WHAT TO EXPECT GOING INTO MID-YEAR FROM THE MARKETS
The last time I posted any kind of chart here was on October 30th, in a posting titled," An Unorthodox Long-Term Indicator Is About To Scream Buy." The general premise, in a nutshell, was that the market was about to embark on a 20% rally over the next 12 months with very little chance for a drawdown from that point. This was at SPX 2100. Now that the SPX is closing in on 2400, it's time for an update to see exactly where we should see an intermediate term top that will interrupt the current sense of nirvana. click to enlarge Given the current trajectory of this run, it is not unreasonable to expect 2500-2550 on the S&P 500 by June or July. Depending on how the market responds to this important trajectory point will determine what happens from that point forward. There remains little reason to bring in long exposure presently, other than obtrusive contrarian indicators and valuation markers that are inherently prone to range expansions during secular bull markets....
PIH IS COOL AGAIN
Have been adding to our position in PIH since last week when it was announced that 1) the company would be making their long awaited expansion into Florida to write homeowners and wind-only coverage 2) Larry Swets Jr. CEO of a previously researched company and investment of ours KFS would become Chairman of the company. Mature Florida property and casualty insurers are selling well above 1 times book in most cases and above 2 times book in a few cases. PIH all the meanwhile is basically being neglected in a dark, moldy closet trading at less than 1 times book, despite have some pretty outstanding prospects for accelerating return on equity dramatically moving forward, while currently maintaining an overcapitalized balance sheet that will assist greatly in the process. This conservatively positioned balance sheet also mitigates a great deal of risk for shareholders at these levels. A diversified geographic base also mitigates the worry of having too much exposure to disaster prone regions such as their primary market in Louisiana. The company nevertheless has been effective in their reinsurance strategy, having faced an inordinate number of weather events over the past few years in Louisiana. Additionally, the company has an activist presence with Fundamental Global, PIH's largest investor. Although shareholder activism by hedge funds has now become more of a marketing strategy as opposed to an investment strategy, Fundamental Global has waged some successful campaigns in the past, proving to be beneficial to shareholder interests over the long-term. Maintaining growth in Louisiana while responsibly underwriting policies in Texas and now Florida should easily yield a near 20% return on equity, which will result in a premium to book value reflecting this new growth. A 1.5-2 times accelerating book value is easily achievable here upon some relatively straightforward execution moving forward. And, of course, barring any anomalous, weather related events. In a market of premium valuation, PIH remains an attractive, undiscovered proposition. Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary...
FEBRUARY CLIENT LETTER: A MAGNIFICENTLY PERILOUS ALTERATION IN THINKING
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. There are preconditions to this current phase of the bull market that will only become obvious in hindsight to most investors. Those preconditions involve the price that is to be paid for the nearly unbridled enjoyment of the past several months by a majority of investors. That enjoyment is a marked change over any rally of the past several years, going back to 2009. As with any change, there are tradeoffs to be made for beneficial conditions that involve new participants with a completely reformed mental attitude towards the markets. Whereas from 2009 to late 2016, there was the perpetual hum and sway of skepticism towards the markets, the rally from November 2016 to present has disposed of skepticism, fear and trepidation, in exchange for optimism, jubilation and to a certain extent, greed. The entire framework of the rally, therefore, has been altered from November 2016 forward. The price to be paid for this alteration in the framework or code, if you will, that is underlying the current rally is likely one that most investors are unprepared to face. That price comes in the form of increasing, sudden volatility on the downside that will become more frequent and pronounced as the rally continues. Gone are the days of simple 5-7 percent pullbacks with the occasional 10 percent pullback that is met with an almost immediate trembling fear taking over market participants. The fundamental backdrop does not justify getting scared after a 10 percent pullback any longer given that investors now have concrete fundamental facts from which to justify buying dips. Since the markets are hell bent on inflicting the maximum amount of pain to the maximum number of participants, the shakes have to increase in amplitude. The dips have to command the emotions of investors before they reverse. The same investors that were hedging, selling and selling short stock after a 5 to 10 percent dip in the markets now have the following logical assumptions to draw from that simply didn't exist at anytime from 2009 to late 2016: I will buy the dip in financials because deregulation will increase profitability I will buy the dip in financials and insurance because increased interest rates expand profitability I will buy the dip in industrials because there is a resurgence in domestic manufacturing I will buy the dip in industrials because infrastructure spending will boost earnings I will buy the dip in oil & gas names because domestic energy production is a priority for the current adminstration I will buy the...