JANUARY CLIENT LETTER: STOCK MARKET POST-TRAUMATIC STRESS DISORDER; SOME FACTS; ADOPT A SMALL-CAP SECURITY TODAY
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Stock Market Post-Traumatic Stress Disorder If you are to believe the flock of market pundits currently making the rounds then you would have no other choice but to believe that a new world order is in place. This new world order does not rely on any common sense measures of economic progress or stability but rather dwells in sorrow of past crisis situations in order to arrive at current conclusions. If you have been reading my monthly letters with some frequency then you will recall the dozen or so times I have stated that the the years between 2000-2009, marked by the dual “once in a lifetime” crisis situations of the internet bubble bursting and the mortgage debt bubble following relatively closely behind, has caused post-traumatic stress disorder to become apparent among the current generation of investors. This post-traumatic stress disorder is marked by a near obsession with calamity resembling calamities of the past decade. We have not had a pullback, macro induced or otherwise, that hasn't been a precursor to either a recession, secondary debt crisis or complete global economic collapse since the 2009 bottom. And of course the word “bubble” has now become ingrained in financial vocabulary as a means of describing anything that moves up in a straight line for a period exceeding 12 months. The point being that a majority of the analysis being pressed upon the impressionable minds of a naive and uniformed investor base, institutional or otherwise, is being formed using past traumatic experiences that incorrectly shape future expectations. This current form of thinking is not isolated by any stretch but rather an epidemic. If you are to believe this line of thinking with respect to prevailing market psychology to be true then two things become immediately apparent: Pullbacks will appear calamitous in nature as the feedback loop of past trauma induced psychology meets with current perceived negative developments in the markets. This will express itself through momentum on the downside. Pullbacks will bottom suddenly, with a majority of them being shallow in nature, as a result of a convergence of selling taking place around the same areas due to near identical mental output of a majority of participants. What we have experienced over the past few months has resulted in a pullback of some 15% from peak to trough for the S&P 500. This has been excessive for the current bull market as measured by pullbacks experienced since the 2009 bottom. The reason for the dramatic price action to the downside is that the...
A DOW CHART GOING BACK 90 YEARS THAT PROVIDES BULLISH CALM
If you were to look at any multi-year chart this weekend, much like every other individual performing the same function, you would have no choice but to arrive at a bearish conclusion. If you were to look at any fundamental data points, much like every other individual performing the same function, you would also have no choice but to arrive at a bearish conclusion. In other words, the present market environment is painting as bearish a picture as it ever has during the entirety of this secular bull market. The fact that there is a singularity taking place along the same line of negative thinking doesn't legitimatize the prevailing psychology. In fact, it should cause investors to question it profusely. In a market environment that is presently blanketed in bearish sentiment there is only one course to take. In the spirit of profuse questioning of the prevailing negative psychology I decided to forget about daily chart looking back over the past several years, instead focusing my attention on nearly 100 years of data. The question I want to answer is has there been precedent in the past for a new bull market (the current secular bull started in 2013, marked by a new high in the S&P 500) to reverse course into a bear market after just two years? The answer in the chart below is based on only two long-term secular bull markets. The secular bull from 1955-1965 and the secular bull from 1982-2000. Both of these secular bull market were preceded by a decade plus long consolidation, much like we experienced in the S&P 500 from 2000-2013. click chart to enlarge Much like the secular bull market of the 90s, which experienced multiple macro shocks from Asia, Russia, Mexico etc. this current bull market is not immune from sympathizing with the plight of emerging market difficulties. That sympathy should not be confused with similarity. There are no similarities between the Chinese, Brazilian or Russian economies and the U.S. economy presently. The dips in the U.S. equities continue to be buys, with a special focus on technology and financials, as they will continue to lead the markets forward. ...
