PORTFOLIO UPDATE: PROBING POCKETS OF RISK
During the trading day, I tweeted the following: IWSY has turned into a bit of an enigma for me recently from both a technical standpoint and a fundamental standpoint. The price action in IWSY has always been a confusing mix of erratic volume and volatile price movement. This is why the stock never made it past a mid-sized holding, despite being the strongest performer in the portfolios for 2013. It is one thing to be an erratic, unpredictable stock when a company is being valued at an unreasonably low valuation given the transformation of the business, as IWSY was in February and much of March. It is another thing entirely to be an erratic, unpredictable stock when your valuation has appreciated by 140%, with increasing pressure on management to deliver. The biggest risk in IWSY from here on out is execution risk, specifically in the form of signing big name contracts over the next several months. Without those contracts, IWSY becomes a sideways drifting asset at best. At worst, it moves back into the $1.50 range before the market is able to gain clarity into what the company can become. Without a doubt, what is occurring at IWSY has substantial upside potential. I believe that the company is a virtual shoe-in for acquisition should they experience a revenue ramp brought on by partnering with big name wireless companies that can showcase their technology appropriately. However, again, this comes with a fair share of execution risk at a near $200 million market cap. Given the opportunities that exist in the market today, I can't justify taking on 30% downside in order to gain 100% from these levels in IWSY. There are companies like CIDM that are offering up less than 20% downside here in order to gain well in excess of 100% over the intermediate term and much more longer-term, without the pressure of execution given the depressed share price. The research for CIDM is here. It is now a mid-sized, bordering on large position going into August with the additions that have taken place during the second half of July. As it stands at the end of July, the portfolios are 90% long and 10% cash. Current holdings include: WMIH, HMPR, CIDM, SPNS and...
CHANGES TO MONTHLY PERFORMANCE SUMMARY
The monthly performance summary will be posted over the next couple of days. As usual, it will contain a detailed review of portfolio positions. Beginning this month, however, the full PDF version of the summary, including managed account performance data will only be available via email. The full PDF version does have a couple extra components to it, in addition to return data. Return data will no longer be published as a part of the summary posted to Zenpenny. If you would like to be added to the monthly email list, please contact me at...
IS THE SOX FORETELLING A MAJOR CORRECTION IN THE MONTHS AHEAD?
If you came up in the old school, you realize the value of the SOX (Semiconductor Index) as a predictive indicator for technology and thus the entire market. While the SOX is not nearly as relevant in the grand scheme of technology as it was a decade ago, its predictive powers should be no means be discounted by those among us who did not witness the days when hardware ruled technology investing. While it has grown increasingly repugnant to have a bearish slant on anything but Treasuries and precious metals in 2013, there are certain pieces of information that I feel compelled to pass on, if for nothing else but to open the eyes of investors to possibilities that are not currently being entertained. It is after all during the most "feel good" periods that the markets decide to unveil a can of whoop ass on investors, leaving those who are unprepared scurrying for the comfort of their mother's bosom. There is certainly an excess of "feel good" here and now. It is noticeable. Much more so than at any point over the past few years, I would venture to say. The action and attention that is being paid to companies like NFLX, TSLA, AMZN and FB is reaching fever levels. Furthermore, investors in the handful of popular names that are favored in the current market have piled on top of each other to the point that when a pullback does come, whether beginning this Friday or 20 Fridays from now, the downside volatility will be extraordinary. With that said, I would like to point out one valuable piece of potentially bearish information that caught my eye today. The action in the SOX is not only severely lagging the rest of technology, it is correlating perfectly with a previous incident in 2012 that just so happened to take place above the exact same trajectory. To make things even more compelling, let me add that each and every time the SOX has broken this trajectory to the upside and failed since 2010, it has led to a repugnant period for the markets in general. The charts below will illustrate my point, beginning with a daily chart of the SOX, followed by a weekly SOX chart and ending with a weekly chart of the S&P 500 to show how the general market reacts: click chart to...
