Lies, Damn Lies: Stampede 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: The greatest indication that investors are finally starting to get the picture that this rally is not a bear market rally meant to separate speculators from their dollars is the action in long-term treasuries. Investors are beginning to understand that a 2.75% yield won't cut it in the face of a rallying stock market, where companies like JPM are up 4% this month while sporting a 3.5% yield. Ten year should be back above 3% within months. Continue to be short a concentration of TLT. As this rally continues on the dynamics of the market are changing. This is one of the better trading environments in recent years, where astute investors can take advantage of both sides of the market. With that said, there are more opportunities developing on the short side of tech and financials. Long opportunities are more focused along the lines of defensive companies, such as BMY that I detailed in yesterday's lies and on Twitter. As you may have noticed during the past few notes I've posted, the metals complex has been an area of confusion. I dumped our metals names at the beginning of the month due to the fact that I thought the markets were going to fully "risk on" status. Metals don't play well in a risk on environment. Up until yesterday, they were holding their own given the acceleration to the upside in equities. That changed today. It looks like metals traders and bond traders are getting the memo that these assets don't play well with where we are now. Long-term very bullish on metals. Have to pick and choose the spots, however. MSFT finally took off for us in an admirable way today. Want to see the trend continue with momentum to the upside for the remainder of this week. Currently long. PAYC is another name we picked up in early January that has taken its time accelerating. That changed today. The momentum on the upside looks promising. The company automates the HR process. With unemployment at historic lows and a natural tendency for companies to chase efficiency, the growth here should continue for sometime to come. USB is our...
Lies, Damn Lies: Hard Knock Life 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 obnoxiously weak. Perhaps earnings will help it gather some steam. However, for the time being it seems that investors are looking elsewhere. The problem I have is that I believe the markets are going much higher from here, however, that is a difficult eventuality to imagine without AAPL's participation. Perhaps we are at that point in the story where the protagonist fades into the sunset. In any case, I do have a buy point in mind for the name substantially lower than where we are now. The numbers for assets in money market funds is mind-blowing. Investors are basically positioned now at the same money market levels as in March 2009. I have repeatedly made the point that investors suffer from 2008 PTSD. These money market numbers demonstrate that in vibrant color. The $3 trillion in money markets as of last week is a lot of fire power for equities in the months ahead into what is a relatively thin volume environment, in general. As discussed in last nights "Lies" note, financials looks like they want higher prices. We got the first bit of good news for financials with Citi earnings not being nearly horrible enough to justify the recent sell-off, which created a bid beneath the sector today. I expect there to be a few curve balls thrown in the days ahead with so many earnings. However, the path of least resistance will likely be up for the foreseeable future. Took a position in BMY today. Defensive names have been left behind in this market. Given that we are at a juncture where sideways and perhaps downside volatility can become more prominent than it has been over the past couple of weeks, defensive oriented long positions are a prudent investment. BMY, in particular, has been beaten up recently due to a highly leveraged purchase of CELG. When BMY announced the acquisition at the beginning of January, debt was being given the stink eye. I expect the skeptical view of debt, in general, to become much less intense over the next few months, allowing investors to see the benefits of their CELG acquisition rather than the perceived...
Lies, Damn Lies: Rotation Station 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: Financial names have the look of a sector that will be accelerating to the upside during the second half of this month. A majority of financial institutions report earnings this week, which will set the tone for the remainder of the month after what will likely be a choppy week of trading ahead. The overreaction that took place in money center banks, in particular, should become apparent to investors this week, setting a bullish tone if all goes as expected. A short-term allocation into defensive longs is likely a decision with a positive expected value. This doesn't mean I would consider selling some of our more aggressive tech or financial long exposure. What it does mean is that defensive names have lagged this month and with the market decelerating, risk/reward on some names looks juicy. Gold and silver names are in a highly confusing spot. We rode the uptrend in the names for a nice gain in December, liquidating in the new year. Since then, a confluence of conflicting signals has taken place that likely dictate a period of being a bystander on the sidelines watching. Long-term, metals are in a bull market. I will be patiently seeking a re-entry point. It used to be that bond investors were the "smart money" on Wall Street before the information curve flattened. There really isn't a smart money contingent on Wall Street any longer. With that being understood as fact, interest rates are absurdly off base in what their expectations for the economy are. Recession is a near zero probability this year with economic growth moderating, however, still moving along. Ten year yield should be nowhere in the vicinity of sub-3%, yet PTSD of a a repeat of 2008 has caused a dislocation to take place that should be taken advantage of. Nasdaq 100 and Russell 2000 are real close to their first major test of resistance since this rally kicked off. How they handle these areas will be telling. I'll be watching the rhythm of their feet carefully to make sure nobody has become drunk, ready to tip over. The range expansion that has taken place in corporate credit as...
