How Everything That Happened in 2018 Now Makes Technology Names A Screaming Buy
The general theme I attempted to convey more than any other during 2018 was that everything changed this year. In fact, before I started sounding the horn on how different 2018 and beyond would be, I penned a note about why the markets would generally suck for the remainder of 2018, calling for the S&P to hit 2,200 at some point this year. While we got close to 2,200 last week, the bottom for the S&P was 2,346. Financials were cause for concern basically all year. In February, I discussed why financials were setting up to lead the market down in 2018, highlighting the fact that all of 2017's gains could be erased in 2018. Here is the yearly chart for the XLF (financials ETF) showing that all of 2017's gains in financials were erased in 2018. In April, I called for exponentially higher prices in crude oil. A call that was abhorrently incorrect. Energy has so many geopolitical cross-currents that I have always found gauging its price movement a difficult endeavor. It's one of the few sectors I refuse to trade as a result. One area that I have made a recent u-turn is with respect to my bullishness on private equity names, specifically KKR. Whatever economic ills may strike in 2019, private equity is ill-suited to deal with the confluence of difficulties that lie ahead. In May I said that KKR has long-term compounder written all over it. I no longer believe that to be the case. In July, I discussed how all of Wall Street was being herded around the FANG names, in preparation for mass slaughter. It goes to show that whenever Wall Street has everybody on one side of the fence, it's most likely because they want everyone to be set on fire simultaneously, with the least amount of effort to empty individual coffers of capital. More recently, I made the case for owning gold stocks. Republishing a research report sent to my investors in our November letter. December was the best month for gold in two years. That trend of outperformance is set to accelerate in 2019 as gold is literally in the perfect spot where all roads lead to higher prices. I was premature in my bullishness for the markets in December, believing that the back end of the month would see substantially higher prices, with the popular averages ending the month in the green. That was very obviously incorrect. I was also incorrect in believing that that the window for a sustainable rally had closed, as discussed in this note on Christmas day. So now that we know that everything did change...
Lies, Damn Lies: Armageddon On Pause Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: Insider buying is now at an 8 year high according to Bloomberg. "The last time insider buying spiked in this fashion, in August 2011, the S&P 500 was in the middle of a 19 percent retreat before staging a 10 percent rally in each of the next two quarters." Insiders are very obviously witnessing the fact that on a corporate level everything is fine. The weakness in the markets hasn't trickled down into the economy as of yet. Whether in two quarters from now those very same insiders are wishing they had put their cash in a bank CD due to a falling stock price and sudden economic weakness is another question entirely. Insiders are just as likely to blow it as anybody else, keep that in mind. For the time being, however, this is another indication that corporate earnings will calm the markets a bit in Q1. Short interest in various industry ETFs is plunging, which is basically the equivalent of soldiers putting down their guns in the middle of an oncoming assault. Either the soldiers have lost their minds or they don't think the assault is worth fighting against. The XLB (materials sector etf) is at a 4 month low in short interest. XLK (technology sector etf) is close to a three low in short interest. XLP (consumer staples) is sitting at a multi-year low in short interest, as well. From a purely contrarian perspective, this is a problem. Among developed countries, the United States is certainly an outlier when it comes to debt. This fact puts the Federal Reserve in a precarious position should another economic crisis take hold. In any case, the U.S. Dollar will be the most apparent casualty. The Fed expanding their balance sheet had a stupendous effect on equity prices. How can we logically assume then that through extensive global central bank balance sheet tightening, this effect won't reverse to an extent? We have already seen that in 2018 as the Fed's expanded tightening starting in October of $50 billion per month was accompanied by a market top. Europe climbs onboard the QT train in 2019. While the markets could very well...
