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...
Those Voices In Your Head That Are Born From Your Screen
I'm bullish on metals. It's like a dark confession as an investment manager to admit that you have developed a fondness for gold and silver. It's bad enough I tend to dwell in sectors that are loathed by the masses, it's quite another when the sector I dwell in is occupied by investors who carry zombie repellent on their belts and a half dozen headlamps in the trunk of their vehicles. In fact, it's one of the few portfolio moves I've made in my career where the decision itself has dictated calls and meetings with clients to explain exactly why I have chosen this path. There are many factors attracting me to precious metals down here. I discussed them extensively in this recent piece. This is really the first time I have even looked at metals since going angry brown bear on them in 2011 when investors were going gold crazy. The purpose of this article, however, is not to pound the table on investment attributes of gold and silver down here. I'll be doing that plenty over the next several months. *** After multiple decades in this business I have seen every type of investor rewarded. I have also seen every type of investor destroyed. I have seen paranoid investors outperfom. I have seen brilliant investors underperform. I have seen technology mavens get it absolutely wrong during cycles where they should be shining. I have seen gold bugs with years of gains that would be the envy of most investors. Point being that there isn't one rhythm for this dance floor. Every single thing in the markets is cyclical, including the punditry that is so common in finance today. The perpetual, hardened bears become absolute rock stars in certain market cycles. Nouriel Roubini and Marc Faber were worshiped as heroes a decade ago. Before Henry Blodget started Business Insider he was a rockstar tech analyst during the internet bubble of the 90s. Then he became an absolute pariah after technology destroyed the economy. Before Gundlach there was Gross. Gundlach will one day be laughed and made fun of when he utters a word. Everybody takes their turn. Just as investors should open their minds to different sectors of the market, they should also open their minds to different voices in the market. Those voices that are reviled now can be seen as genius level minds in the years ahead. Those voices that are currently considered brilliant will stumble. Knowing when to listen to what and who is just as important as which sector or stock you choose to invest in. It's all a part of the market ecosystem...
Rampant, Unabated Distribution Rules
There is distribution taking place in literally every sector. It's in your face, intentionally malevolent, unrestricted selling. It's happening across sectors from finance, technology, retail and biotech. Individual names such as C, BAC, BRK, CAT, AMZN, FB. There's no discrimination taking place. Whether the stock is sitting near its highs or well below, shares are being distributed. In the most obvious illustration possible, there are significant entities that want out of equities. All the meanwhile, there are groups attempting to sooth investors into a sense of complacency about this current downturn, with a "this too will pass" attitude. While a confident sense of bullish enthusiasm may have been the default stance for the majority of this decade, the current situation warrants a much more cautious approach. Not simply because of the distribution taking place either. As I have been saying for a majority of this year, everything has changed in 2018. Let's look at the most obvious fact of all: If you are long equities, you are now officially fighting the Fed as quantitative tightening (QT) has shifted into 5th gear as of October. Keep in mind, the QT that took place throughout a majority of this decade injected literally trillions of dollars into the financial system that allowed companies to function against an environment where the cost of doing business became extraordinarily cheap. So cheap, in fact, that a majority of corporate executives decided that nearly free money would be best used to buy back their own stock, boost the valuation of their companies, collect inordinately large bonuses , eventually walking away as heroes with flower wreaths, lipstick on their cheeks and chests puffed out with a mission accomplished swag few could muster. The QT that will continue for the next few years, as of Q4 2018, is now removing $50 billion MONTHLY from the Fed's balance sheet. Not only does that put pressure on rates to move up, but it effectively acts as steroids to the monetary tightening taking place. The QT that started last year, up to the end of Q3 2018, was at a much more moderate pace. The move up to $50 billion in QT that started in October was preplanned. We have all witnessed the reaction of the markets to this tightening, as we are now in the midst of some of the steepest losses of this bull market to date. All the meanwhile, there is an adversarial tone taking place from the White House with respect to any measures of monetary tightening. Should the equity markets continue to decline, then the growls will grow louder and eventually, there will be need...
Considerations
The technical damage taking place in the current market environment is so extensive and pronounced that rallies are going to be selling opportunities for some time to come. With that said, it becomes incumbent on market participants to develop a means of gaining alpha in the midst of chaos. As usual, the answer to the question of achieving alpha is a simple one. Of course, execution of the strategy is another story that has far too many variables to go into here. This environment will, very simply, reward those who manage to: Avoid exposure entirely Pick select names having fundamental attributes that prove so overwhelmingly positive that the market recognizes their value Add short exposure The old 2016-2018 methodology of picking momentum, growth and/or whatever is popular among investors at the moment without regard for quality, analysis or rationale is dead in the water. This effectively means that trend following, which had knowingly or far too often unknowingly, become the default strategy of most every fund manager out there is also finished for the foreseeable future. The remainder of Q4 and the first half of 2019, at the very least, will look nothing like what investors have become accustomed to. The methods to achieve returns will have to be modified. I've opened up the scans to short selling opportunities on future rallies in select financial, real estate and related names where I feel a tangible edge exists to merge technical and fundamental data points moving forward. New long opportunities are shot for the time being. _______________________________________________________________________________ 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 should not construe any discussion...