Portfolio Update: The Persistent Shuffle
We came into January with a 200% long position based on a confidence that nearly everybody had the market wrong at the end of 2018. As the month wore on, it became apparent, at least for a period of time, that there were some issues with overall stability. At the beginning of this week, we came in close to 100% net short. Following a Fed that absolutely gave it up to both the stock market and the President (not sure which yet) this week, I covered all of our shorts between yesterday and today, leaving us at a close to 100% long position as we enter February. Needless to say, it was an active month of near persistent rotation. It all came together, however, as we managed to absolutely obliterate our benchmark (S&P 500) for the month of January. I have eleven months now to turn something very good into something spectacular. This will be my focus. With that in mind, the shuffling continued today. The morning consisted of both covering all of our remaining shorts (covered NVDA and C yesterday) while initiating a small long position in NFLX and reversing from our short TXT position into a long position. Towards the latter half of the day I took another shot at KL on the short side as the gold trade, especially in this name, has become overcrowded, begging for a rinse to reset some of the foaming at the mouth taking place among investors. Much like January, I'm going into February with a bullish outlook on technology and interest rates. One of our better trades in January was long rates, which is something that is looking tempting again here very soon. Unlike the beginning of January, however, where I was bullish on metals, I think that gold and silver are due for a reset. This could be a trade that makes me look foolish, I acknowledge that fact ahead of time. Gold and silver could morph into a runaway train on the upside. However, the risk/reward here warrants a position on the opposite side of the consensus long metals trade. It will be important in 2019 to remain fluid in one's approach. This isn't a one size fits all type of market environment. Rather it is one that should be adapted to continuously as it evolves based on a volatile economic and geopolitical cycle. Any investor who is clingy or possessive of their thesis should just check out now. This isn't the time or the place. _______________________________________________________________________________ From time to time, I email commentary and excerpts from my monthly investor letter to those who are interested. If you...
Tucking Tail and Running Post-Fed
I came into today a chest pounding, snarling bear emboldened by a combination of a substantially positive January (leveraging gains during big up months is crucial) and all cylinders firing on the short side of our portfolio. The boost given to the market by AAPL was of no concern to me whatsoever. As I detailed last night, I felt that the market would use AAPL as an excuse to relieve some downside pressure before resuming the downtrend at some point in the near term. The historic about face from the Fed, however, was something entirely unexpected. At least by me. Let's not beat around the proverbial bush here: Today's near complete reversal from a hawkish stance to an extremely dovish stance was historic in proportions. It speaks of a Fed that has been compromised because: They are either beholden to the President of the United States OR 2. They are beholden to the stock market In either case, they are basically telling us that we are a few negative economic data points away not just from a completely halt of QT but a resumption of QE. More than anything else, this was the message from today's Fed. The question now becomes where does this end? Once the Fed has justified carrying a balance sheet that is bloated beyond any relevant historical comparison, why would they have any problems bloating it a little further and then further still? The answer is very simply that they wouldn't. The answer is that the Fed has told the markets that their balance sheet normalization wasn't anything more a short-term exercise that was neither concrete in intention or in execution. Delving deeper down into what all of this means, it is obvious that the economy is much weaker than anybody expected at this stage of the expansion. The Fed isn't simply ruining their reputation on a whim. They are obviously seeing data points that worry them to the point that they don't care. They know the economy can't handle any further tightening, regardless of how badly they want to get to a 4% Fed Funds rate and a balance sheet that resembles anything close to what they had in 2010. With all of this said, the bear case that I was only too happy to embrace pre-FOMC has been compromised post-FOMC. Realizing this as the trading day wore on, I covered short positions that had the potential to harm us the most. I took profits on NVDA. I took a small loss on our C short. I also took a small loss on our KL short that I initiated just yesterday with the idea...
