THE EMOTIONLESS, MISUNDERSTOOD PRESENT DAY BULL MARKET
A majority of the investment population, both professional and otherwise, continue to not understand this market. The proof is in the performance of investors over the past several years along with reactions to extremely standard events like the October pullback. Short of cramming equity issues forcefully down investors throat, I was as clear and adamant as I have ever been that October was a substantial buying opportunity, one of the most substantial of this bull market, in fact. One of the most widely read articles I have ever written on this site called for new highs to be seen in the popular market averages by year end when bearish sentiment was at its extreme in mid-October, with anonymous bloggers of false reputation being quoted by Business Insider as calling for continued severe price declines. Little did I know that new highs would be seen before months end, in what turned out to be one of the swiftest recoveries from a correction in decades. Nobody expected it. Still, to this day, there are few that see what is going on. And what is going on is as powerful a bull market as any of us will experience. Those who were around in the 90s and truly digested the various nuances surrounding the bull will grasp what is at hand here. In fact, as has been discussed numerous times this year, we are very much on path for a 90s type continuation of the bull that puts up numbers in the major averages that few expect. Witness: oil is crashing, metals are done, Fed Funds rate is set to rise, long-term rates remain low, mom&pop are absent from this bull market and far from returning, technology innovation is fueling the U.S. economy, investors are realizing that emerging markets can't compete with U.S. assets, the Dollar is king, the recession is still fresh in the mind of investors causing adverse bearish reactions at the first sign of trouble. Interesting? Good, I'm talking about 1995, which was not even the mid-point of the bull market. We are very much replicating that environment now. There is no reason not to expect extraordinary growth in equities going forward based on the duplicative nature of price, fundamentals and time. The growing banter about valuations etc. is grossly early and horrendously useless. It is misleading to those who simply do not know better. Markets don't top on valuations, but rather emotions. Emotion has invariably been present at every major market top. I was there in March of 2000 when I had distant relatives calling me telling me how much they have made in QCOM. I was there when...
IN THE THICK OF IT
Sometimes you just know. You know that the decisions you make during a predefined, limited window in time have reverberations far exceeding similar windows in different time periods. You know that opportunity is breathing down your neck and the culmination of all your experience is needed for it to be seized. You know that the opportunity for significant profit exists that can propel rates of return for years to come. This happens to be one of those periods. In the small and especially micro-cap world, the market of 2014 has created a dislocation between price and reality. The intangible factors that go into investment decision making are being completely overlooked in favor of only the most obvious, textured type of information that can be easily understood and interpreted. The more complicated the situation, involving abstract, multi-faceted outcomes that cannot be easily interpreted utilizing stale modeling forecasts, the more the chances are that the stock is severely depressed. There simply isn't a whole of interest. There isn't interest in digging for information. There isn't a desire for risk in the form of emerging companies. And the interest that exists is from those who are looking to trim the books into year end for cosmetic or perhaps, tax purposes. The propensity towards rotation has been obvious for most of this year. 2014 has been the year of the large-cap. Even more pointedly, it has been the year of the favorite large caps. It has been an extremely narrow run to the upside, with old school favorites like AAPL and BAC leading the upside. The market has been very comfortable with leaving some key names behind. It has certainly been comfortable with leaving a majority of small-cap names behind. The Russell being basically flat for the year doesn't begin to describe the pain being felt, mostly in the form of frustration, by a majority of small-cap investors. Just as the rotation favored large cap names in 2014. The money will rotate back into small-cap names in the years ahead. I published a study a couple of months back that showed what the Russell 2000 does following both down years and years where the S&P is up while the Russell is lackluster in nature. The results showed a definite propensity towards significant outperformance in the year that followed either the down or lackluster relative year in the Russell. The outperformance in most years was double digit in nature for the Russell following such an event. I expect that 2015 will yield a similar result. I've been spending all of November checking, rechecking and once more checking my work. I have been scavenging the detritus for...
HERE IS THE SUPPORT LEVEL THAT MATTERS MOST FOR THE MARKET GOING FORWARD
In my continuing lust for a market that has become increasingly plague ridden according to popular perception, I would like to present the following chart showing a key level of support that the market responded to in a dignified manner during today's trading. This dignified response to such an important area of support is yet another clue, in addition to recent small-cap outperformance, that the undercurrent of the market is bullish in its intent. Not many people can see it in the midst of the noise. But that is what bottoms are made of. In the chart below, I reference this article from exactly one year ago today titled "The Resistance Level That Matters The Most For The Bullish Case Going Forward." The resistance level of exactly a year ago is the support level of present day. The market is a poet. click chart to...
