PORTFOLIO UPDATE: THERE IS NO FENCE LIKE DE-FENCE
During the trading day Friday, I tweeted the following: Defense in the markets is a an exercise in sacrifice. I've had positions that I have loved in the past that I've had to shed in the name of asset allocation. In order to create the proper equity curve while maintaining one's own sanity, these types of sacrificial exercises need to be tended to from time to time. Otherwise, your portfolio simply ends up becoming a derivative of market volatility that will eventually be susceptible to a terrific swoon that you will be powerless over because you have no cash to allocate at prices you never thought you would get. Any asset allocation worth its salt should take into account the risk equation the market is offering at any given moment. In fact, this consideration should take precedence over any fundamental research or favorable micro scenarios that your mind can dream of. With respect to KCG, it was a sacrifice that I didn't enjoy making, but nevertheless had to. It came down to two strikes against KCG that made me liquidate the name first when looking to raise cash: 1. Market cap was higher than anything contained in the portfolio 2. Liquidity was greater than anything else contained in the portfolio The first consideration is one of correlation. The second consideration is one of convenience. Together, they made the decision quite easy. As it stands now, the portfolios are roughly 80% long spread out between WMIH, CIDM and BFCF. 20% of the portfolios are sitting in cash. It should also be noted that this was the worst week for the market in 19 months. Despite that fact, the concentrated portfolio you see above finished the week up. That is exactly what I like to see and hope to see more of that in the week...
THE VERY SERIOUS RAMIFICATIONS OF A NEGATIVE JANUARY
The recent market action has put some salt in my game. Not because I am some hardcore bull that can't see outside of my own market thesis. And it's not because of the fact that putting together a profit in January has become a difficult exercise. Rather, it has to do with the ramifications of a negative January for the market as a whole. You should know first that I'm not attached to any single piece of analysis that I put out there. I am convinced of my analysis to the point where I am willing to take on large positions for long periods of time. But I am not attached. There is a difference. Attachment creates judgement flaws that are emotional in nature. Conviction creates judgement flaws that are intellectual in nature. Intellectual judgement flaws that come with conviction can be corrected through new sets of data. Emotional judgement flaws that come with attachment cannot because the data cannot be separated correctly due to its emotional nature. It becomes a cloudy mess. With that said, I can change my mind and often will on a dime when new sets of data become apparent. Bringing me to this January's market action. January rallies following a strong year of gains are like the egg white and the yolk. They just work well together. One does not exist without the other. Therefore, when I crack the egg open and see that the all I have are the egg whites, I begin to worry that the whole carton of eggs may be wrong. That is what has happened here in January. Something that was supposed to happen, with every conceivable type of wind at its back to insure that it would happen, simply didn't. Not there. Absent. That absence is a cause for worry. I will present the statistical data to back this up in my monthly summary next week. In the research I have done so far, however, into the ramifications of a negative January following a strong year, it has led me to believe that 2014 could be more volatile, frustrating and potentially negative than most are prepared to deal with. We are certainly not on track for a 2000 type bear market or worse yet, a 2008 type bear market. Not by any stretch will things get to that level of pessimistic disregard for equities. However, we could very well glide within a range of flat to down 10 percent for most of the year. Nobody predicted that type of outcome for 2014. It now needs to be on the radar of every trader and investor, as the probability...
A LOOK INTO A RECENT FILING FROM BFCF
Here is something to take solace in as an investor who enjoys hidden asset, murky, under the rug type investments that the rest of Wall Street can't find, see or have the patience to understand properly: BFCF released an 8-K with the financials for BFCF subsidiary BlueGreen Corporation (formerly BXG:NYSE). The presentation simply reinforces everything I have discussed regarding the company since taking a position and publishing research in October: - Generated free cash flow of $71 million during 9 months ended September 2013. - Full year free cash generation of near $100 million - $46 million in EBITDA through first 9 months of 2013 - Full year estimate EBITDA close to $60 million - $337 million in sales during 9 months ended September 2013 - Full year sales estimates near $450 million - 20% growth in top line vs. 2012 - 11% growth in bottom line vs. 2012 - Timeshare industry as a whole experienced highest one year sales growth since 2006 Important to note that BXG is just one sub of BFCF/BBX. We know of three other subs that were acquired just over the past few months: Renin Corp, Hoffman's Chocolates, William & Bennett. Don't have much insight into the financials of these companies. However, we know the modus operandi of the company is to purchase niche businesses with a proven history of cash flow generation. On a post-merger basis, assuming the merger is consummated between BBX/BFCF, we are talking about a company that is trading at less than 4 times free cash flow AND has real estate assets throughout Florida that are impossible to value correctly due to a) vastness of portfolio b) various stages of development c) murky path to discovery of assets gained through foreclosure. ...
