CONSERVATIVE ARROGANCE IN A BULL MARKET
In browsing through the noise with a focus on discovering the rare signal that emanates from within, I made the mistake of reading a blog posting from a financial advisor in which he unabashedly advocated a significant cash position in this bull market. I skimmed through the remainder of the article which cited various elementary arguments for remaining conservative in the face of an extraordinary bull market. There is a certain degree of arrogance that comes with the opinion of maintaining a significant cash position in this market. Cash is not a position. It is, in fact, an opinion. The degree to which you remain in cash is the degree to which you disagree with the act of equity appreciation. For example, a 10% cash position with a 90% allocation towards equities is significantly bullish opinion about future prospects for a bull market. A 50% cash position within a secular bull market, on the other hand, is a significantly bearish opinion with respect to the prospects for future appreciation. The arrogance disguised as conservative stewardship of capital comes from the act of disagreeing with a bull market that has been as consistent and steadfast in its appreciation as any of the past 100 years. It is always easy to argue bearish points because they appeal to the pseudo-intellectual crowd who grasp onto seemingly sophisticated measures of value or pending disaster that are predicated on data points subject to massive range expansions during a bull market. As an example, it was about two years ago that nearly everyone was clamoring about margin debt levels being sky high. Voila! Two years later we are at record highs and margin debt levels have expanded even higher. The "normalized" range has expanded. Everything from simple valuation measures to more sophisticated monetary measures are subject to expansion during a secular bull market. What you consider normal at the beginning of a bull market becomes stretched, contorted and disfigured to the point that it is unrecognizable by the time it all ends. In other words, it is all noise, with no signals. As this bull market continues, more seemingly influential investors will sound the warning bell that all is not Le Beurre d'Echiré butter and warm French Bread at the dining table. They will argue that what we are in fact being served is a steaming plate of merde. This consistent hum of noise will do its job to either dissuade investors completely or jostle them out of their existing positions. Despite the powerful tool for wealth creation that a secular bull market provides, very few actually take appropriate advantage. The sole reason behind this...
CLIENT LETTER: MARKET OUTLOOK
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. The theme of small-cap outperformance is one that I highlighted specifically in the October client letter. Numerous statistical studies were presented at that time pointing to a small-cap market that had a tremendous amount of reward in exchange for an insignificant amount of risk going forward. Since the beginning of October the Russell has gained 13.71% vs. the S&P 500 which is up 4.87% On a purely technical basis, the Russell is equivalent to the Nasdaq in its demonstration of strength thus far in 2015. These are all signs of a healthy market advance that is predicated upon rotation among asset classes by investors. The fact that investors continue to remain discerning in their portfolio choices throughout the current bull market indicates a level of responsibility that should not be overlooked. It is in responsibility among investors that sustainable advances take place. It is in irresponsibility on the part of investors that unsustainable advances turn into intermediate to long-term market tops. The thinking behind this is that when you have all classes of investors simply throwing their cash at every asset class regardless of risk/reward then investors are disregarding risk, thus setting up the market for increased volatility that typically results in a mass realization, at some point in the near future, that an exit should be made from stocks into safer assets. There is not even an inkling of this foolhardy behavior among the current class of investors. For example, the technology sector is successfully separating robust business models from business models that are questionable in their ability to provide long-term growth. There is no blanket mentality towards investment that demands social media, software or mobile names regardless of price, growth prospects or management ability. Companies that deserve to experience growth in share price are experiencing growth in share price. Companies that do not, have been lagging behind. Additionally, the appetite for portfolio hedges remains undaunted despite one of the most steady increases in major averages over the past several decades. The combined put/call ratio is sitting at levels that aren't too far off where we started this bull market, in terms of the voracious hunger for put buying over exposure to calls. In the chart above, the 50 day moving average of the put/call ratio is at its highest point in more than 2 years. The longer-term 200 day moving average is at its highest point in nearly 3 years, with only the European crisis of...
HIGHLIGHTS FROM IMPAC MORTGAGE CONFERENCE CALL & EARNINGS
For those looking for background on our investment in IMH, please see the research report published in January here. In the final paragraphs of the research report I cited the fact that the CashCall acquisition was a game changing development that allowed IMH to market their Alt-QM product, which is in its infancy, to a vast audience. The good news is that the marketing of the Alt-QM product to the vast number of borrowers who require such flexibility in borrowing hasn't even started yet. IMH's substantial growth is coming from originations of the traditional variety. The growth taking place is at a very early stage given where the company is within its own reformed life-cycle along with where the mortgage industry is as a whole. This was once a $2 billion company in terms of market cap. The current market cap of $125 million is not the end game for management that has been at the helm for 20 years. Why do I say that? Take a look at this commentary from CEO Joe Tomkinson earlier today: "With the addition of CashCall Mortgage, we have a scalable, centralized retail platform that is able to efficiently expand and retract during market fluctuations. By using this marketing to generate leads internally, we expect CashCall to be able to compete with some of the large internet lenders across the nation. In addition, we intend to leverage the same marketing platform to expand the volumes of Impac's new AltQM products as well as its government loan products such as FHA and VA. CashCall Mortgage will also be able to make use of our state licenses to expand its national lending footprint into more than 40 states." Currently, Impac only services 11 states. They are expanding int0 more than 40 states in the next 60 days. Basically, nationwide coverage. Additionally, the fact that the marketing presence of CashCall allows them to push their high margin Alt-QM product means that profitability can soar over the next few years. Deutsche Bank in a recent report on the potential for Alt-QM pegged potential upside growth at $200 billion annually within a mortgage market that sees $1.2 trillion in annual volume. The percentage that Alt-QM can command within the total mortgage market is substantial and IMH is basically the first one to the plate, as they were with Alt-A loans in the mid-90s. "Consistent with our strategy to expand total originations, the company also rolled out its non-QM loan programs last August marketed as the AltQM and we funded its first originations during the third quarter. In the first quarter of 2015 the company's AltQM pipeline was approximately...