HERE IS WHY THE S&P HITS NEW HIGHS BY YEAR END
You know the market has hurt investors when the analysis becomes a plethora of "maybes," "coulds," and "should bes." The days of putting yourself out there for all to see has been replaced with putting yourself out there to make sure you aren't humiliated by being wrong. I don't believe in such timidity in analysis. With that said, I will offer the following proclamation: The markets will end 2014 at new highs after making a low in October. I base this on two pieces of analysis that nobody is talking about: 1. The 200 day moving average being broken for the first time in something like 500 trading days. This is a record. It's a tremendous record, in fact. The record should end this week as the S&P is an inch away from breaking the 200 day MA to the downside. First, let's talk about what the record signifies. The fact that persistence on the bid for the markets has been so relentless to not allow the S&P a decent pullback for nearly 500 days is NOT bearish. It is a testament to the strength of this bull market. Strength that will not subside from the first "real" pullback of this bull market. That bid will return with the force of a million bearded dwarfs into the seasonally favorable period of November-December. Let's look at past data dating back to 1990 with respect to previous "record" runs above the 200 day MA: A. The second longest run after the present one was from 1995-1996. The break of the 200 day MA took place in July. Just a couple months later the S&P was 10% higher. A couple years later it was close to 100% higher. B. The 3rd and 4th longest runs took place in the 50s and 60s. Too far back to have any relevance. However, the fifth longest run took place from Oct 92-Mar 94. After the S&P 500 broke its 200 day MA in March 1994 it declined by roughly 5%. That was the low...for the decade. C. The 7th longest run took place from Aug 96 - Oct 97. The break of the 200 day MA was a one day event here. 6 months later the S&P was higher by 30%. 2. Speaking of 1994, there is an interesting correlation occurring in the Russell with respect to that year. See chart below: click chart to enlarge There are other reasons, as well. Such as leadership, earnings, interest rates, the Dollar, oil prices, valuations etc. But I want to keep this focused. Those speaking of...
PORTFOLIO UPDATE: HULK SMASH
During the trading day Thursday, I tweeted the following: Let me begin by saying that I am by no means your typical value investor that will simply rely on the aura surrounding improving fundamentals to allow me to hold onto a position. I bring a trading mentality to fundamental investing because I have seen far too many brilliant fundamental managers get absolutely pummeled by completely ignoring price. And don't give me the "what about Warren Buffett" excuse. He has an infinite time frame and equally infinite access to permanent capital that can weather any storm. 99% of investors, whether professional or otherwise, do not enjoy that convenience. Playing this game while ignoring price is like playing football while ignoring your opponents offensive and defensive formations. Sure, you'll still be on the field. But you won't be very good and you won't win many games. With that said, I have been steadily disassociating investor capital from HH over the past two months. The company has very little risk at these levels. However, the small-cap market has witnessed a significant enough degree of injury that numerous opportunities with a higher degree of upside potential now exist. I want cash available to take advantage of those opportunities in Q4. Currently up to 30% cash, giving me enough dry powder to take on 1 or 2 new positions over the next few months. 70% invested in four names total, including WMIH and KFS. Every couple of years an investor is faced with decisions that possess a disproportionately significant influence on future, long-term portfolio performance. This chain of decisions has the potential to positively or negatively influence portfolio performance not just in the coming months, but perhaps years down the road. Every investors chain is different based on their strategy, focus and timeline. However, every investor, whether they realize it or not is disproportionately influenced by decisions made around key points with respect to their specific traits. I have a strong feeling that I am entering one of those periods here in Q4. Being conscious of what I think will be a key point in my chain of decisions already gives me one leg up, I believe. The scope of opportunity being presented paired with what I have found to be significant probability of small-cap outperformance in 2015 and 2016 means that the buying opportunity brought by the current mood of the market can't be misjudged or squandered. I'll be presenting the data for my conclusion that small-cap outperformance will significant in the years ahead next week. Back to writing my client letter for...