AN EYE ON GOLD
Being a contrarian by nature, I am drawn into opportunities that the rest of the market dismisses as either nonsensical or passe in nature. It is not good enough that I dwell among the heathens that derive pleasure from buying small companies, ignored as they are. My pleasure comes from a deeper scale of travels into the world of restructured, hated, convoluted, distressed and misunderstood companies. Stuff that not only is passed over by the Wall Street community, but dismissed as being of plebian descent, lacking class and structure of any sort. This character trait that has made its way into my investment philosophy also translates into more macro opinions. For example, during Q4 of 2013 I started glancing over gold names and actually found them appealing. Not because I know anything about gold mining companies, gold as commodity or the commodity markets in general. But rather due to the fact that gold is getting to the point of inflicting pain to the point where there must be an opportunity in our midst. So I started looking at separate gold mining companies. Just looking, mind you. And actually found some candidates that seemed semi-appealing from a risk/reward standpoint. The problem for me is that my macro calls are notoriously and consistently early. They always have been. More than 10 years go I used to pile into positions based on my macro opinions, suffering some extraordinary volatility in the portfolios I managed at the time, as a result. The opinions would turn out to be correct, but the path in getting to the point of profitability was filled with too many potholes, in hindsight. It was actually during the 2000-2002 that I became extraordinarily bullish on gold. I remember gold was so hated at the time that Jim Cramer kicked Don Luskin off TheStreet.com just for saying that gold stocks were a good investment. That was when gold was trading for about $300 per ounce. It turned out that Don Luskin was correct and Jim Cramer is now a popular Wall Street caricature. My mentality in the early 2000s was much different than it is now. I couldn't hold onto investments for years at a time waiting for my scenario to play out. My allocation model wasn't refined. I didn't make nearly the level of returns I should have during that gold run. It reminds me of one of my favorite market quotes: "It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find...
WHAT IF?
There are no doubts about it, I'm bullish. I was bullish when I started this blog in January 2011, with talk of Nasdaq 5,000 when it was sitting at 2,700. I've remained bullish throughout, with tiny periods of bearish doubt when the markets have become overcooked. The long-term thesis here, however, has and will remain of a bullish variety until the markets tell me otherwise. As those of you who have been reading the past few weeks certainly realize, I am also bullish for January. Despite today's near 200 point drop on the Dow that hasn't changed much either. I continue to believe January will end substantially higher than where we are now. In fact, I believe this week will end flat, in a worst case scenario. That means that we should see a turn between tomorrow and Thursday, at the latest. I do understand, however, that my job isn't to become entrenched in my own ideas, regardless of how well the last 5, 10 or 50 ideas have gone. My job is to realize that there will come periods when I am incorrect and decide how to deal with those periods appropriately. Risk management at its essence. During last week's review, I did have the markets basically being straight up for the remainder of this month. Today's hiccup certainly wasn't part of the road map. With that said, I have to start calmly entertaining the idea that my road map may, in fact, be completely incorrect. Today I was brainstorming the ramifications of my idea of a strong January being disproved by the market and what that would mean for the remainder of 2014. I came to the following conclusions: 1. If January does end up flat to down, then I would take it as meaning that the correction I had planned for mid-year (May-August) may, in fact, occur sometime earlier. Perhaps in the March to April time frame. A flat to down January would be a sign of market that is heavy to the point that it is perfectly content ignoring what is one of the better seasonal tendencies: a bullish January run following an extraordinary year previously. This would indeed be a signal of the market being comfortable with mediocrity during a point in time when it should be shining. 2. A weak January would also be a sign that the sharp, sudden and relatively short-term (less than 2 month) correction that I saw during the May-August window may be more of a shallow, rolling affair. I would guess between 5-7 percent on the downside, lasting around 2-3 months from March-April with June-July being a significant...