Lies, Damn Lies: OMG Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. In other words, markets are a thief and must be treated like one whenever attempting to interpret their message. These are simply thoughts (some completely random) as I attempt to connect the dots: The inherent conflict that has existed between the Fed and White House is nothing new. In fact, there have been numerous times throughout history when the Fed is pursuing tightening in monetary policy while the White House is spearheading an aggressive fiscal campaign. The Fed will remain true to its mandate, spoken or not, irrespective of interference from the White House. Whether Trump can actually have Powell removed is another subject. Should the markets continue to slide in 2019 I can't see him not making a valiant attempt. Bid to cover ratio on recent 2 year and 5 year treasury issuance is extremely thin. In other words, there is little demand for U.S. debt. Foreign central banks and institutions are stepping back due to negative dollar hedged returns, leaving only U.S. institutions, such as banks, pensions etc. to do the bidding. This dilemma will only be amplified in the new year as funding costs for the U.S. are set to increase. The next version of QE, if it comes, will look nothing like the last. Expect yields to jump and the dollar to dive. The theme in 2019 may just be "how the Fed lost control of the financial markets." What happens when 401k statements and hedge fund capital balances are seen by investors in January? There will be redemptions galore. If your financial advisor is down in line with the market this year then they are a premium priced ETF with a voicebox that regurgitates news on a daily, weekly or monthly basis. 2018 flipped the market into an environment where skilled investors can generate alpha. I expect it to remain that way for years to come. Chinese conglomerates have been on a global buying binge driving up everything from real estate, to equities, to nightly high end hotel charges. Their appetite for accumulation seems to be shifting to a more nationalistic tone, however. This could turn into a very real theme in the years ahead. An article on it here http://www.globaltimes.cn/content/1133609.shtml As much as the markets have turned...
Lies, Damn Lies – Santa Is A Hater Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. In other words, markets are a thief and must be treated like one whenever attempting to interpret their message. These are simply thoughts (some completely random) as I attempt to connect the dots: The S&P is on track to have one of its worst quarterly performances ever. As of today, it stands as the 14th worst quarter for the S&P in market history with a loss of 17%. Without going back into the Great Depression years, here is what happens the next quarter after experiencing despondent annihilation in the previous quarter: Q3 2002 -17% Q4 +10% Q2 1970 -18% Q3 +11% Q3 1946 -18% Q4 +3% Q2 1962 -21% Q3 +3% Q4 2008 -22% Q1 -13% Q4 1987 -23% Q1 +3% Q3 1974 -25% Q4 +1% In November I said that the downside on Apple was 150-160. After witnessing the price action over the past several weeks, it's now apparent that Apple will move below 100 at some point in 2019. Perhaps far below. There doesn't seem to be a chance in hell AMZN can escape all of this without moving back into the triple digits. It will bounce with the rest of the market. However, in 2019 it will have a 9 handle and then perhaps 8 or 7. Private equity firm ARES is highly susceptible to a slowdown in the business cycle as they are heavily involved in CLOs to businesses that have become popularized due to the fees enjoyed by those who participate. Economic downside will turn those companies exposed to these assets into one-eyed zombies. Here is a recent Bloomberg piece describing the absurdity of it all https://www.bloomberg.com/graphics/2018-collateralized-loan-obligations/ BABA is a terrific short candidate on any future rallies. I'm increasingly compiling a list of companies to short in 2019 when the market strengthens. This is a top of the list candidate. BRKB could be headed to 130 in the next 6-12 months. Another short candidate. While I don't like the dilution in BTG, it's an attractive name in the gold sector. Like other miners, their management is paid far too much and they dilute shareholders ad infinitum. Don't own it. Already have our favorite name in the sector, but BTG is an attractive option. Looks like the Nasdaq Comp is...
The Window For A Real Bottom In The Near Term Has Closed
In my February article titled "Here Is Why The Markets Should Generally Suck For The Rest of 2018" I spoke about the S&P hitting 2200 at some point this year. There are still a few trading days left in the year with the S&P sitting at 2351. With the recent volatility 150 points on the downside could happen tomorrow. Admittedly, as the markets sold off into the first couple weeks of December, I wasn't expecting my target of 2200 on the S&P to come anywhere close being hit. I was, in fact, expecting a substantial rally to end the year. There were numerous, highly relevant support areas for the markets combined with sentiment readings that when combined created a statistically significant probability of rampant upside. What happened is the support areas, sentiment readings and favorable seasonal aspects of the market got hit with a voracious combination of anomalies. Those anomalies have now caused the markets to more or less collapse during the back half of December. What we are experiencing currently is exactly what anomalous behavior by markets in the face of numerous favorable data sets should do. When markets do not correspond to normal functionality, being overwhelmed by anomalies, they essentially break. They cease functioning as anything but a mechanism that feeds on itself in one single direction. The question to ask is now that the markets are effectively broken, what is the next course of action? While there is a lot of fear in the markets as determined by nearly every gauge of sentiment and price behavior available, the general sense I get is that investors are looking to play a bounce in the markets more than anything else. Everyone knows how powerful the bounce will be given such compressed prices and sentiment so they want a piece of the action. Therein lies the problem of the next few weeks for equities. We are now approaching a new year and with that investors have a tendency to think that with the flip of the calendar comes what are likely to be seasonally favorable factors, as well as an earnings season that "can't be that bad, as the economy is still functioning at normal levels." This natural tendency to want to buy stocks in the new year and the predominant view that earnings don't justify this level of panic is plain and simply the next trap for investors. The game then becomes too easy for such a profitable buy point. The window for a sustained rally and the bottom that everyone seems to be looking for has therefore been closed. This doesn't mean that we won't see a...
