PORTFOLIO UPDATE: THE BOTTOM LINE & SOME YEAR END PERFORMANCE STATS
During the trading day Friday, I tweeted the following: EVOL is likely a stock that I will continue being wrong on. Well, perhaps I'm being too hard on myself. I originally discovered the opportunity when it was in the $6 range, publishing a research report based on what I gained from studying the opportunity. I never got the position sizing correct and my timing on the addition a couple months back wasn't necessarily inspired work. What I mean by continue being wrong with respect to the stock is that I wouldn't at all be surprised to see the stock move up from here. Perhaps substantially so. Here is the bottom line for me and it may just seem silly to you: If I'm not 100% comfortable in a position then I will move capital into positions that I am 100% comfortable with. Positions that I can wrap my head around completely, without any doubt whatsoever as to the clarity of my analysis. There is no reason to waste energy on positions that an investor doesn't understand. Diversification is the poorest excuse possible to wrap oneself into the mummified state that is a vast portfolio of ill suited opportunities that an investor fails to understand completely and totally. With that said, the current portfolios are spread across four positions at 90% invested of total capital. Those positions are: WMIH, CIDM, BFCF and KCG. All of these are companies that I get, both on a technical and fundamental basis. In going over my results for 2013 I had a total of 5 losing trades for the year, not counting trades in ETFs. That is against 9 winning trades for the year. These results are for both realized and unrealized gains. The average loss was 9.45%. The average winner has been 63.74%. Again, this is for both realized and unrealized gains, meaning stocks like WMIH, which I have been holding for 18 months now are included in the total. The largest realized/unrealized loss for the year was a near 18% loss in PXLW taken in January. This was a position I initiated in 2012. The largest realized/unrealized gain for the year is in shares of WMIH which are up 223% this year and 440% since initiating the position in July 2012. I'll have some more numbers in my year end performance summary next weekend. It has been a kind market. Don't confuse that kindness for any level of genius or you will find yourself on the opposite end of a poisoned spear to the...
2014: A GLIMPSE OF MIDNIGHT IN A PERFECT WORLD
Us equity types have had it easy in 2013. We haven't suffered much of any pullback whatsoever. Bears have been disparaged, dissected and pilfered from to the point that they populate a small leper colony surrounded by dying weeds and various reptilian lifeforms. The nouveau rich investors of the social media sector abound as whatever is related to the sector bounces up in ways that are only comparable to the mid-cycle of the 1990s bull. With 2014 upon us, the comfort with which bulls operate has been growing. With that growth has come a certain confidence in the form of increasing bullish forecasts. Gone are the days of low single digit growth forecasts. Investors are demanding a certain level of chutzpah from their local, neighborhood analyst. You must realize by now that Wall Street forecasts are only an articulate, analytically driven reflection of the popular sentiment of the time. In other words, what Wall Street analysts do is gift wrap what investors are feeling in pretty words and a colorful bouquet of statistics, passing it off as original thinking. It is, in fact, group thinking that only serves the purpose of driving trends. Wall Street will never tell investors to be bearish in a soaring (think 2000) bull market. And it will never tell investors to be bullish in a brutal (think 2009) bear market. I won't be alone with my bullish forecast, no doubt. I am bullish on 2014, despite the fact that I have more company than I have become used to over the past few years. All that means is that we are mid-cycle in a bull market. There is really nothing more to read into it than that. All the knee jerk sentiment analysts that simply believe that bullish talk equals a reversion to the mean forget that markets do tend to reward investors at times. Markets are not always as difficult as 2000-2010. There are loyal, angelic markets. And there are demonic, nefarious markets. An investors job is to know which type of market we are in and act accordingly. Where will the surprises be in 2014? I think in two places: 1. 2014 will not be as smooth and effortless for bulls as 2013 was. After Q1 up until about August, a window opens for a relatively sharp, precipitous and unexpected pullback that will be brutal. It will likely be called a mini-crash by investors. Probably to the tune of 10% plus on the downside within a couple of weeks. It will likely be macro driven, with Fed policy being cited as a key reason for the violent reaction of the markets. 2....
