PROFESSIONAL WALL STREET AND PORTFOLIO MISMANAGEMENT 101
This market of ours. This enigma that disallows any real understanding of its intentions until it is ready to shape shift entirely. The endless puzzle that attracts hungry, testosterone driven individuals that want nothing more than to be on the winning side of the trade. Every. Single. Day. It has taken on a new shape recently, this market of ours. A grinding, relentless bull market that seems perfectly content in a near death defying tightrope walk 600 feet up in the air, while curious onlookers from both the bull and bear camps gasp every time it wobbles or twitches. For all that wobbling and twitching, the stuntman that has become the current bull market simply presses on until it reaches points unknown at a time unknown. It is none of any of our business to attempt to determine when the tightrope walker is going to plunge to his death by throwing money behind the idea that it will happen tomorrow or next week or next month. That act of taking a financial stake in the end of the walk up the tightrope misses the whole point of being involved in the act in the first place. That point is to, of course, profit to the maximum extent possible from such moves. Profitability doesn't occur by running away from the market at the first sign of an uptrend. Yet that's what a majority of those I have witnessed seem to be doing. Even the so called professionals, who eagerly pontificate about the markets on a daily basis, seem to have forgotten the fact that allowing profits to run without interference from all the sources of noise available to investors today is the key to building wealth for yourself and your clients. It is as fundamental and old school a concept as sandals and the crooked toes that go in them. But alas we must not forget that the current generation of market professionals has been conditioned, no differently than a circus monkey, to perform the trick of selling rallies at every opportunity. The average fund manager has forgotten that markets do trend because over the past 13 years that have gone absolutely nowhere. Too many times profits have turned to losses. Losses have turned into disasters. Whipping boys no more, an attitude of preservation through quick fingered execution of profit taking, hedging or selling short has replaced a more patient approach. I say poo poo on you average fund manager. Without two pounds of Suave firm hold styling gel, the leash you wear around your neck to display your subservience to the all mighty dollar and the deep voice you have...
FACEBOOK THE LOVER
AAPL was snarling, hissing and vomiting on investors in the days and weeks leading up to its earnings report. Much like the little girl in The Exorcist, AAPL did everything possible to warn those who chose to listen that it was possessed by a bearish spirit that was intent on harming any investors who came within spitting distance of the stock. From an angel to a demon in a matter of months. On the opposite end of the spectrum is FB. Once the poster child for maleficence, FB is one of the better performers in technology over the past few months. As the company prepares to announce earnings in the week ahead, the stock is lovingly starring investors in the eyes and blowing kisses in the wind. In other words, the setup from a price action perspective is outstanding in terms of structure, quality and participation. There are rare instances where the market gets things wrong. A stock will climb to high end of its range, only to be blindsided by an earnings report that floors investors. I don't think FB is due for such an anomalous event in the week ahead. The earnings should confirm the loving and rosy picture that price has been painting over the past few months. Here's a look at the upside possibility as we head into earnings this...
WRATH OF THE MATH
There isn't much to do in this market. Hopefully, you allocated to the long side sometime ago and are enjoying the current gains, without much anxiety of getting ripped apart in a pullback. If you do find yourself with a lot to do, in terms of activity, then odds are that you are either (1) a short-term trader (2) you are doing something wrong. Let me elaborate on the second point since the first point is self-explanatory. If you have activity here then odds are that you are either buying into new positions heavily counting on this very bullish start to the year to continue OR you are liquidating in anticipation of the uptrend ending right around here. You could be right in either scenario. However, either way, you are making the wrong move. I hate to pull out a cliche poker analogy, but your being correct in either one of the aforementioned moves has less to do with skill and everything to do with luck. In any case, it has a negative expected value over the long-term. Whenever the market gets you to make the wrong move, then you have made a play with a negative expected value regardless of the outcome. Over the long-term you will lose money making the same mistake, irrespective of your short-term results. The reason why being active at these levels with either new investment buys or liquidating your portfolio has a negative expected value has everything to do with probability based on the understanding of price. The markets (Dow, S&P and Nasdaq...even the Tranports) are all tagging significant upside resistance points at the same time. More importantly, they are doing so very early in the year, during a period when institutions are eager to put money to work indiscriminately. Coordination in hitting or penetrating resistance points among varying important averages does have a high probability of retracement. This becomes especially true when the coordinated hit or penetration comes during the first few months of the year. The very same individuals who are hitting the buy trigger in an eager rush to allocate assets to equities now have 11 more months in 2013 to become frightened out of those positions. Not to say that every Q1 move to the upside gets retraced. However, those that are coordinated in hitting important resistance points while in Q1 have a significant probability of seeing retracement. That makes this general area of the market an undesirable point to allocate new funds into equities due to the significant probability of loss. So why is it an equally terrible decision to liquidate or begin liquidating a portfolio here? Again, it...
