AN EDGELESS ENVIRONMENT THAT IS SET TO CONTINUE
There is no secret to it, really. We are in an absolute edgeless environment that deserves less of your attention than you are presently giving it. In fact, I shouldn't even be writing this article to give this environment credence. If you go back to September of last year, you will find most of the major averages in pretty much the same spot that they closed at today. Meaning that for the past four months the markets have done absolutely nothing. It has been a constant back and forth between earnings worries, macro fear, interest rate hysteria and an occasional global pandemic thrown in for good measure when the pity party starts slowing down a bit. I'm not here to dissect the indistinguishable and abstract, as is the norm in the modern day finance. Let's leave the professorial sermons to the professors of finance, of which the news pages, blogs and websites are filled the brim. My sole purpose is to make money for my clients and for myself. To increase capital as opposed to propagate illusory facts that serve no purpose other than to complicate simple situations. With respect to making money, the current macro-market situation is extremely simple: We haven't moved in four months as previously stated. The major averages are down less than 5% from their recent highs. In the meanwhile, pessimism as measured by long-term moving averages of the put/call ratio is higher than at any point in 2013, nearing the highs of 2012, below the levels of European crisis of 2011 and nearly matching the highs of 2010. Simply put, the only time the market has been demonstrably more pessimistic than this current moment was during the European crisis of 2011. Here is the chart of the combined put/call ratio using the 20 and 100 day moving averages only. Notice the level of the 100 day moving average in red: What does this mean for investors? Any breakdown of the recent choppy, sideways ranges for the market averages will not result in sustainable downside pressure. At worst, the averages will move back into the ranges we have become accustomed to over the past few months. At best, a breakdown in the recent ranges will develop a swelling of pessimism great enough to put in a sustainable bottom from which the markets can rally. In any case, this is not the time, place or psychology that leads to 10%+ declines, eventually leading to the lopping off of investor limbs. It's a situation where the best course of action remains little to no action. Point is that the desire to become overly-defensive at this juncture...
WANDERLUST
This is garbage. The start to 2015, I mean. I'm not talking from a personal performance standpoint either as I have avoided ice skating in molasses through the act of being long a group of names that are outperforming through the first few weeks of the year. WMIH, IMH and KFS make up a bulk of long exposure with a significant possibility of it remaining that way for a long time to come. The reasons why are rooted in the fact that outstanding risk/reward opportunities simply do not exist in this market any longer. You are giving up a significant degree of risk to achieve a reasonable gain. Not the type of odds deserving of capital. As for the garbage that has managed to seep into the veins of the current bull, it comes in the form of disobedience in the face of strong seasonal tendencies. You see, these seasonal tendencies, of which the vaunted January rally following a strong year for the market ranks high, have rhyme and reason behind them. They are not simple random events that just happen to occur during a specific time span dictated by a the flipping of the calendar. When rhyme and reason fail then the astute observer of the markets must ask the question, what could it be that I may be missing? It is similar to the spouse who comes home every day at 4:30 and the one day, without warning, decides to show up at one in the morning. The sudden, unexplained aversion to natural tendency cannot simply be dismissed. Odds are that something is brewing beneath the surface. So the market in its wanderlust has decided to avert itself from a positive January, instead performing a volatility dance that is unpredictable in nature and frustrating to those involved. Of specific concern is the Russell 2000 given that January is supposed to favor small-cap names as investors put money to work in high-beta outperformers. It's simply not happening. There are a million reasons as to the possibility of why? I'm not here to act like I'm smart enough to pull the "why" out my hat. What I am here to say is that anomalous behavior shouldn't be dismissed whether on the macro or micro front. What we have here is an anomaly across multiple asset classes that is deserving of a perking of the antennae until we are given more information. Until then, stay...
5 CHARTS REVEALING THE DIARY OF AN ODD MARKET
By no means should this current market be considered sane. In fact, it is quite odd. It is odd because following a relatively strong year for the major averages in 2014, January is off to a completely nauseating start. According to well substantiated Wall Street lore, January is supposed to be a time of minting money following strong performance in the previous year. If January continues at its current pace, it will mark the second year in a row that Wall Street has been thrown a screw ball instead of a slow pitch in January. While last year's malfeasance during the month proved to be benign in nature, there is a substantial possibility that this January has much more nefarious intentions in mind. Allow me to demonstrate via the following 5 charts: click chart to...
NEWEST RESEARCH REPORT: 15 PAGES ON IMH (IMPAC MORTGAGE)
T11 Capital Management is currently long IMH at prices between 5.50-6.50. Download (PDF, Unknown)...
CLIENT LETTER: A MARKET OF ABUNDANTLY FAVORABLE ODDS
What follows is a portion from the monthly client letter I send out to investors. A Marathon, Not a Sprint In the spirit of welcoming the new year with a sense of forthrightness that seems to be lacking on Wall Street, I found the second half of 2014 to be agonizing. Perhaps my agony stems from the fact that I was caught in the malaise that was small-cap trading during this period. Or maybe it lies in the fact that the major benchmarks just kept going up while I couldn't figure out which names were driving the market forward. In any case, the narrow market of 2014 left all but a chosen few scratching their heads wondering out loud, “what can I do to keep up?” Although yearly performance is an important statistic that I take pride in, all investors are prone to forget the fact that this is marathon, not a sprint. There is no strategy that can be asked to outperform under all market conditions. Within any strategy there are times that a digestion period takes place. The investments within a portfolio don't know or pay attention to the same calendar you and I do. They are driven by events, both macro and micro, that are sometimes immediately reflected in the stock price and other times take many months to be realized. In either case, patience is the determining factor as to who ends up successful and who ends up in misery. The Antithesis of Euphoria Why exactly were small-cap companies such underperformers in 2014? The broad stroke version of the answer lies in the fact that small-cap names required a break. They had been moving at breakneck speeds over the past few years, with double digit up years every year since the 2009 bottom with the exception of 2011. In fact, the preceding year (2013) was the strongest year of all with a gain of near 40% for the Russell. So it turns out to be a well deserved break, in fact. The most pressing question, at this point, is how can a market be in any type of euphoric stage when entire swaths of speculative sectors, whether small-cap or otherwise, are left for dead in the midst of a narrow advance? If anything, this reveals a market that is timid in nature, as a small group of well heeled, sophisticated investors bid up companies that are well-researched, extremely liquid and fairly reliable with respect to earnings. This is the antithesis of euphoria as it demonstrates responsibility in the face of increasingly frequent record highs in major indices. Euphoric markets are characterized by...