THOUGHTS ON STRATEGY AND COMMENTS ON A COUPLE HOLDINGS
It goes without saying that investors are excessive in their lust for action in the financial markets. The simple act of sitting is one of the most powerful gifts an investor can have. Yet what we have are a large group of information obsessed investors who can't decide which investment will best suit their needs because of the inability to differentiate between the signal and the noise. It is a modern day plague that is one of the bigger liabilities to an investors equity. I monitor my results extremely closely. Not just such obvious measures such as performance relative to a benchmark. But also the number of ideas I am generating. The number of ideas I filter out due to the opportunity not meeting my requirements. The number of trades I make per month and per year. In going over 2013 results, the number of trades I have made has dropped by some 50%. The number of new ideas I have generated in 2013 versus 2012 is down 40%. My filter has become more stringent in its requirement for investment, not allowing a number of opportunities in the portfolio that would have made the cut in 2012. Yet, the results in 2013 are substantially better than 2012 which saw a gain of 59%. Quality beats quantity. The general theme here is one of selective, measured inactivity. It is essentially trend following as applied on the micro level of choosing quality misunderstood, murky opportunities in my method in particular. The point is that you, as an investor, allow the market to do the heavy lifting for you, as it is only too willing to do during a secular bull. You come to the realization that you can only get in the way of superior investment results during such conditions. I'm laying low. Have no need to look beyond the concentrated portfolio of names that make up our current holdings. Brief comments about two of the names in the portfolios. I'll have more in the monthly performance review in the New Year: WMIH - I have received a number of questions regarding future valuation here. I believe it is extremely difficult to put together a valuation model because we have no idea what form their future business will take. I do however believe that the most common methodology of simply valuing the NOLs minus X% discount is misguided. What we know about WMIH with the KKR deal is that it has now gone from a point of imagination of what can be done with the shell to consummation. The only question that needs to be answered is what form (insurance, bank,...
2 CHARTS THAT WILL HAVE YOU DANCING WITH THE BULLS OF PARRAL FOR THE WEEK AHEAD
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PORTFOLIO UPDATE: YOU CAN’T BEAT THAT WITH A BAT
With WMIH up 100% just last week after KKR made an announcement of a financing deal that will allow the company grow substantially from here, it would seem that the cat is out of the bag. I have certain ideas of how this partnership with KKR will work out. KKR has many companies under its umbrella that 1) could certainly use the tax efficient structure WMIH can provide 2) can use WMIH as a reverse IPO to gain a lubricated route to listing on a major exchange 3) can use WMIH's existing reinsurance business (WMMRC) to gain entry into this lucrative segment of insurance. In any case, the potential here remains what I thought it was when WMIH was simply a shell with an all-star board of directors and Blackstone as an adviser. In the last paragraph of the research report from July 25, 2012 with WMIH at .50 cents I said: In the meantime, my time horizon for this investment is not several months, but years. I think this type of mentality towards WMIH as an investment is what will yield the greatest results without the burden of unrealistic expectations for magic to happen at the snap of two fingers. Given the upside potential (1000% +) I am willing to give it the time it needs to answer all the questions that investors have in a favorable and profitable manner. The investment of KKR provided a lot of answers to questions of risks going forward. The downside risk barring unforeseen catastrophe has been mitigated substantially. I said on Twitter a couple hours after news was announced on Monday that the upside potential was impossible to assess, however, with KKR involved the downside risk had been capped. In any case, I have very specific ideas of where this will end and believe the companies that will consummate the first stage of WMIH as a "real" financial company have already been chosen. I have gone into some details with my investors and will likely put out an addendum to the first research report at some point in the near future. As of the close Friday, portfolios are at roughly 90% invested of capital. Current holdings: WMIH, BFCF, CIDM, EVOL, KCG. Concentrated, high conviction, well understood investments that, for the most part, continue to exhibit highly favorable risk/reward profiles. My capacity for deep understanding of a company is limited to 6 companies ideally, with a maximum capacity of 8. Those who decide to fill their portfolio with dozens of names are either a) much smarter than I am or b) don't have a deep, "under the hood" type understanding of the companies they have allocated...