Lies, Damn Lies: Broken Markets 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: Much to the delight of plebeians across Wall Street, AAPL released their earnings with what pretty much a thud. Of course, the market being the market, with negative mental associations already built into the stock...it promptly rallied afterhours some 6%. The market will use AAPL as an excuse to relieve some downside pressure before what I suspect will be further downside in both the stock and the market into the middle of February, at least. With the FOMC set to announce their decision tomorrow and knowing that the Fed hates to be seen as predictable, I would expect them to zig while the market is expecting a zag. In other words, don't expect them to hand investors a bouquet of flowers and a box of candy tomorrow in the form of an accommodative stance disavowing knowledge of QT or further rate hikes. Shorted KL today for a trade. This has been the hottest gold stock in the market over the past 12 months. While I am very long-term bullish on gold, in the short term I suspect that investors have underestimated the Fed's resolute stance towards QT. If there is any inkling of doubt regarding the Fed's propensity for dovish behavior, the US Dollar will strengthen and gold will fall. Gold, like nearly every commodity, is highly influenced by technicals. In what is a classic breakout pattern here recently, I expect that there is a lot of weight gathered on the upside that if tipped, could result in some high velocity damage over the short-term. It's a high probability trade I expect, especially when given the potential payout due to the aforementioned. Have been short NVDA since last week. The earnings warning on Monday gave us a nice cushion to push the position. I have added to the short since. These types of momentum names, once their earnings trends shift and price deterioration begins to take place, become possessed spider demons on the downside. They completely obliterate expectations for what is possible in terms of sheer destruction of capital. Once the market begins to deteriorate further, the point I am making here will be demonstrated in real time via...
Lies, Damn Lies: Pre-Market Ponzi 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: Got shorter as the week progressed last week. This is a difficult spot for the market that presents investors with a terrible risk/reward situation, as opposed to the beginning of the month where risk was negligible and the reward for participation on the long side was shiny. Can't emphasize this enough: Understanding the company you keep in the markets is a highly overlooked edge. As it currently stands, the same investors who were making the terrible decisions to sell late last year are trying to buy back the stock they sold here and now. The reason? They have been provided comfort by the market in the form of earnings, the Fed, government reopened and so on. It's an environment that is being made cozy and comfortable for investors so they don't realize that ritualistic castration is about to take place. The put/call ratio on Friday fell to some of the lowest levels observed over the past 12 months after spiking to some of the highest levels observed in years just several weeks back. This type of velocity shift in sentiment typically ends up in some type of violent reaction by the markets. It's akin to stumbling upon a monster in its lair. This is one case where popular sentiment may actually prove to be correct. Emerging markets look like they are set to outperform this year. It's not at a point where I believe in the emerging markets thesis strongly enough to invest. However, it is worth noting that sentiment and relative value versus developed markets is at historically extreme levels. In other words, emerging markets are a bargain vs. Europe and especially the U.S. With the Fed meeting taking place this week and the market largely pricing in a dovish Fed, there is potential for an extreme reaction if they aren't as soft as investors expect. In either case, it seems to be setting up to be sell the news type of event. This week is the heart of Q4 earnings. Again, with the markets advancing as they have, the reaction to earnings has the potential to be weighted on the downside. It's a simple probability scenario where...
Lies, Damn Lies: Traps In Technology and Financials 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: AAPL looks like a trash can on legs. The lag it has experienced has now become so pronounced that it requires a dose of fundamental steroids in order to move substantially forward. Of course, that dose could come via earnings. However, somehow it doesn't seem like a highly probable conclusion to the current chapter of the AAPL saga for it to overcome a downturn in the iphone cycle in a few weeks. I actually wouldn't mind buying into it, but it would have to be substantially lower. Volume across the board is somewhat concerning here. The participation at this stage of the rally is negligible. Either the market needs a substantial fundamental event to get buyers interested again or the market will roll. Semis were all the rage today after XLNX and LRCX reported. Of course, INTC came in after the close today, adding a little zig to today's zag. This isn't 2017. What that means is that chasing positive fundamental developments simply because they make you feel good is a trap. Bringing me to my next bullet point: This is a market where investors want to buy discomfort and sell comfort. This will be an ongoing theme in 2019, just as the theme I was pounding the table on last year was that everything changed in 2018. In late December/early January it was extremely uncomfortable to buy stocks. In late January it has become exponentially more comfortable to buy stocks as we have found that earnings were nowhere near as nasty and vile as advertised by a market that fell into the abyss. The comfort levels here for investors are begging to be taken advantage of. The market will not waste time in doing so in the weeks ahead, once again instilling doubt in the minds of the ravenous masses. Financials are especially guilt of providing the aura of absolute warmth and comfort with last week's onslaught of positive reports. It has provided those who liquidated during December in a recency bias induced coma of reliving 2008 with the emotional wherewithal to jump back in. After all, the water is once again warm. The mirage of comfort in...