SEPARATING MICRO AND MACRO IMPERFECTIONS
In participating in the financial markets, we have all made a silent agreement to be subject to the rules of imperfect information. In fact, a better classification would probably be subjective information. In either case, we use a set of data that is highly subjective in nature to make decisions that we hope will positively impact our financial fate. It should be seen as highly unusual then when a market participant who chooses to make his or her decisions public sports a near flawless record. I am always shocked by the nature of fraud that is reported commonly involving investors who believe in a guaranteed return exceeding Treasury yields by anywhere from 500 to 5000 basis points. I am even more perplexed by individuals who choose to pay for information given by financial charlatans who are posting gains not in the 20-30 percent range per annum, but 200-300 percent range. If it were only this easy we would be all be fighting for parking spots at Whole Foods in our Lamborghinis. The truth of the matter is that incorrect decisions, thesis and hypothesis are as much a part of the landscape of the market as a bid and offer. With that said, I have decided to dedicate tonight's post to a study of my micro imperfections, followed by a commentary on how unrelenting and fatal imperfections of the macro variety can be. You can get away with a host of micro imperfections in the markets, but a macro imperfection is death. Let's start with a plethora of my micro imperfections that those of you who have been reading this site over the years have been subjected to: - Recently I have been eating hairy humble pie (mind out of the gutter, please) on TZA. It has been my biggest losing investment in 2013. It shouldn't be a surprise, as we are facing one of the strongest bull markets of recent memory. Anything with a bearish slant will get you killed. Just ask Bill Ackman. - I have been off with AAPL as of late. A lot more off than at anytime over the past couple of years. According to my studies it was supposed to be below $400 by now. I defer. - Off the top of my head, my call on RGR was atrocious. I actually dedicated an entire post titled: The Technical Case For An 80% Drop In RGR Over The Next 12-18 Months Not only was the title too long, but RGR isn't dropping. It is up 5% since I posted this study in October of last year. To be fair, I still have some time...
4 CHARTS THAT WILL INFLUENCE PRACTICAL SPECULATION DURING THE WEEK AHEAD
click chart to enlarge
PREPARING FOR A DROUGHT
An unusual experience came to be in recent weeks. Unusual in the sense that over the past several years it has seemed that taking comfort in fear has trumped the emotion of being driven by greed. When that particular dynamic is in place it results in value creation, particularly in small-cap land where I dwell, that patiently occurs over a very long period. In other words, investors who spot an opportunity have plenty of time to accumulate before the hoi polloi become aware of the opportunity. That dynamic has changed. For the first time in years, I had a brilliant small-cap opportunity that I discovered run away from me within days of its discovery. I have become spoiled by the market of the past several years. It has been a market where I could patiently discover an opportunity, ponder that opportunity for days or even weeks, begin typing my research report, accumulate and then publish the research on my timeline, without worry of a runaway train to the upside jeopardizing this process in any form. That has changed. In addition, opportunities in general are becoming more difficult to discover as entities of all classifications seek validation through wealth creation in the equity markets. Now before you get carried away with feelings of premature contrarianism brought on by the erroneous mindset that an accommodating equity market equals pending disaster, let me remind you of a few relevant facts: 1. The major averages Dow, S&P, Russell are just a few months into all-time highs. Furthermore, these moves are being confirmed by the important "periphery averages", such as the Dow Transports. We are closer to a beginning than we are an end of this rally. I am talking long-term here. Not whether the markets are going to pullback in September of November of this year. 2. There remains a great deal of fear with respect to pullbacks. 3 percent pullbacks are feared to become 6 percent pullbacks. A 5 percent pullback is thought of as being a precursor to a 10 percent pullback. In the case of a 10 percent pullback, there will be talk of Armageddon, with Roubini and Faber leading a band mutant pessimists that only believe in gold, guns and reruns of Bonanza. This dynamic has and will continue to create support beneath the market during compromised periods. 3. Technology hasn't asserted any distinct leadership prowess over the market, as of yet. Technology has certainly been a participant in the rally of 2013, but it is far from leading the charge. That leaves an entire chamber of dry powder for the markets, especially as we get closer to Q4...