A Portfolio Update: Carrot On A Stick
This past week liquidations in the portfolio: Out of AVGO Out of JPM Out of NFLX This past week additions to the portfolio: Purchased Z Added to TLT short Currently long: COOP, EIGI, INTC, MSFT, PAYC, USB, Z Currently short: TLT While I believe the market is going remarkably higher over the next several months, there are very short-term setups on the bearish side of things that may prove too mouthwatering to pass up in the weeks ahead. There remains a good deal of alpha to be juiced in January from both the bull and bear side of the trade. Just as the market carrot and sticked short sellers on NFLX on Friday with a seemingly alluring gap up on a weak open for the broad markets - enticing them to take the short trade thinking that the gap would be retraced, followed by grinding up the price almost all day - the same dynamic will continue to take place in the general markets. Bears are salivating for an entry point, erroneously thinking that we have embarked on a secular bear market that has dramatic downside left. All indications point to bears being naive in their elementary analysis of the situation at hand. Their persistence will cause the markets to continue grinding higher, until they are forced to capitulate the secular bear theory at new highs for the major averages. In the meantime, investors can take jabs on the short side, but the hooks and uppercuts should be saved for the long side of the trade until further notice. _______________________________________________________________________________ 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 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 to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site...
A Little Market Statistic
First, a little history to provide context. I presented this chart in January 2016, right around the lows that accompanied a correction of the magnitude we have experienced recently. The only difference then is that the correction and subsequent low of 2016 didn't cross the 20% barrier, which is a number that for some reason gets all sorts of hair raising chills and screams from stampeding investors. The article was titled A Dow Chart Going Back 90 Years That Provides Bullish Calm. That same chart I presented in the article then (chart from the article is below) can provide bullish calm now, only this time for different reasons. When looking deeply into what has occurred recently compared to previous periods, it is worth noting the following: We have experienced a 20.21% correction in the S&P from its September top to its December low. This is the 5th time since 1954 we have experienced a 20% plus correction during a secular bull market. Let me explain. In my work, there have been three secular bull markets post-Great Depression. They are labeled as "bull" in the chart above: 1. 1954 – 1968 2. 1982 - 2000 3. 2013 - ? In the 1954 – 1968 secular bull market the following substantial (being defined as a correction of ~20% or greater) took place: 1957: -20.57% correction 1962: -26.40% correction In the 1982 – 2000 secular bull market the following substantial (being defined as a correction of ~20% or greater) took place: 1987: -33.50% correction 1990: -20% correction 1998: -19% correction During the secular bull market that started in 2013, this is the first 20%+ correction we have experienced. What happened in the instances when a 20% or greater correction took place during a secular bull market? 1957 – After the correction, the market was positive 6 quarters in a row, gaining 64% 1962 – After the correction, the market was positive 9 quarters in a row, gaining 58% 1987 – After the correction, the market was positive 8 out of 10 quarters, gaining 60% 1990 - After the correction, the market was positive 11 out of 13 quarters, gaining 62% 1998 - After the correction, the market was positive 4 out of 5 quarters, gaining 55% If this secular bull market was to terminate after only one 20% correction, it would be the first secular bull market over the past 100 years to do so. Additionally, 20% corrections, as demonstrated above, are traditionally buying opportunities, with an average gain of 60% taking place before real turbulence is witnessed again. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts...
Lies, Damn Lies: Skeptics and Steamrollers 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: Watching the price action in the markets you realize how skeptical investors continue to be by observing the relationship between the US Treasuries and equities. For every downtick that occurs in the market, there is a disproportionate reaction into fixed income. It's as if investor are expecting a bearzombie apocalypse at any minute. Conversely, for every uptick that occurs in equities, bond investors are relatively slow to react proportionate to their buying activities. Apple supplier, SWKS, cut sales and profit forecasts in their earnings report today. The stock was up 5% afterhours as a result. There will be some cuts to guidance at a greater rate than investors happen to be used to. However, it's important to keep in mind that markets look forward and what they might be seeing some months down the road is a lot better than most realize. Crude oil is leading the market. It led on the way down as equities and crude topped almost simultaneously in October and it has led with the most recent breakout. Again, crude is rallying overnight on a bullish data release and equities are following with Dow futures up 120. NVDA has been unusually weak. It may pick up into the end of the week. However, if it remains an underperformer, there may be something devious brewing beneath the surface for the company specifically. Might even worth a shot on the short side at some point. Meb Faber had a tweet today that said the following: Every single 2019 investment outlook: Returns stunk in 18,Economy in 9th inning, The Fed, Recession on horizon, US stocks expensive, Value vs growth, Volatility is increasing, Too much debt, Credit spreads are low, Something about China's economy, Emerging markets cheap. Being a staunch contrarian, it feels like all of these are a fade. However, there is one thing about contrarian theory that must be remembered: Many of the above theories are grounded in sound analysis that will likely end up being correct. However, the route the markets take to get there will be much different than everyone excepts. I agree that emerging markets are cheap. I agree that value is a better bet...