Portfolio Update: Radical Transparency Performance Heat Map Style
Over the past few years, I've been hamstrung to a certain extent by an oversized position that those of you have been browsing this forum from time to time and following me on Twitter are probably all too familiar with. As a result, I had been unable, for a much more prolonged period than I originally anticipated, to capitalize on other opportunities. The resolution came during the final months of last year, allowing the rest of the markets to open up to us. The timing couldn't have been better, as I am of the opinion that this is one of the better environments for experienced investors to extract alpha from the market since the mid to late 90s. Since we are now running at full speed again, I am going to be introducing things like this performance heat map as a means of keeping track of where we are so that all the names we are juggling don't get lost in the daily shuffle. It should be noted, that the performance heatmap is month to date, excluding today's trading. The heatmap contains not just current positions, but positions that have been closed out during the month, as well. Basically, anything that we touched during the month is listed here. Quite a number of changes took place today that should be noted before continuing. I shifted to a net short position in the portfolios, by initiating short positions in UTX, LNC and ULTA. This is in addition to MCO, C and NVDA that I shorted yesterday. I also liquidated long exposure in ALL, PAYC, SNAP to name a few. Our tech exposure has been cut down to zero more or less. It's defensive long names and core long, deep value holdings from here until further notice. Here is the performance heat map for the month. Each symbol listed is how much of a contribution to overall performance the position has made: All of the trading positions I take on are for incremental gains only. The deep value plays are for the homeruns. In a properly functioning portfolio, the trading positions will mitigate downside in the deep value plays when they are underperforming and will enhance the gains of the deep value plays when the value side is performing. Since we already have the homeruns covered, it would be idiotic of me to swing for the fences in our trading positions. Trades are for the purpose of singles and doubles only. Ideally, a loss on a trade never exceeds 1% of total assets, preferably much less. As the year progresses, this is going to be a good way of keeping progress...
Portfolio Update: Desperately Seeking A Zen-Like Balance
Perhaps I'm asking for too much? Given the rampant chaos that is all around us it would seem that to achieve any portfolio balance would be an overly-ambitious wish. However, I'm not seeking balance in the traditional, market-neutral sense of the word. I'm seeking balance in the fact that we are up significantly enough for the month that I can push for alpha from both sides of the market. This means that when short opportunities pop up, I'm going to be swinging with the intention of busting the pinata wide open. And that's what experienced investors should do. It's imperative to leverage gains to create further gains. Too many investors look at alpha as a almost a rarity that must be preserved and cherished. Alpha is a tool to create more alpha, not to be squirreled away for fear of irreversible loss. In my case A Zen-Like Balance encompasses seeing the markets well enough to be able to capitalize from both sides of the volatility coin. With that said, I initiated some shorts today: MCO, C and NVDA to start. I have a few more candidates behind them. I also shed more of our long exposure. If you'll remember, last week I started taking down our tech exposure with the idea that the markets were getting ready to change the game just when investors were getting comfortable. I continued shedding our aggressive long exposure by taking a small profit on our INTC position and a small loss on our position in Z. Our defensive longs are performing well for us, as one of our larger positions - ALL - was green on the day and we even managed to see one of our tech names - PAYC - close in the green during what was an all around bad day for equities. Investors basically have two ways to approach every market environment: In a proactive manner or a reactive manner. There are some circumstances, like being long in 2017, where being reactive works. The markets weren't difficult then. They were an amateur investors dream. A lollapalooza of sorts where smiles, neon bracelets and equity gains were being handed out like drug laced candy. Now that the anomalous ease with which investors became all too comfortable has passed, investors are forced to become proactive. In other words, it's an environment where those who are familiar with the terrain will excel. Those who simply react to obvious data points will fall flat. This will be a consistent theme for sometime to come. My decision to get begin scaling into short opportunities was a proactive one that allows us to take this...