THE FED WET BLANKET HAS BEEN REMOVED
It's not about the rate hike cycle that is now upon us or the accompanying statement by the Fed. What today's move up a quarter point in the Fed Funds rate meant to the market was the simple vanquishing of the wet blanket that has been spread across equity prices for the second half of the year. The incessant debate over Fed policy combined with the potpourri of worries on a loop didn't allow investors to properly focus their attention on all the harmony that exists in the economy at present. With the wet blanket removed, investors can now focus on the fact that unemployment continues its downward trend; inflation is non-existent; interest rates are still inordinately low and favorable to business; commodity prices are favorable to consumers; earnings are growing especially in technology and financials. Most importantly, developed markets are where its at and that dynamic isn't changing anytime soon. What happened during the past decade is that a vast global misallocation occurred away from developed, technology/financial led economies into emerging, commodity led economies. That misallocation is now in the process of being recalibrated. Along the way, we get news every so often of an imminent implosion of debt tied to this unwinding that effects all asset prices, developed economy included. As I've pointed out in the past few months, those are the buying opportunities, of which there have been many in 2015. Developed economies, of which the U.S. is the predominate player, will continue to attract global assets. That's the bottom line. Now that the Fed has exited stage left with very little in the way of future surprises or indecision, the markets are free to focus on the continued rebalancing act of capital that has been ongoing since the start of this decade. Bulls win. 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...
RUNNING SCARED
In witnessing the vast amount of carnage taking place in individual equity names of all shapes and sizes I can't help but be reminded that financial markets take special delight in warped displays of psychological despondency that are meant only to be diversionary in nature. Of course, the greater the severity of the despondency the more likely that the effort being exerted by the market serves purpose to divert attention from a substantial prize. In other words, markets do not take time to inflict an inordinate amount of pain to hide nickles and dimes. The prize on the other side of the pain trade must be substantial in nature to justify the effort. With this in mind, let's look at what your average investor, fund manager and casual market observer have witnessed in 2015: They have witnessed silky haired, moon gods of finance such as David Einhorn and Bill Ackman being reduced to spume at the bottom of a city sewer. They have witnessed cult like energy names such as SunEdison, Westmoreland Coal and Kinder Morgan get absolutely pummeled. They have witnessed the superheroes of finance like Carl Icahn declare Armageddon right on the horizon. They have witnessed all but a select few stocks either lose money or do nothing. They have witnessed an indecisive Fed that wants to load bullets back into the liquidity gun just in case. They have witnessed gun stocks move substantially higher as everyone is afraid of everyone and everything. They have witnessed headline after headline of every fear imaginable from global terrorism to global recession. All the magicians tricks are on display for a captive audience of the battered husbands and wives of Wall Street to fear taking decisive action of any shape or form. It really is no different in essence from the 2009 lows. In fact, if you were to look at the markets according to sentiment indicators alone, some are reflecting a mood of pessimism similar to 2009 despite the fact that we are 5% off all-time highs in the S&P. The message here is a simple one: The fear being created is pure theater. The purpose is to distract so that the eyes, ears and nose of those participating moves off the scent of the market. Scenarios that diverge substantially from the headlines will likely be the most profitable for 2016 and beyond. Financials remain advantageous with an emphasis on small to mid-sized regional banks. Select technology works, as well. This bull market is young. Enjoy it. Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information...
OCTOBER CLIENT LETTER: LEARNING TO LOVE LUMPY, THEY HATE US
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Learning To Love Lumpy Generally speaking, markets are sadistic tools for separating capital from those who are both emotionally and intellectually unprepared for the challenge at hand. As emotional individuals we are inherently unprepared for the primary challenge of inverting greed and fear instead of falling victim to the burdensome exertion of their influence during the most inopportune moments. Secondarily, as individuals in an ever fast paced society, we are unprepared to remain patient in the face of constantly shifting value equations reflected in green and red ticks on a minute to minute basis five days per week. Equity investors would be much better off, if like the real estate market, values were only available through expert appraisal which would only take place on occasion of a sale or borrowing on the asset. This type of structure would eliminate the need to obsess over price, which for the most part is inconsequential except for a few times per year. The liquidity afforded by the equity markets, while being one of its most attractive attributes is also its greatest force for manipulation and the ultimate failure of the investor who dreams of Buffett like riches. Buffett is famous for saying, "the stock market is a device for transferring money from the impatient to the patient." Patience takes on a different meaning based on which sector you are invested in. For example, in large cap, widely traded equity names, patience means that you are subject to price manipulation on a much more frequent basis than the thinly traded, deserted names that I happen to favor. When the markets swoon as they recently did, large cap investors take on correlation risk as securities are largely lumped in same basket with the classic dumping of the baby with the bathwater taking place. This correlation risk is a much less prominent feature of the micro/small-cap marketplace. The more off the run the security, the less an investor has to worry about correlation to the broad market indices. There is a trade off, however. The lack of influence created by the broad market creates long periods of relative inactivity in small company names. And when the gains do come, they show up in lumps that total a few weeks of movement per year. The rest of their time is spent effectively grazing on a pasture waiting for a regrettable trip to abattoir or preferably, a blue ribbon at the state fair. This tendency towards lumpy gains is as much a form of manipulation running counter-intuitive to prevailing...