THE SURE SHOT
Early on I have a relatively good idea of what my 2014 will look like. Not in terms of performance of the portfolios I manage or the markets, in general. But rather from a standpoint of focus. I am seeing my focus increasingly turn towards quality rather than quantity. This is partly due to where we are in this bull market cycle. And also it has something to do with where I am in my own cycle as an investor. I had a conversation with an investor today regarding prospects for future returns and the engine that will generate those returns. His question had to do with how many ideas I would have to generate in 2014 in order to keep up with my performance of the past couple of years? When I told him that the portfolio you are looking at now is enough to accomplish my target returns, along with possibly 2-3 either new or recycled ideas from the past playing a part in the overall structure of the portfolio, he was somewhat surprised. I told him that I don't need 20 ideas per year that I don't understand completely or am unsure of in order to achieve returns. In fact, if anything, that type of portfolio structure tends to diminish returns as it compromises the quality of holdings within a portfolio. If you know how to perform research, find excellent ideas, learn everything you can about all the key components of that idea and execute a strategy of diligence towards seeing the idea to fruition then why on the rolling hills of Asgard would you dilute the idea by building a portfolio of mediocre ideas? As an investor, you stick to the best ideas and eliminate the rest ideas. Otherwise, you achieve frustration instead of any measure of wealth creation. I'm not trying to be the KRS-One of finance here, by the way. Consistent outperformance cannot be achieved by buying into any facet of traditional portfolio management. How can it? Traditional portfolio management has been proven decade after decade underperform the benchmarks. It can therefore be classified as closet indexing dumbed down. There is no magic in it. Only pain. If you look at the list of published research in the second half of 2013, you will see that I have chosen to become much more selective in only publishing three research reports. It is not that I am trying to avoid finding new ideas. Every single day after the market closes I spend an hour running scans, shuffling through candidates and taking notes on them, just as I have been doing for years on end....
4 CHARTS EXHIBITING A MARKET THAT IS HIGH AND MIGHTY FOR THE WEEK AHEAD
click chart to enlarge
DECEMBER PERFORMANCE SUMMARY AND LOOKING AHEAD TO JANUARY
*This is my monthly letter to investors summarizing the month of November. The full PDF version of the summary, including managed account performance data as well as a few added components is only available via email. Return data will no longer be published as a part of the summary. If you would like to be added to the monthly email list, please contact me at mail@t11capital.com Largest winning position in December: WMIH +145.22% Largest losing position in December: CIDM -12.17% New additions to portfolio: None New liquidations in portfolio: EVOL Portfolio exposure as of December 31st: 93% long/7% cash Top 3 winning positions in 2013: WMIH +236% (unrealized), IWSY +165% (realized), SPNS +44% (realized) Top 3 losing positions in 2013: PRXI -16% (realized), MITL -6% (realized), PTGI -3% (realized) Portfolio Highlights For December WMIH experienced an extraordinary month of gains following an announcement early in December that renowned private equity firm KKR would make a strategic investment in the company. This announcement created a gain of 145% for shares of WMIH during the month of December. The KKR deal, assuming it is fully-consummated over the coming weeks, immediately alleviates a number of pressing issues for the company: 1. It takes away the possibility of any further discounts in the value of the WMIH NOL shell, accompanied by WMMRC (reinsurance entity), due to fears of equity somehow being shelved in a future deal that puts equity holders at a severe disadvantage. The structure of the deal between KKR and WMIH provides, among other things, a hefty grant of 5 year warrants collectively totaling 61.4 million shares of WMIH common stock at an average exercise price of 1.36. KKR upon exercise of the warrants becomes a significant shareholder in WMIH, therefore removing the risk of any devious, underhanded type deals that will diminish or exclude the upside for equity holders. 2. It confirms that the NOL shell, with a reinsurance company attached, that is WMIH will more than likely be cultivated into an entity within the financial arena that is substantial in nature. Companies like KKR and Blackstone, not to mention the all star board of directors that has been assembled, do not come together in this manner to simply put up lemonade stands seeking profits that are inconsequential in nature. These are home run hitters. They seek out situations that in 2, 3 or 5 years can provide profits of an exponential nature. The modus operandi here is to seek out opportunities where relatively small amounts of capital are deployed, leveraged and cultivated into large amounts of gains. That will be the goal with WMIH, with details...