JUNE PERFORMANCE SUMMARY AND LOOKING AHEAD TO JULY
*This is a copy of my letter to investors summarizing the month of June. May monthly report can be found here. 2012 Return: +58.61% 2013 Return: +9.54% Portfolio June Performance: +4.44% S&P 500 June Performance: -1.50% Portfolio YTD Performance: +9.54% S&P 500 YTD Performance: +12.63% Total Return Since Inception (1/1/12): +74.76% vs. S&P 500 +27.73% Portfolio Highlights For June - TZA was a position that didn't affect overall performance during the month of June as it gained 0.25%. However, I wanted to mention it first in order to highlight the nature of the performance in the portfolios during a month that was exceedingly volatile relative to anything we have witnessed in 2013. In fact, the decline that took place on the 20th of June was one of the most severe we have witnessed over recent years. On this day, the portfolios were up .02%. During the volatile week of June 17th, the portfolios were relatively steady throughout, witnessing a gain of roughly 200 basis points during a week that saw most asset classes decline severely. These small data points are significant because they provide validation to the core strategy of maintaining the appropriate levels of both market risk and position risk within the portfolios. Every action that is taken within the portfolios is taken with either position risk or market risk in mind. With that said, I was extremely pleased with the way the portfolios handled the extreme turbulence of June. The position in TZA was increased during the first week of June to a maximum allocation of 25%, where it remains through the end of the month. -IWSY saw its share price appreciate 71% during the month of June. This is on top of a 60% gain in the month of May. The overall position is now up some 170% since it was initiated in late February. There was no fundamental information that caused this price spike during June. It should be noted, however, that this run did essentially start with the conference call that took place in early April. I highlighted portions of that conference call in last month's monthly summary. I will reiterate the fact that Jim Miller (CEO of IWSY) strikes me as an extremely conservative individual given his past history. The type of aggressive, excited statements he has made regarding the advancements the company has made are not something that should be taken lightly by investors. This is, after all, a veteran of this company, not a fly by night CEO who was brought in to resurrect and recreate, with immense incentive packages attached that are determined by stock performance. The fundamental news that I believe the share price is in the process...
LAND OF CONFUSION
Is there anything more delightful than a market that obstructs, perverts and distorts the view of participants to the point of complete befuddlement for every asset class at the expense of professional returns? In case you had to think about the answer here....it is a resounding NO. Markets that choose to take the path of most confusion are always the most profitable as that is where the opportunities for outstanding returns are born. Since a majority of market participants both professional and casual tend to rely on confirmation bias reinforced through consensus analysis, anything deviating from an A+B=C path tends to rile the uninitiated pseudo-intellectuals who tend to dominate this business. In other words, they cannot function properly from a cerebral standpoint when confronted with dynamic scenarios. It is only natural then that a vast majority of hedge fund managers are underperforming the markets this year, last year and all the years in between and out between. This has been the most dynamic environment for investment thesis of anytime in recent memory. The markets were supposed to crash a hundred times between now and the 2009 bottom. We were supposed to be driving a horse and buggy around this time, while relying on song and folklore as entertainment for our families after a supper consisting of freshly slaughtered moose and homegrown potatoes. Everybody got it wrong. Not just the bears, such as Dr. Doom and Nouriel Roubini, characters that are the financial markets version of Mickey Mouse and Donald Duck, respectively. But the bulls got it wrong, as well. They simply didn't stick around long enough to truly enjoy the fruits of this bull market. How many fund managers were bullish in 2009 and have managed to keep up with their benchmark from that moment? That number is less than 5%, I would guess. Most likely, much less. Here we are again at a point in time when consensus thinking is being challenged from both sides. Neither the bullish camp or the bearish camp have much clue as to what path to take from here. The confusion is, again, what will create the opportunity. What we have here and now is as follows: - A seemingly reactionary rally in the markets as they hit key support levels. Reactionary rallies are subject to retracement a majority of the time. - A perfectly symmetrical test of support on the S&P, Nasdaq Composite and SOX. It is rare to see such a symmetrical, perfect test of support, followed by the bounce we have seen this week. I have said in the past when a market is symmetrical in its behavior it is...
PORTFOLIO UPDATE: POUR SOME SUGAR ON ME
During the trading day, I tweeted the following: There comes a time in the life of every investor when they must admit satisfaction with a certain position, trimming that position down in an act of reverence for the profits allowed. IWSY has grown in the portfolio into a large position as a result of the 130% gain that it has seen since the position was taken in late February. That position size, given the volatility exhibited by IWSY, makes me a bit uncomfortable. I certainly do not want to see the portfolio overwhelmed by the volatility in one name, which is what tends to happen when positions swell in size due to appreciation. As with everything, the decision to take profits in IWSY was a risk management move today. Again, I am holding a majority of the position for what I believe will be higher prices into Q3 and Q4. I'll provide further details into my thoughts on IWSY and the remainder of the names in the portfolio in the June monthly performance summary due out this coming...