WALL STREET JUST GOT PLAYED
During these past two months the headline fear that possessed nearly every class of investor caused an irrationality in decision making that has created a misallocation in assets into riskless propositions, such as fixed income and cash. The type of misallocation we have experienced must be corrected, especially as we enter a seasonably favorable period during which a vast majority of portfolio managers are greatly underperforming their respective benchmark. These portfolio managers possess the same tendency towards self-preservation and procreation that all of us do. As a result they desire employment from which they can derive the various necessities to facilitate self-preservation and procreation. This wide-sweeping generality very simply equates to a portfolio manager class that will be interested in proving their worth to investors by creating a portfolio that, at the very least, attempts to emulate the S&P 500. Very simply put, investors will be taking on more risk through equity exposure into year end. These swash buckling captains of mediocrity are now coming face to face with the stark reality of deceit at the hands of the market. What they saw just one month ago doesn't at all match what they are opening their eyes to today. One month ago we didn't know about the future of Fed policy. One month ago we thought commodities and emerging markets were on a hand basket to hell. One month ago technology and financial earnings were being questioned incessantly. One month ago we thought Chinese woes would engulf developed economies in flames. All headline fears that have created the wall of worry necessary for the next upleg of the bull market to get underway. The reality of the situation one month later is that commodity prices have stabilized. Emerging markets are now surging. Technology is being led by its greatest tandem: The SOX (Semiconductor Index) and key technology leaders, such as Google, Amazon and Facebook. Major financials are virtually riskless propositions as earnings begin to shed light on the sector. The Fed is no longer a threat due to the recent jobs report. All the meanwhile, interest rates have fallen and continue to remain low. The inevitability of every semi-competent asset manager that is interested in self-preservation realizing that they have very simply been played over the past couple months has no other outcome but to cause a surge in equity prices as these asset managers correct their errors....
SEPTEMBER CLIENT LETTER: DEFENSIVELY OPTIMISTIC, A GAME OF RISK OBFUSCATION
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Defensively Optimistic We are at a point in the bull market cycle where macro fears are at a level that has not been experienced since the entirety of the developed world thought that the global economy was headed towards a Fred Flintstone period of stone wheels and wooly mammoth vacuum cleaners. Fortunately, we managed to avoid such a dreadful fate, returning to prosperity post-2009 much more persistently than most would have expected. The persistence of this new cycle of prosperity has managed to catch the stewards of capital across our global economy somewhat flatfooted. As a result, we are now witnessing a reallocation of capital away from asset classes such as commodities and emerging markets. The instability created from this reallocation of assets is effecting emerging market economies, such as China and Brazil, with the vibrations from those shocks creating the illusion of instability in the U.S. economy. While we are certainly experiencing a contraction in revenue/earnings growth, Wall Street analysts have a tendency to overreact on the downside. That overreaction sets the markets up for generally positive surprises from companies that are less weighted towards global industrial exposure. Those surprises to the upside should come from financials and technology, which I expect to lead the markets out of this correction beginning in October. It is important to remain defensively optimistic in the face of such unjustified pessimism during what has been one of the strongest secular bull markets on record. Defensively optimistic means that there is a controlled tendency towards long positions, as opposed to a leveraged, let it ride mentality that leads so many investors astray. Skilled stock picking alongside generally rudimentary risk control practices goes a long ways towards stabilizing a portfolio within such an environment. The tendency towards excessive hedges and an overabundance of cash in a portfolio at this juncture of the bull market is a conventional stance that will invariably lead to conventional results. Those who participate in this type of fear based investing that is curve fitted around seemingly relevant fundamental data points will very simply be left in a cloud of dust, as they have been during the entirety of this bull market. Being defensively optimistic as opposed to chronically defensive continues to separate the outperforming portfolios from the rest of the bunch. A Game Of Risk Obfuscation For all the resources and time spent on obtaining the pedigree necessary to thrive on Wall Street, the true professional after years of perfecting their craft does not become a master of interpreting company fundamentals,...