DECEMBER IS A TALE OF TWO MARKETS
To begin the typically bull friendly month of December, I decided early on that this month would be a tale two markets. The front half of the month providing the necessary strength to get everybody excited about the standard year end rally. And just when greed would be extending its hand for that very last dollar, the market would punish investors by pulling out the rug, creating a second half of the month downdraft. Instead, the market has decided to turn into a swindling thief of sorts by turning this well thought out scenario of mine on its head. The market has not started December on a positive note, insisting on greeting market participants as if they have no rights to any further riches that it will provide. This type of obnoxious trickery at the hands of the market has led me to believe that the scenario I envisioned to start the month will work in reverse. Instead of witnessing a second half swoon, we should see a second half rally. Enough of a rally, in fact, to take the S&P 500 up to 1820 to close out the year. Despite what you may hear, there is still too much money that has missed out on stocks. Instead choosing to be stuffed into any other asset class, namely of the fixed income/money market variety. That money is looking for an entrance into this market. Any type of rebound into year end will cause it to chase as the belief that 2014 will start strong is already deeply embedded in the psyche of the investor class. With a January rally being a high probability event, I simply don't believe for a second that the markets will allow investors a comfortable buying opportunity into the final weeks of trading for 2013. Any continued weakness from here makes the buying opportunity in anticipation of a January rally overly-comfortable, if that makes sense. In other words, the market is making it too easy to take advantage of that high probability/profitability event. With that said, what we saw today should be the extent of it. We could see some slight weakness into the end of this week. However, come next week, the tune of the markets should change from bearish to decidedly bullish. Let's see what the river card...
HOW CURRENT MARKET LEADERSHIP TELLS US THIS BULL MARKET HAS A LONG WAYS TO GO
I made a reference on Twitter Friday to how late stage bull runs are always led by frothy, growth names as opposed to consumer cyclical and basic material type names. In late stage bull runs, near 200 point Dow up days will have momentum names like YELP and TSLA leading the charge. There is a psychology to this frame of thinking that has more conservative names left behind while more aggressive names shine. When bull markets mature, participants become extremely comfortable in the bed that has been made for them. This means that they feel cozy enough to make moves that can create the greatest gains in the shortest amount of time. High-beta investing to the fullest. Invariably, more conservative sectors will get left behind. During strong up days is when the tendency of investors becomes the most evident because that is when greed will surface. So on Friday we had a strong up day, but the "new school" momentum names didn't shine. In fact, they lagged considerably. Instead, classic market sectors like basic materials, healthcare and consumer staples led on Friday. What does this tell us as astute observers of the market? 1. The market is being led by institutional investors as these sectors are their stomping grounds. When was the last time a guy at a cocktail party was boasting about the prospects of UnitedHealth Group? Institutional investors piling into conservative names is not what creates market tops, instead it creates market sustenance. It's a behavioral continuation pattern, if you will. Leading to the next point. 2. Speculative fervor is nowhere near reaching a culminating, mouth splitting, volcanic inspired blow off point. From volume, to price action, to sector leadership, none of the indications are there. 3. Retail investors are absent in a big way. Retail is always the final piece of the puzzle to an important speculative market top. In 1999/2000 it was retail that was leveraging up and driving stocks like Pets.com, Garden.com and CMGI through the roof. In 2006/2007 it was retail home buyers, with little to no experience in the marketplace, flipping homes without having the credit worthiness or knowledge to determine prudent risk. Retail is the hard cheese to any cushy situation in creation of monetary units. And retail buys buzz worthy names in bunches during strong up days. Retail is still licking the wounds from the double stock and real estate debacle of the past decade. Watching the market closely during strong up days can reveal a lot about the feelings of investors. The feeling currently continues to be cautiously-optimistic as judged by how participants are treating individual sectors on powerful...
SOME QUICK THOUGHTS
- Anytime a near 30 year member of the board of any company makes a purchase in the common stock it is worth noting. In this case, it was Bruno Di Giulian, a member of the board for BBX, which is one and the same with portfolio holding BFCF due to their impending merger. A purchase for nearly $50,000 took place last week. A relatively paltry amount, but nevertheless notable given where the company has been and the history of Mr. Di Giulian with BBX/BFCF. - I don't want to sound like a broken record, but I suppose I am a reflection of market conditions in 2013 which have been very repetitive in nature. There is nothing to dislike about the current market structure from a technical point of view. It is brilliant in nature and portends higher prices going forward. The Nasdaq Composite being an important leader of the bull movement is especially well put together here. - The Dow Transports are another leading index that is doing nothing but putting out a fantastic set of rhythms for investors to dance to. If you choose to be a wallflower when such music is playing that is a you problem. - The Facebook, Yelp and Tesla complex continues to be uninspiring in nature. I don't see much up in the immediate near term for these names. The downside will likely be tempered as well given the strength of the general market that should persist in December and throughout January. Q1 of 2014 should see a change in behavior for the better here. - The Nasdaq 100 is an index I have been referencing for its leadership qualities over the past couple of months. It continues to have tremendous technical prowess, as it is one of the stronger averages here. I'll go over all these technical points in the chart review coming later. ...