A COMPLETELY IRRATIONAL (OR IS IT?) LOOK AT THE DOWNSIDE IN AAPL LONG-TERM
As I sit here tonight over a bowl of frozen yogurt pondering an investment world where AAPL is devoid of any role other than frustrating investors through under-performance, I can't help but wonder exactly how bad this will get before it gets better? The answer doesn't lie in the fundamentals of AAPL. Truth be told, those who have relied on the various ratios of value to gauge the stock have been struck with a plague of epic failure. Fundamental valuation has been quoted the entire way down from the highs in a HD quality display of the failings of fundamentals in dynamic situations where overexposure to an asset causes emotion led price movement. The market owes none of those who step onto its playing field a single sliver of rationality. Fundamental ratios of value assume that it does. That is exactly why fundamentals should be used as a complimentary tool and not an absolute measure of whether to buy or sell. This fact seems to be forgotten far too often. A chronic mental disease of the investor class. The CORRECT study of price offers the most impressive results for the fluidity that AAPL brings with it. Without quoting a single ratio of valuation, let us look at what price says is the future of AAPL on the downside, as well as the possible duration of this bear market in the stock. The chart below is a QUARTERLY chart of AAPL. That means every bar you see represents an entire quarter of trading. The chart goes all the way back to 1985 so that the trajectories that are guiding AAPL can be accurately interpreted. This look is the best way to ascertain (1) the depth of this pullback (2) the length of time it will take. Here are the results of that look...
4 CHARTS THAT PAINT A PICTURE OF RISK/REWARD THAT IS SLOWLY TURNING UPSIDE DOWN
click chart to enlarge
HERE IS WHAT TO EXPECT ON THE DOWNSIDE FROM THE MARKET OVER THE NEXT FEW MONTHS
In order to have an accurate assessment of the future, it is important to look back at where we have been. More importantly, this look back can help in understanding the foundation of this current analysis. So let's get started: - On October 14th, after waving a caution flag since late September, I posted a 1-2 month downside target for the Dow in the 12,300 range. - On November 16th, the Dow hit what would be its low for the rest of 2012 at 12,471. - On November 17th, I posted an upside target for the Dow by year end of 13,500. - While year end was clogged by a Congressional circus, on January 2nd the Dow closed at 13,412. The market finds itself sitting in a familiar position, once again. That position being the noticeable difficulty the Dow in particular has had with the generational trajectory points that have acted as upside resistance for a number of years now. The only question the astute observer should have then is the following: Is the market in a position to overcome this resistance or are we due for another case of fear induced declines off these trajectory points? Although I am long-term bullish and believe 2013 will see the Dow end at record highs above 14,000, those record highs won't be made during the first half of the year as the market is currently suggesting. To achieve such highs early in the year would require an acceleration far above the generational trajectory points. This is something that market simply isn't positioned for at this stage. The market continues to be in a low volatility uptrend that will hug these trajectory points for a number of years to come. Very similar, in fact, to the 1991-1995. Over the next several months this reality sets the market up for limited upside from current levels. The "hugging" effect will more than likely see a rolling top take place into March, with an ultimate low for the Dow around 12,800 by the time all is said and done. The upside from these levels over the intermediate term (based on the Dow) is roughly 100 points. My allocation is completely mechanical in nature so I won't be taking down my 85% long exposure on Tuesday morning as a result of this assessment. I will, however, likely be keeping a lid on long exposure at 85%. Once my trend indicators begin turning, assuming I correct, I will then begin lowering net exposure. In the meantime, good stock picking will continue to outperform as we begin forming a rolling top over the next few months. Here is an...