Market Vitriol Irrespective of Circumstances
You know the markets are having issues when support areas for major indices are treated as if they don't exist while tried and true seasonal patterns are treated with loathsome disdain by the markets. I was expecting the markets to utilize abundant areas of support in major indices, primarily tech related, as well as the favorable seasonal setup to mount a formidable rally into year end. The fact that they haven't even made an effort is an informational nugget that shouldn't be ignored by investors. When markets begin demonstrating such vitriol, irrespective of circumstances, there is nearly always something brewing underneath. The message to investors from the market presently is "I don't care about anything but derisking at the fastest rate possible." Indeed, we are seeing some measures of velocity to the downside that are unprecedented except for periods when we are in severe economic chaos. The mystery, as it stands today, is that by all measures the economy is fine. This is worrisome for one and only one reason in particular: If this is how the market reacts when the economy is fine, how does the market react when the economy is actually deteriorating? And deteriorate it will as the stock market is now 155% of GDP, this will ring throughout the economy. QE created inflation in asset prices resulting in a boost to the overall economy that is still showing up in the economy today. QT will deflate asset prices resulting in an overall contraction in the economy that will show up in the future. Meanwhile, there's no liquidity, the Fed's balance sheet doesn't have the firepower to properly fight an economy downturn and Europe is about to start their own version of QT. For Christmas investors are receiving a horror themed 5,000 piece jigsaw puzzle to assemble courtesy of the White House and the Fed. Enjoy. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com 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...
Lies, Damn Lies – Festivus Edition
This is something new I'm trying out. Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. In other words, markets are a thief and must be treated like one whenever attempting to interpret their message. These are simply thoughts (some completely random) as I attempt to connect the dots: AG (currently long) is an attractive risk/reward proposition. Silver, as an investment, is severely undervalued according to nearly every measure, most obviously the gold/silver ratio which is near multi-decade highs. AGN is broken. It's a value trap with a track record of engineered earnings. Management changes haven't helped. It should be shorted on rallies. Gold continues its stealth rally as I type. Question has become is the rally in gold during December a flight to safety which will unwind once the market reverses or is there something more substantial and systemic building that will cause long-term appreciation in the metals complex? BH is a company I watch because Sardar Biglari is an interesting character. However, his restaurants are terrible. His business practices seem to be self-serving, as well. The stock price has become a complete, unmitigated debacle. BHC seems like a value trap. Too many value investors who have stumbled into it thinking the former Valeant is due to return to its former glory. Seems too easy. There is an angle most are missing. Private equity names have gone from beautiful to horrific. Nothing embodies QE beneficiary like PE names that thrive off of cheap leverage. It is only natural that they would suffer the most in a credit/liquidity contraction. Emerging markets are flat for the month. US markets are down 12%. Commodity valuations as a sector are around 100 year lows. That valuation gap is poised to close in 2019. KKR is more than likely a short candidate on the next rally. The full effects of QT will not be nice until after a period of significant adjustment. SFTBY won't fare well in any type of tech contraction. The CEO is brilliant during technology led advances and an absolute liability when that cycle turns. Interpreting all the moving parts of the business and attempting to assign a valuation is an exercise in futility. If you look at the FANG names, the declines in these companies have not come close to getting started....
Reflection In The Face of Mayhem
Some thoughts: Bear market bounces typically provide enough cover for the liquidity needed so that those who want to evacuate the premises may do so. They usually last approximately two months before they fizzle out. Q4 earnings, when they are reported in January, should be rosy enough or at least, not bad enough, to warrant further selling. That may provide a short to intermediate term base for the markets. The stock market of 2000/2001 may provide a guidepost as to what can be expected for investors, as it was the last time the Fed was hiking into cratering stock prices while investors had as much equity exposure as they do now. The reflexive nature of equities in relation to the economy is the biggest question of all. The recession of 2001/2002 was directly caused by the deflation of the tech bubble and the adverse effect it had on the economy in general. The stock market is now 155% of GDP. It is essentially the economy. By March-April this selloff should show up in economic data, if not earlier. The Fed will very suddenly reverse course. It will be unexpected. The fact that QT is on autopilot according to the Fed is downright frightening. Nothing should be on autopilot that has never been attempted before. Autopilot works with tried and true systems that require little thought, only execution. In an economy largely driven by QE the past decade, how can QT not be expected to result in a substantial contraction? The balance sheets of developed economies, primarily the U.S., is in no shape to fight an extended downturn. Weakness in the US Dollar is all but guaranteed in the time ahead should the economy weaken significantly. The specter of 2008 looms large. Decisions made by investors during downturns are framed largely via 2008 as a corollary. The resulting overreactions, causing statistically anomalous price action, has to be considered by every investor. At its essence, our capital markets are a confidence game. There has never been a time in the past where confidence in our system has potential to erode as quickly and as violently as exists presently. This is due to both the current state of leadership, the balance sheet of the government and the fragile state of the economy. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained...