A SYMPHONY OF THOUGHTS
Putting together some really interesting studies on a flat to negative Russell 2000 (Russell down 1.44% YTD) and its influence on the rest of the market over the next 12-18 months. I'll be publishing the data in my client letter that will be posted here in early October. This has been a difficult quarter for the small-cap universe. I haven't been spared the lashings despite my attempts at agility through selective rotation out of weaker names and either into cash or names with stronger footing. Liquidity has been especially atrocious, which leads me to believe that, as is so often the case in the tri-dimensional vortex that can become of small-cap investing, companies with market caps under $500 million are simply leaking equity due to disinterest more than actual "real" selling. The ramifications for investors are simple: You either believe this is a buying opportunity, taking advantage. Or you believe that this is a harbinger of an eroding foundation beneath the markets, lessening exposure. For the time being, outside of the Russell, there are plenty of developments taking place that warrant the attention of investors. Here is a symphony of thoughts: - AAPL is tracing out a volatile, above average volume consolidation that typically signals a stock that is ready for a break. The IPhone 6 and 6plus are now out. Inevitable criticism of their new product as well as a short-term hole in new products to announce typically lead this stock into negative territory. Price action seems to be suggesting that weakness is on the way. - In looking through my list of stocks on a nightly basis, if I didn't know any better, I would think all averages are having a negative year. I don't typically follow market breadth, but the recent rally to all-time highs seems extremely narrow. Institutions that dominate this market are increasingly focused on a handful of large and mega-cap favorites, leaving behind a chem-trail of inefficiency in the small to mid-cap complex. To not take advantage of this foolish. Markets will rotate, as they always do, away from what seems indestructible for the moment into the already destroyed. - The Nasdaq Composite is exhibiting the type of erratic behavior that brings with it a weak market over the short to intermediate term. Generally speaking, the setups in large cap tech are disadvantageous for deploying new money. Too much risk is needed for a very mediocre potential reward that has the potential to be taken back in one swoop as demonstrated earlier this past week. - Some of the bargains I am beginning to spot in the small-cap world are ridiculously attractive. However,...
TODAY’S THOUGHTS: CONTROL THE TAKE
Settling in for my nightly perusal of the financial markets on a day when the Nasdaq, in particular, let it be known that holes do indeed exist in the game of September trading. It is by no means a normal act to give up an entire month's worth of gains in one solitary day. However, this is exactly what momentum names decided to do today. The list of names that were caught in the midst of the debacle include my favorites: FB, TSLA, YELP, NFLX all gave up multiple weeks of gains in a single day. A reflection of a market that has been and continues to be high in risk and low in reward. A market, I should add, that has very little in terms of proportional interest of the players involved. The bids are relatively thin. The offers are also somewhat light. Whenever either side of the trade is met with some conviction, a sinkhole opens up beneath the market swallowing investors in rapid fashion. Nowhere is this more evident than my crawlspace: Small-Caps. I have become accustomed to the cyclical nature of the small-cap space that sees investor interest in names ebb and flow like the emotions of a teenage girl at a One Direction concert. When the time comes, however, to deal with the receding of the landscape that is liquidity in small-cap space, it is never an easy task. What is already a group that is ignored by the 99% that occupy the investment space, crawls into a ball and gets buried beneath the soil until it is time shine again. Many of the small companies out there are simply trickling lower not because there is any real selling, but rather due to the fact that there is zero interest presently in taking on risk in small companies. And the primary culprit behind this aversion to risk is plain and simply the fact that investor funds are overly focused in larger companies. This is a market that is driven by institutions who most often ignore smaller companies because of liquidity constraints. The retail investor, of course, still believes that Wall Street houses reptilian demons who sleep under the thick brush of the money forest surrounded by pointy ear elves that are trying to take investor's money. Retail is mostly nonexistent in the small-cap space, barring a handful of popular names that are widely followed. So for small-cap investors nothing is left. The bids are empty. The offers are not met. The price trickles lower. Once the tide turns, however....and it always does, the upside reaction is monstrous in nature. Especially in names that are...
PORTFOLIO UPDATE: CTRL+ALT+DELETE
On Friday, I tweeted the following: Let's first review the micro thesis behind such a seemingly sudden decision. IWSY has always been a volatile investment vehicle. I have been in and out of the name numerous times since I initiated a position and released research in March of 2013. I know very well that IWSY enjoys whipsawing market participants along its path of least resistance, which has mostly been up over the past year and a half. It was no surprise to see the name whip around in the manner it did following the positive news of a major retailer being signed up that was rumored to be WMT. What turned me off with this past week's activity was a realization that I can no longer be sure of how much risk I am taking to achieve any potential reward. The highly inaccurate hit piece that was released this week is surely not the issue. Controversy is the name of the game in early stage technology adoption. There will never be a consensus regarding the validity of the technology or the viability of the company behind the technology. Negative criticism occurs in nearly every stage of a highly-visible technology company's life cycle. It is the reaction to the inaccurate hit piece both in terms of price and volume that instantaneously layered IWSY in what I can best describe as a thick fog of confusion in terms of my risk going forward. If sellers were so quick to damage the name on grounds of a questionable article, what happens if management doesn't execute in the next quarter? Now that IWSY has become a circus of sorts, with competing Seeking Alpha articles, management's threshold for error is reduced remarkably going forward. The price action is screaming that fact here. On the flip side, management will also be rewarded that much more in terms of stock performance with positive developments as a powder keg of volatility is sure to ignite on any surprise positive developments. Again, irrespective of these possible outcomes, I didn't know how much risk I was taking to achieve any type of respectable reward going forward. The situation has become devoid of proper perspective...for me, at least. When that happens, I can't continue in the investment. The macro side of this is grounded in portfolio theory. If an investment manager has a methodology that has a positive expected value over the long-term, then it can be expected that positions that are underperforming can always be replaced with positions that will outperform. The expected value of rotating the portfolio or performing a CTRL+ALT+DELETE reset of the...