CLOUDY WITH A CHANCE OF FURBALLS
To think of oneself as a patient market participant is a sign of maturity as an investor. Most of those who are just becoming acclimated to the various nuances of the financial markets are quick to jump at the first shadow. Many of those, in fact, who attempt to create wealth through financial speculation of any sort are plagued with a mindset of risk AVOIDANCE instead of risk CONTROL. Avoiding risk is what short-term traders attempt to do on a daily basis with an erroneous mindset that not being involved heavily overnight or keeping tight stops is a competent form of risk control. Instead they wind up getting minced through the teeth of the market as a result of stops that are too tight, markets that are too efficient and patterns that stopped working when Iomega was the "it" stock. In my article "An Ode To The Short-Term Trader" I went over all of the obstacles faced by the short-term trading community in the current market environment. It seemed to resonate as it is the most popular article I have written on this site in the two years it has been up. Risk control is another animal entirely. It does not involve setting arbitrary stops or being overly-conservative to a fault. It simply involves having every aspect of risk in the portfolio planned out. You know where your allocation will be if the Dow is at 13,000. You know where your allocation will be if the S&P is at 1600. You know how to respond to a 5 percent drawdown in equity. You also know where you will be if it gets to 10 percent or more. A road map of risk that controls risk and DOES NOT avoid it. After all, we are in the markets to make real returns. By that, I don't mean inflation adjusted returns, I mean REAL returns. Controlling risk is how you get there. Avoiding risk is not. With that soliloquy out of the way, I can now focus on the real purpose of this posting . While the Dow did post a very positive close on a technical basis, we have now moved to a point where risk/reward has shifted to the downside for the overall market. This does not at all mean that a ferocious pullback is imminent. It simply means that the upside bias that has become a comfortable backdrop for the market early into 2013 will start getting a little bit uncomfortable from here. In my posting on January 3rd (The Road Map For 2013: Same Rules Different Year), I determined the road map for 2013 would continue to follow...
PORTFOLIO UPDATE: HAMMERTIME
During the trading day, I tweeted the following: The research report for MITL can be found here. This is a small position, meaning that it constitutes less than 10% of the portfolios. In addition to MITL I have been accumulating a small position in nano-cap penny stock with a market cap under $25 million. It hardly has any volume during the trading day, with some days finishing at not a single share traded at all. For that reason, I won't be publishing a research report on the stock. It is simply too illiquid. I will, however, be posting the symbol in my January month end summary to investors in order to stick to the record of transparency I have established on this website. With these new additions the portfolios are right above the 85% net long mark. The remainder sits in cash, for the time being. Current positions: WMIH, SPNS, MITL, PRXI and...
THE TOUCHING STORY OF A LONELY CANADIAN TELECOM COMPANY IN THE CRUEL NASDAQ WILDERNESS
5-24-13 - MITL sold for a 6% loss since inception MITL position taken at average of 3.60 on January 11 & 14, 2013 A research report detailing MITEL NETWORKS CORPORATION (Symbol: MITL) An Introduction - Canadian company founded in 1972 - MITEL stands for MIke and TErrys Lawnmowers. The company hasn't been in the lawnmower business since shortly after their founding. - Company has been focused on Voice Over IP (VOIP) products since 2001. - MITL originally wanted to IPO in 2006. However, due to the purchase of InterTel , they withdrew their IPO registration. - MITL did go public in April 2010 at $14 per share. By October 2011 MITL was trading at $2. - Current market price = $3.64 for a market cap of $195 million A Look Into The Ghosts Of Mitel's Past Through the benefits of hindsight it is apparent that MITL should never have attempted their IPO given the structure of the company at the time it came public. The expected range for the IPO was in the 18-20 dollar range. It never made it close to that offering price. It was priced at $14 on the day of its offering, closing the day in the $12 range, nearly 40% below the target range. A disaster by any stretch. It is obvious why the market not only frowned on MITL as an investment worthy entity but participated in pummeling the company. At the offering price, MITL was sporting a P/E above 50. That is in an industry where the average P/E was in the 20 range at the time of its IPO. VOIP has not been considered a high growth technology segment for years now. It can even be argued that networking companies like MITL and their competitors Cisco and Alcatel-Lucent are "old technology" companies that deserve conservative multiples given their growth characteristics. It is obvious now that a premium multiple for MITL simply wasn't acceptable given the profile of its technology offerings. The problems didn't stop there, however. MITL had three major problems as it came to market: 1. Revenues were down low double digit percentage year over year. Somehow the underwriters in tandem with company management thought the market would be willing to pay growth stock prices for a company that wasn't growing in the least bit. 2. Market share was slipping away from them at a fairly consistent pace. 3. Debt was extraordinarily high. They came to market with nearly $500 million in debt incurred mostly as a result of their merger with InterTel. Cash flow, at the time of the IPO, was only $30 million versus that extraordinary debt load. Additionally,...