Lies, Damn Lies: Market On A Warpath 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: As detailed in yesterday's note, I have cut all of our exposure to gold/silver names. I continue to believe metals offer some of the best long-term risk/reward setups out there today. However, the current market is so rich with trading opportunities due to the newfound surge in volatility that I need firepower. At a near 80% allocation to metals that I took on in November-early December, that firepower would best be served elsewhere for the time being. I want true "risk on" assets here. I want beta to the general markets. At some point this year I will revisit the metals thesis. With charts like this, you have to take gold seriously given the potential for exponential upside performance in the years ahead. You know why you want "risk on" assets here? The chart below sums it up. Global equity outflows are past the point of the 2008 financial crisis. The difference between now and 2008 is we are in a secular bull market that has been greeted with its first cyclical bear raid since it started in 2013. Let me say that again for the purpose of clarity and emphasis: We are in a secular bull market that has been greeted with its first cyclical bear raid since it started in 2013. That's important because when investors panic during secular bull markets (right now), it is a completely different beast than when investors panic during secular bear markets (2008). The market doesn't take its time in coming back as the foundation of the market is rebuilt during secular bulls. Instead, the market rip that comes typically only leaves bear scrotums behind as evidence they existed in the first place. In other words, it happens so fast that most investors who are attempting to intellectually and emotionally digest this monster will be left holding their tails instead of stock. The current market has forced investors into cash, giving it all the sidelined firepower it needs to move to new highs before the middle of 2019, as those investors come to the slow realization they have been played. One more demonstration of how badly investors have had their minds completely...
A Portfolio Update: Getting Longer
At the very core of my philosophy with respect to investing is that markets inherently push investors into terrible decision making cycles by functioning in a highly counter-intuitive manner, taking advantage of emotions and thought patterns that are rewarded in most other endeavors. If one believes the aforementioned to be fact, then one must also believe that the entire ecosystem that has been developed around Wall Street is simply a further tool to foster terrible decision making that run counter to an investor's best interest. The news flow, the analysis, the talking heads, the hedge fund manager who has four yachts. Everything that is seen and heard drinks from the same well. As a result, in order to successfully navigate the terrain, an investor very simply can't believe anything that is prominent within the popular news cycle. That very same news cycle has been existent since the beginning of time for the markets. Now more than ever, that news cycle is instantaneous. Investors still lose massive amounts of capital by feeding into it. If there is such a thing as fake news, Wall Street invented it. Bringing me to the point of this note: The hysteria that has developed around a weakening economy, recession, yield curve, corporate debt etc. will be viewed as silly by the middle of 2019. It is typical of a news cycle that is curve fitted around price action, which further drives the news cycle and feeds further into the price action. In other words, a self-reinforcing vicious cycle of poor research that leads to poor decisions among investors. The markets, as dictated by the purest form of information possible - price - are telling a completely different story than what most everyone is talking about currently. It's a positive divergence that should lead to higher prices in the weeks and months ahead. This has led me to take profits on our gold and silver names, a trade we took approximately 1,000 basis points out of in roughly one month time frame. The decision to remove metals for the fund has nothing to do with my long-term opinion of their viability as an investment. I continue to believe that metals represent one of the best risk/reward investments in the market today. However, I am focused on performance. Over the next several months, our capital is better served in investments that are heavily skewed towards "risk on." That means that I want beta in our portfolios. I want to be exposed to the equity markets because I believe they are about Space Shuttle it out of this atmosphere in the next few months. We've taken positions...
Lies, Damn Lies: Stocks In The Buy Zone 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: AMZN has reversed convincingly. While it may have a few more tricks up its sleeve, the December low should hold in January. Safest buypoint in some time not just for it, but FANGs in general. Took a position in AVGO on Monday. Demonstrating wonderful relative strength within technology. Relatively safe way to get exposure to semis. Traditional and plain vanilla, yes, but BRK.B allows exposure without normal concerns for volatility. A conservative consideration for exposure to the financial space. BTG is an example of the convincing strength that took place in mainstream gold names during December. The pattern looks set for continuation as it is becoming apparent that a weaker U.S. Dollar is the release valve the global economy needs to sustain growth. C is in a low-risk short-term buying position. The compression in price/book for financials is overdone. Q4 results should be relieve some of that pressure. Every market bottom has its hook. A hook is the primary market average that will lift the rest of the boats. For this market bottom, the hook is the Nasdaq Composite. It has managed to reverse at an important technical level, which will give the rest of the market averages the courage to push forward. GOOG is another FANG name that looks to be setting up for a push higher during January. Economic data and earnings will be seen as strong enough to justify purchasing growth at 30%+ discounts. Not buying JPM on a 20% pullback will only be seen as a mistake for most large cap fund managers when it's down less than 10%. Unfortunately, buying into points where fear and misinformation is at its greatest point does not present a situation comfortable enough for a majority of those who manage money. And this is why they underperform. If you're comfortable doing anything, then odds are something is wrong. Was talking to a bodybuilder at my gym recently who was training for a competition. He told me that whenever he feels good, he knows something is off in his training regimen. Whenever he's uncomfortable, he knows he's doing it right. MSFT falls in the same category as JPM. Large cap...