Memo To The Fed
Everything changed in 2018. It's a theme I have been pounding the table on almost all year. The acceleration of QT paired with a Fed that is hell bent on taking the fed funds rate to neutral so that they will have the ammo to fight the next recession is a double barrel approach to monetary policy that the economy, very obviously, is not in any condition to handle. There is an interview with Stan Drukenmiller from yesterday where he speaks about calling the past four recessions by observing price action in certain sectors as being a bonafide tell of an impending recession. What has changed, however, is the fact that algos have completely diminished the signaling power of the markets. They have turned what were once reliable price signals into nothing more than noise that can be discarded along with 99% of the other observable phenomenon occurring in the markets today. For that reason alone, it may be misleading to judge the markets based on price signaling that has worked in the past. The very basis of many of the algorithms that dominate trading is a trend following approach that is further reinforced by passive investors (ETFs) whose clientele will always buy market tops and sell market bottoms. Among the few humans left actually utilizing intellect to analyze the markets there is a very real tendency towards recency bias predicated on the 2008 financial crisis. Everything on the downside, whether fundamental or technical, is framed in the context of 2008 for the modern day investor. With the aforementioned tendencies of algos, passive investors and recency bias among thinking investors there will be a tendency for all of these parties to converge along the very same lines arrived via different paths. The danger here is that markets are reflexive in nature. Negatively reinforced price action irrespective of how ignorant the cause of selling can negatively influence fundamentals within the economy. Confidence is fragile. Most obviously demonstrated by the fact that once it's lost, it is nearly impossible to regain. Once investors lose confidence, their behavior can influence institutions that extend credit, create jobs, purchase machinery and invest in the general economy. Especially when every single management team in the developed world is operating against the backdrop of 2008 being the framework for any negative eventuality. The actions of the Fed tomorrow in the form of any hike whatsoever with continued QT to the extent of $50 billion per month can irreversibly tip the weight of confidence towards the blatantly negative side of things, pushing the economy into a situation that will be precarious due to the limited resources of...
Taking The Other Side Of Wall Street’s Most Popular Current Idea
Being long the US Dollar is the cool trade among fund managers according to the most recent BAML survey of fund managers. More popular than FANGs. More popular than BATs. More popular than any semblance of value names. This matters to me because I'm on the other side of this trade. I believe anything related to being long USD here is a wretched risk/reward proposition: The rate increase cycle is set to end Deficits are becoming cumbersome Government is in a general state of dissary USD strength is wreaking havoc in fixed income markets as hedging USD risk is now a net negative return proposition The integrity and independence of the Fed will be continually challenged in 2019 as the economy becomes difficult to navigate and the president wants to be reelected in 2020 The reserve status of USD is under increased pressure globally, especially from China and Russia All of this spells a series of issues for the USD, which make competing currencies especially attractive. Gold, in particular, has a set of dynamics working for it that create very few avenues for any weakness moving forward. In other words, the risk/reward proposition in metals is more attractive than virtually any other asset class in the markets presently. Over the past month I have steadily been building a metals portfolio that now consists of AG, SA and GDX. All substantially sized due to the favorable risk/reward conditions that exist. The news of other fund managers taking the other side of my long gold trade by being long USD is as good as news as one can expect when being in any position. Asset managers of today are trend followers that extrapolate fundamental arguments curve fitted around whatever trend it is they are following at the time. In other words, a majority of fund managers who are long the USD here are only long because it's going up. They pay for uptrends and they pray for uptrends to continue. That's simply the depressing nature of asset management in 2018. The remainder of this week will likely see some of the wildest swings in an already wild year. While not expecting the market to make being long precious metals as easy a trade as it has been thus far, 2019 has all the ingredients of a bull market in places where there has been a long period of drought. Precious metals being the most obvious beneficiary. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at...