WEEKLY REVIEW SPECIAL EDITION: THEY HAVE IT ALL WRONG
I wanted to do something a little bit different for the weekly review on this Sunday. There is quite a bit of debate occurring surrounding the origins of this bull market from a time standpoint. Some have been arguing that it is years old as it started in 2009. Others will tell you it is only a couple of years old, with 2011 serving as a reset. What if it is only a couple of months old, as measured by the most reliable tools I know in TA: The trajectory points I illustrate every week. Let's take a look at a completely different and potentially explosive way of looking at the current bull market: click chart to...
FINANCIAL ACROPHOBIA RELATED TO THE ISSUE OF “WHEN”
In life, "when" matters. If your coworkers see you out drinking at 8pm, they will consider you a fun loving guy who enjoys himself after work. However, should your coworkers see you out drinking at 8am, they will consider you an alcoholic who probably won't be their coworker too much longer. To illustrate further, if you take a plate of warm cookies to a new neighbors house at 3pm, you will be considered hospitable and kind. If you take a plate of warm cookies to a new neighbors house at 3am, you will be considered creepy, weird and possibly get shot depending on your geographical location. Yes, "when" does indeed matter in life. In the markets, however, the issue of "when" is much less relevant. This is contrary to the popular wisdom that insists on timing being such an important facet of the investor experience. Obsessing over "when" for investors is one of the biggest stumbling blocks to profits. It creates trepidation, doubt and anxiety that would not come into the equation if the issue of "when" was left in the realm of life and out of the realm of finance. In the past, I've touched on what truly separates an amateur investor from a professional investor. It surely is not a degree, a certificate, any level of training or anything pedigree related, for that matter. I have seen retail investors that could have been all-star fund managers. I have seen fund managers who shouldn't be trading a $20,000 retail account, let alone a $200,000,000 portfolio of retirement assets. True Wall Street professionals, I have found, are much less involved with the issue of "when" in the traditional sense. They are able to buy high and sell higher. They are able to look at the issue of "when" in a much more relative sense, as opposed to the traditionally minded investor who comes into the Wall Street arena with the same tools he uses in everyday life. The very same tools that Wall Street inherently preys upon. Much along the lines of fear and greed. The same emotions that will keep you out of a dangerous part of town at night and keep you motivated when you want to give up. These emotions have no place in the investment world. They are stumbling blocks. The obsession over "when" falls right in line with fear and greed as a classic stumbling block for experienced and less-experienced investors alike. Let's take the market of present day as an example. "When" is killing the average investor here. They are looking at the market from a standpoint of 2009, when the Dow was...
THE B9 ENVIRONMENTAL CONTROL ROBOT AND SOME OTHER STUFF
Let's start with the meat and potatoes of this segment, followed by the appetizer. As of the close today, the portfolios are long: WMIH, HMPR, SPNS, CIDM, EVOL and IWSY. Overall exposure sits at roughly 85% long and 15% cash. SPNS has been reinitiated after I took profits on the position in May, after holding it for 11 months. Even after the run SPNS has had over the past 12 months from the mid-3 range to near 6, there remains considerable upside for the name, as the recognition of the role the company is playing with financial sector compliance software continues to be underestimated. The company continues to make progress with their DECISION software, specifically targeted at larger financial institutions. This brings about a completely new revenue stream that the market hasn't factored into the price here. In fact, the market is just starting to get the significance of the progress the company has made in their bread and butter - the insurance space - over the past 12 months. Here is the original research PDF from June of last year http://www.t11capital.com/wp-content/uploads/2013/07/T11-SPNS-Research.pdf I tweeted the position earlier today: Since B9 Environmental Control Robot (aka my mechanical system of allocation) has calmed down over the past several days, I now feel safe enough to up exposure closer to the 100% invested level. This is irrespective of how I feel about having this level of exposure personally. If I was to invest based on how I felt personally about the state of the markets at any given moment then I wouldn't get very far in terms of adding exposure. Additionally, I would be running for the exit door at the first whiff of bad guys. I worry too much about everything to allow myself to personally get involved with opinions regarding general market direction. This is exactly why I turn to the B9 Environmental Control Robot as well as the chart work I do on a daily basis. It is all a way of getting away from my own personal worry, instead relying on what I observe to be facts. The facts tell me it is time to get even longer than the 85% exposure that I currently have. Who am I to...