PORTFOLIO UPDATE: STRICTLY BUSINESS
During the trading day, I tweeted the following: A majority of the liquidations I make within the portfolios I manage are due to asset allocation decisions as opposed to any fundamental opinions with respect to company that I am liquidating. JMBA certainly falls into that category. I expect the stock to be significantly higher in the coming 12-24 months but have to be cognizant of companies that are have a greater degree of market risk than others. Being that we are in a softening environment if I can find names that have a lesser degree of market risk or beta then I will allocate towards those names. I have recently discovered a technology company that seems to have minimal downside risk with even less correlation to the general market. Completely under the radar with tremendous upside potential. I will be detailing the company in a research report in the coming one to two weeks. The current portfolio has been performing remarkably well this month despite the volatility in the markets. Given this fact, I don't want to tinker with it too much, taking away what has been relatively steady performance in a terrible market. The allocation is currently 70% long, 25% short and 5% in cash. Long positions: WMIH, IWSY, HMPR and CIDM Short positions: TZA (long) I'll have full performance and position details in the monthly summary this...
WHY HELL WEEK WAS A GREAT WEEK
Excuse my tardiness. I was in Europe this past week and was pressed for time to put any fingers to the keyboard. As I fly over a remote part of Northern Canada that looks like a meat locker in the shape of a country, I am compelled to make up for the lost time now. From a market perspective, last week was splendid. It was the kind of week that tells investors whether they are simply biding time until the next downdraft wipes out their profits or if they have a properly constructed portfolio of stocks that is nuclear proof. As a responsible steward of capital, a week like last and especially a day like Thursday must be viewed as your hell week or hell day. The day where the market puts your portfolio through the ultimate test of endurance. If it buckled, then you go back to being a cadet. If it held up, then you are one of the elite. One cannot simply take a 2,3, or 4 percent down day that comes as a result of being inappropriately exposed to a market with increasing risk, shrug the shoulders and go back to watching The History Channel. When a portfolio suffers at the hands of the market then it is an indication that the portfolio is not fit to handle current market conditions. Investors must learn to view performance in absolute terms in order to even begin the process of managing risk correctly. The view that "the s&p fell 3% and I only fell 2.5," needs a bar of soap and an open mouth to put it in. Last week was your test. If your portfolio experienced volatility that matched the market, then you are incorrectly positioned. If your portfolio experienced volatility that was more than the market, then you are idiotically positioned. Thursday was a day that I will be discussing in "Portfolio Highlights" in the monthly report as it was not only a green day, but suffered from little of the volatility that plagued the market. It validates the method of risk control used in my portfolio management strategy even further...for now. I qualify that statement with "for now" because I realize how quickly that very validation can turn into Chinese water torture. Adapt or...
A SENTIMENT UPDATE TO INTERPRET HOW YOU WISH
What separates an amateur from a professional on Wall Street? The separation doesn't have anything to do with a professional designation, your pedigree, a license, years worked or people you know. It has little to do with the type of car you drive, how much hair gel you use, the type of music you listen to or the number of Gordon Gekko lines you can imitate. It has everything to do with knowledge. There are people in their mid-20s trading six figure accounts from a one room apartment who are more advanced in thought and analysis than some fund managers. The fact that a person wakes up each morning, puts on a suit and tie, scurries out the door into a large office full of trading screens does not make that person a professional. It makes that person a corporate participant on Wall Street. A cog in the giant machine that keeps the capital markets spinning. If the overly-observant media and public would simply choose their labels better, perhaps Wall Street would have a far better reputation than it currently does. The word professional is defined as: Having or showing great skill; expert. When a majority of retail investors who come to rely on "professionals" for advice have been burned over an extended period of time, the word professional then becomes compromised. One of the ways I classify a true professional on Wall Street, in the classic definition of the word, is an individual who knows what method of analysis to use when. This individual realizes that the markets take advantage of those who come to believe in one form of analysis, clinging onto it regardless of market conditions. Just as the markets change continuously so does its treatment of the popular analysis used over a certain time frame. Sentiment is one form of analysis that is constantly shifting in relationship to the markets. Whether it is the use of the VIX, various sentiment surveys, odd lots shorts, outstanding margin debt or the put/call ratios, there is no magic wand when it comes to sentiment. It is, perhaps, the most finicky form of analysis. There is no other popularized form of analysis, other than oscillators perhaps, that claim more causalities in trading and investing than blind trust in sentiment indicators. They fail constantly. They get investors into bear markets prematurely, often at the point where the final leg of the bear market is hell bent on the most severe destruction. They get traders to go short bull markets way early, just as the uptrend is entering its sweet spot. You have to know when to ignore it. Unfortunately, there...
5 CHARTS THAT WILL ALLOW YOU TO CREATE BEAUTY FROM ASHES DURING THE WEEK AHEAD
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