IT’S THE 90S ALL OVER AGAIN, ACT ACCORDINGLY.
Performance for 2016 is going to be greatly determined by how investors treat this sell-off. Per the usual routine of buffonery brought on by memories of past painful episodes, those seeking gains will misallocate assets, most likely by an overallocation into cash. This is a developed market led global economy. Developed markets run on technology and finance. Therefore, the reasonable conclusion is that technology and financials are where the greatest potential for returns lie. The great commodity bull, while being oversold and ready for a bounce, is now a misallocation play. Meaning that it will take some time before the assets that were irresponsibly allocated into this segment unwind. During an unwind trading becomes sloppy, investors become frustrated and it is generally a shit shoe, marked by periods of severe angst. This is the 90s all over again. Tech is king. The US is the growth engine. Emerging economies are risk-laden. Commodities are something you eat and put in your car. Most importantly, dips brought on by emerging market fears are to be bought hand over...
IF YOU’RE NOT DEPRESSED, YOU HAVEN’T BEEN PAYING ATTENTION
The market is supposed to be depressing at this juncture. It is meant to be dissuasive, seemingly dishonorable and unworthy of investment dollars beyond what one would consider allocating into a keno tournament. There is no other way to put in a sustainable, mind-numbingly solid long-term bottom in a secular bull market other than to undergo the conditioning process we are facing at present. If you are not depressed by the market action at this point, you are either a) not watching the markets closely or b) completely incapable of normal human emotion. I'm as bullish as can be going over the long-term and I've found myself drifting off into visions of the bliss that would be a job that doesn't involve red and green fluctuations in wealth. Anything but wondering when normal price action, sensible observations and a propensity towards discounting fear instead of embracing it will return to the markets. The separating factor between the winners and losers of the current act of monetary malice is very simple: Those who come out ahead are the ones who will realize that their depression is a necessary part of the process. In other words, those who realize that their emotions are converging along consensus extremes, deciding to move in direct opposition to that consensus will secure a substantial victory in the form of outsized profits. Those who allow the markets to manipulate them along consensus extremes will end up with conventional returns going forward, which are far below any major benchmarks. And this precisely describes the plague of the current financial community that is hindered by convention masked as...
SO THIS IS NOT THE BEGINNING OF A BEAR MARKET
With that said, the astute investor will be looking for points to put capital to work. There are two support areas ahead that will tell us the scale of malicious intent brought forth by this current correction. I outlined the support areas for both the Dow and Nasdaq 100 in this weekend's review, but thought that it needed to be articulated further. Let's look at Nasdaq 100 first. As I write this note, Dow futures are down over 100 points. If this trend down continues to the market open we should see a gap down below the red trajectory highlighted in the chart below. The ideal situation at that point would be for a steep reversal to take place, closing above the trajectory. Basically, stock market bulls don't want to see a close below 4,150 on the NDX. click chart to enlarge Should the NDX give way, the next obvious and absolutely critical point of support becomes Dow 16,000. And not simply because it's an attractive round number. It carries with it one of the key trajectory points for this bull market. The trajectory goes back all the way into the 1920s, carrying with it a great deal of weight. A touch of this trajectory, followed by a steep reversal back up would be as bullish an indicator for a fall rally as anything. A convincing thrust down below this trajectory sets the markets up for another 7-8 percent on the downside. So 16,000 on the Dow is a big deal. There are a ton of sentiment indicators out there that are flashing some pretty extreme readings. However, it should be noted that steep declines in the markets do occur on extreme bearish sentiment paired with oversold readings, as we have now. In fact, the August 2011 pullback caused by the Euro crisis occurred with extreme bearish sentiment paired with oversold conditions. That one didn't put in its final bottom until October. If catching market bottoms was as simple as buying whenever the put/call reached X number or AAII bullish sentiment went below X, then 95% of hedge funds wouldn't be underperforming their benchmark over the past few years. This is art, not science. ...