumbent has run for re-election, the S&P has gained an average of 9.7% from Jun to Dec. We happen to be in a very bullish period for the markets from an election cycle standpoint.
2. QE/Liquidity - Fighting central bank intervention, whether European or US led, has historically proven to be an effort in futility. There are only two possible courses of action to the current debt crisis: Allow the system to organically rid itself of the waste that has developed as a result of decades of irresponsible debt creation OR artificially inflate and buoy the system to insure that the pain is, at the very least, put off for a substantial period of time.
I am not here to philosophize over moral hazard. What I am here to do is to point out the obvious outcome of a global central bank effort to keep the system afloat. They will succeed since the only other alternative is an instability and disintegration of the financial system that would be ruinous in nature and long-term in its repercussions.
Life is filled with general rules of thumb that we abide by on a daily basis to insure our survival and happiness: Look both ways when crossing the street. Don't go into certain neighborhoods after a certain time. Don't eat cheeseburgers everyday. Look but don't touch. If your wife is around don't even look.
There is no greater rule of thumb in the financial markets than this: Don't be on the opposite side of desperate central bankers. They always win.
3. Technical backdrop: On June 2nd, I posted a chart of the S&P 500 to the website outlining the reasons I thought an important bottom was going to take place that week, marking the lows for the month of June. The bottom occurred on Monday. I believe that bottom will be the low for the remainder of 2012, as I outlined in this posting the following week.
I base a lot of my technical work on "generational trajectories", a phrase I coined that looks at long-term angles that the markets tend to react upon consistently. What is important when a market is close to a generational trajectory point is not the point itself, but rather how the market reacts to that point. It is the markets way of letting the observer know of its intentions.
The way in which the market bounced off of the generational trajectory point on the S&P 500 the week of June 4th, told me everything I needed to know about not just what the market would do in June, but for the remainder of the year.
Additionally, there is a price mirror taking place in the Russell 2000 that tells of a very strong month of July ahead. A "price mirror" is another phrase I have coined to describe similarities in price structure that take place around generational trajectories. You can see in the chart that the price structure between the most recent test and probing of the generational trajectory in the Russell 2000 is very similar to that of Nov-Dec 2011.
The outcome, once the probing was complete, was a powerful rally that started in January. I expect July to strongly emulate January.
4. Sentiment - There is a very strong perception of July earnings coming in weaker than expected rendering any rally from this point useless once the second week of July roles around and companies begin announcing the horror of the previous quarter. I don't think the negativity with relation to earnings is as cut and dry as it seems. We either rally right through a negative earnings period based on a factored in, looking ahead type mentality OR earnings and forward projections will be nowhere near as bad as most are expecting.
What is obvious is obviously wrong. In this case the negative earnings, lowering estimates = a terrible month of July is too obvious an outcome for my taste.
I am looking forward to further positive results in the month of July.
Regards,
Ali Meshkati