Lies, Damn Lies: Pre-Market Gin & Juice 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: There has been a pretty distinct pattern taking shape in the markets during January: Gaps down are met by buying pressure throughout the day. Earnings seem to be protracting this trend further into the month. It seems that macro pressures build overnight, led by news related to China, which is then met by a bullish onslaught of fundamental micro information related to the overall health of the U.S. economy, recession be damned, culminating in an upward resolution of the gap down. I've been dwelling on the metals complex quite a bit. It occupies my thoughts fairly consistently as I'm monstrously bullish on it long-term. However, I've come to realize that I have to compartmentalize that bullish fervor if I want to trade the complex with any semblance of competence. I've been back and forth on it. As it pertains to the short to intermediate term, it has become clear that there are a lot of bearish investors hiding in metals from the Q4 macro, recessionary boogie man onslaught. Typically, during a resumption of a secular bull market, there will be a clearing out process of all the crevasses that investors tend to rely on to soothe their fears. The metals complex should be no exception during the first half of 2019. May be good for some trades on the short side as a result. Attempted to short the market last week on a relatively light basis with some QQQ. Failed miserably as I covered on Friday. My work has this as an area of volatility, with the potential for a very short-term top that lasts no more than a few days. I'm not sure if it's even worth attempting another hit on the QQQ. There are several individual short opportunities setting up in sectors like financials and retail. Short-term opportunities, however, there is enough bang for the buck there to make them worth a swing. After last week we now know how terribly off everyone was on the financial sector. The Wall Street asset management and analyst community are basically trend following algos in suits with advanced degrees and complimentary sales skills. Other than that, they know nothing about...
A Portfolio Update: Embracing Discomfort
This market doesn't waste a minute telling an investor when they are wrong. It's up to the investor whether they want to listen or not. I'm currently in a listening only mode so I'm open to all suggestions the market puts forward. As a result, I had to quickly evacuate a small long position in gold I put on just as quickly as I took the position. The reason? Market is telling investors it is in love with the idea of risk, whereas gold is a risk off asset. I'm listening. I also had to cover our QQQ short that was put out last week in a quick tail between my leg move, allowing our long positions room to breathe. The market very simply is expressing the fact that it's too early for a defensive posture of any sort. Once again, I'm listening. In the meantime, we took a position in SNAP that was immediately rewarded with a gain of 6% from the point of entry for the day until the close of trading. Generally speaking, it seems that the market did a very good job of convincing nearly everyone that a bear market/recession was on the horizon. As a result, investors have been slow in coming back to the market. Now we have a market that is in runaway freight train mode, making the decision to gain long exposure as uncomfortable as possible for investors. The fact that taking long exposure here for most investors is such an uncomfortable proposition bodes well for a continuation of this rally. A broad mix of defensive names (insurance, pharma) mixed with aggressive technology exposure is a reasonable position to take and one that has been rewarding as we approach the final trading days of January. I may sporadically take shots on the short side in the weeks ahead in select financial and retail names, depending on how this cookie crumbles as we progress. ______________________________________________________________________________ From time to time, I email 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...
Time To Rotate Em’
It's not so much that I'm bearish. Call me skeptical. I was a maniacal, raging bull as we entered 2019. Since then, however, investors have become unduly comfortable. The reason, of course, is that earnings have now provided a warm, cozy blanket for investors to snuggle under while they begin counting the number of cookies mama bull will bring to their bed. Investors becoming comfortable makes me a bit uncomfortable. While we continue to be very long equities here, the mix of exposure has changed. First, I'm seeing more opportunities on the short side of the market. Earlier in the week I shorted some QQQ as a hedge to offset some of our tech exposure. I also took profits on our MSFT position, which was my pure play on the Nasdaq. It's not just tech, however, that is worthy of some rotation. Financials are arguably providing an even warmer blanket for investors, as we now KNOW that bank earnings are fine. It has caused those investors who sold in December to pile back into some of the mega-banks, like Citi and Bank of America. Again, it is simply too cozy a scene to be comfortable with, for this investor, at least, which is why I took profits on our USB (my pure play on financials) position this week. The name of the game here and now is rotation. While it may be too early to get short, it's not too early to get conservative. Selling some tech and financials in order to gain exposure in names that haven't made their move yet isn't a bad trade. We added ALL and BMY recently in keeping with the conservative rotation theme. It's not time to sell em'. It's not time to hate em'. It's simply time to rotate em'. ______________________________________________________________________________ From time to time, I email 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 applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any...