The Current Market Pullback Leaves Investors With Only Two Outcomes From Here
Let's take a step back before we begin to understand how I arrive at the conclusion laid out here. On December 31st I put out an article titled: How Everything That Happened In 2018 Makes Technology Names A Screaming Buy In the article I said, "The buying opportunity here for technology, in particular, is one of the best over the past decade. Whether this assessment of risk/reward ends up being something that lasts one quarter or the entirety of 2019, I am not sure yet. However, a buying opportunity it is and I have taken advantage through broad based exposure to leading technology names including NFLX, INTC, BKI and AVGO." Here we are close to mid-year, with the rally that has taken place up until recently exceeding even my ultra-bullish expectations. During May we have crossed a certain threshold that I frankly didn't expect from this market all year. Let me explain: Whereas the market was demonstrating a preponderance of bullish symmetry at the December lows and in the months that followed, it is now showing nearly identical BEARISH SYMMETRY at the recent highs. Just a few weeks ago I watched as the markets approached critical resistance at 2950. In fact, I spoke about the only crucial resistance point for the market in February on Twitter: The recent high for the SPX was 2954. That high not only nearly perfectly matched the substantial resistance point mentioned, but the ensuing "thrust" that occurred created a pattern that results in one of the following two scenarios sticking over the next few months: The markets chop around in a volatile, sideways range The markets have seen their highs for 2019 and will continue to drop into the summer In any case, the time to be offensive has surely passed. It is now time to reign in longs, focusing on defense and capital preservation. Value beats growth. Trading beats investing. Selling short has an opportunistic place in portfolios. Being bearish isn't necessarily a bad thing, whereas it was a cardinal sin in January. On the positive side of things, housing names continue to exhibit inordinate strength and select SaaS names look tremendous, with my personal favorite being PAYC. Tread lightly. Zenolytics now offers a premium service for those who want frequent, actionable analysis. Click here for details. 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...
There Are Few Things As Reliable As Zillow Outperforming During The 1st Half of Any Year
Zillow is a company that has some very defined seasonal characteristics. It makes sense. Real estate is a highly cyclical industry not just from a broad macro perspective, but within any calendar year. Spring and summer are traditionally the busiest month for new residential real estate purchases. Zillow tracks these buying patterns almost perfectly. The stock tracks not just the seasonal characteristics of real estate with uncanny consistency, but it also moves inverse to interest rates. The cost of borrowing to buy real estate as expressed through the ten year yield is just as important a consideration of when and where to buy the stock as the seasonal aspect. On average, Zillow returns 50% during the first half of the year with remarkable consistency. The only time it has been down during the first half of the year was during 2015, a year when rates rose 7.6% from the beginning of the year through the end of Q2. Here is a look at first half performance in each year since the stock went public with the ten year yield plotted (blue) to further demonstrate its negative correlation to rates. Zillow 1st Half 2012 Return +71% Zillow 1st Half 2013 Return +103% Zillow 1st Half 2014 Return +75% Zillow 1st Half 2015 Return -18.08% Zillow 1st Half 2016 Return +41% Zillow 1st Half 2017 Return +33% Zillow 1st Half 2018 Return +47% Zillow 1st Half 2019 Return +19% as of 3-15-2019 Further, the last time Zillow traded at a multiple of 6x revenues was 2016, a year that saw the stock return 41% during the first half of the year. A combination of persistently lower rates, seasonably favorable factors and a relatively low valuation puts the company in a very attractive position with the recent pullback. $50 looks highly likely during Q2, which would put the stock within a frame of the average return of 50% for the 1st half of the year. Should interest rates persistently move lower in Q2, $60+ is not out of the question. 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...
Bullish With A Caveat
Thus far during March, I haven't been shy about expressing my bullish feelings about how this final month of Q1 will play out. March will more than likely go out with a bang, not a whimper. What this means, specifically, is that the current pullback we have experienced is a buying opportunity within the greater bull trend. This bullish opinion does come with a caveat, however. The purity of the uptrend since the December lows has been compromised at this point. In other words, the remainder of the month, while being generally bullish, will be a choppy affair. The bulk of the gains has the potential to occur in a very short time-frame, more than likely during the last week of the month, as fund managers rush in to "dress" their under-invested portfolios, giving the appearance of not being completely behind the curve of one of the greatest starts to a calendar year on record. Believing that the markets will be more chop than substance for the next week or two, the most prudent path would be to cut down on trading new positions and focus on trading around core positions. The potential for getting shaken out of new trading positions, racking up a series of small losses, is simply too great given the current texture of the market. The "bang" for March, when it does occur (most likely at month end), has the potential to lift the S&P 500 over 2850. It won't be an inconsequential affair so it's worth staying fully invested in anticipation of. Investors simply have to be willing to cope with what will be, very simply, a frustrating trading environment as we get into the middle of the month. We are down to a three position portfolio currently with COOP, Z and RDFN. That's likely how it will remain for a majority of the month. 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...
A Game Of Unintended Consequences
It was April of last year I began pounding the theme of Everything Has Changed In 2018 into the consciousness of investors. As we are now at the midway point of Q1 2019, another theme is becoming readily apparent. The theme of 2019 will be A Game of Unintended Consequences. The Fed has done something that is unprecedented in modern economic times. The message they have given the markets since the crash of Q4 2018 is that equities are the economy. As a result of this A-HA moment by the Fed, they have abandoned all conventional, accepted thought as to their role within the grand scheme of the economic landscape. By basically admitting that they have no desire to take the Fed Funds rate to the neutral target of 4% while normalizing the Fed balance sheet to anywhere near its pre-crisis levels, they have essentially told the markets that they are fine with a soft-QE, with the possibility of moving towards a full QE if the economic situation worsens. Judging by the reaction of the markets to this soft-QE it has been enough to reignite the equity markets, which should in turn bolster the economy moving forward. The unintended consequences of such a policy come in the form of the sector that stands to benefit the most from inordinately low interest rates during an economy that is running at above average levels. Much like 2002-2003, when the Fed overreacted to the bursting of the internet bubble, determining then, much like now, that equities were too important to the economy, a low interest rate policy will ignite the animal spirits in real estate. Real estate moving into 2019 and beyond, with a record low unemployment rate, rising wages, low interest rates and millennials who are on average 30 years old, will be a primary beneficiary of the evolving economic environment. Homebuilders, mortgage originators and servicers stand to benefit the most. Those companies providing streamlined/low cost methods of finding, financing and buying a home have inordinate upside, as millennials balk at having to sign reams of paperwork while paying unreasonable commissions for the privilege of somebody telling them where to sign. Already in listening to the earnings calls for homebuilders and real estate related names, we are seeing CEOs express markedly increased optimism at the environment that has been developing in Q1. As the economy accelerates into Q2 and interest rates remain at reasonable levels, I would expect that the real estate market will serve as a reflexively positive factor in the resurgence of both equities and the economy at large. That's all for tonight. _______________________________________________________________________________ From time to time, I...
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...
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...
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...
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...
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: 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...