QUICK THOUGHTS OF A DISTINGUISHED NATURE
The past few months have been a blur of research intersecting with a suspicious eye towards a market that has been as a difficult to predict as any I can remember in 20 years of investing. There is something to said for human inclination towards the expectation for a reversion. The pendulum that is proportionality is constantly moving in both directions so that we cannot become comfortable with a state of emotions for too long before another state takes over. It is only natural then that we would expect another state to take over the market. This market, however, has proven that it is perfectly fine holding the pendulum of proportional behavior firmly planted to one side. That, of course, being the bullish side, which has shown little interest in abating in recent months. It is often best during times of perplexing price behavior to simply allow the market the freedom to do as it wishes without opinion, as difficult as that might be. Opinion is most easily suspended when you focus on other things. In my case, it has been research. I have become obsessed with a couple special situations recently. This has given way to research that has taken me down roads that I find both entertaining and challenging, at the same time. I've literally spent more time reading over prior bankruptcy cases, court documents, dockets and opinions over the past few months than I probably have over the five years prior. It becomes financial detective work when you have a stake in the outcome that is determined by forming the proper hypothesis, backed by taking the correct amount of risk given the particulars of the situation. Luckily for me, this exercise in financial detective work comes at a time when the market doesn't warrant excessive thought or effort. It's uninteresting in its opportunities, as they are generally being offered with a significant amount of risk. It is taxing in its one-sided persistence, which comes during a seasonally treacherous period for the markets. My focus on the micro instead of the macro is warranted, in other words. When I did my end of the day run through the charts, I noticed the following: - The SOX is in no man's land. No read there. - The financials (XLF) found resistance right at the trajectory from the 2009 low. There hasn't been a real "thrust" downward, however. Neutral reading here. - The Nasdaq has also found resistance at an important trajectory, as discussed in last week's notes. The average could whip around this month a bit more. The more volatile the whip, the more relevant the top. Remember...
HOW FACEBOOK HAS PROVEN THAT BIGFOOT STILL EXISTS ON WALL STREET
There are few things as fascinating as repetitive error in human thinking. When monetary consequences are assigned to these mental errors, it amplifies the fascination factor as emotions get involved. When emotions get involved a curious thing happens to people: They descend into group thinking, where they find the most comfort. It doesn't matter how many times history has told these individuals that group thinking will result in an average output at best and a far below average output at worst. It doesn't matter how articulate or persuasive the argument to stand away from the group might be. The comfort of company that is aligned in thought rests so deeply in the human psyche that pulling an individual away from such a pseudo-gratifying circumstance is observed as reckless. Take, for example, the case of Facebook stock when it IPO'd a couple years back. Professional Wall Street was horrified by the prospects of a social media company with such a steep valuation coming to the market. It was seen as a sign of "the bubble" returning. You know, that bubble that Wall Street has seen a few times over the past 15 years and now randomly assigns the label to anything that comes up. It is similar to a hairy guy, with his shirt off, walking through the woods in the Appalachians. You will be mistaken for Bigfoot 9 times out of 10. On Wall Street, bubbles are the Bigfoot of finance. People think they know what they know what they look like, but are unsure if its a real Bigfoot until their Birkenstocks fly off with toes attached. Mark Andreessen, who by the way, is probably one of the best follows on Twitter, posted a fascinating number of articles about the pessimism regarding Facebook before the IPO. Here is the list of articles he cited: 2007: "Irrational exuberance ... Facebook is being valued by investors at nearly half the value of Yahoo ... bubble." http://www.nytimes.com/2007/10/17/business/media/17bubble.html?pagewanted=all&_r=0 2008: "Social networking will become a ubiquitous feature of online life. That does not mean it is a business." http://www.economist.com/node/10880936 2009: "The prospect of a Facebook death spiral is very real." http://gawker.com/5152040/facebooks-value-37-billion-and-dropping 2009: "One can argue that Facebook is probably worth far less than the aforementioned $3.7 billion." http://mashable.com/2009/02/11/facebook-valuation-3/ 2009: "Famously overvalued Internet start-up businesses: $15B value for Facebook, $2.6B valuation for Skype..." 2010: "Facebook's $56 Billion Valuation Smells Like A Scam To This Guy" http://www.businessinsider.com/buyer-beware-facebooks-56-billion-valuation-smells-like-a-scam-to-this-guy-2010-12#ixzz38ZCaG8fn 2011: "Facebook's stock price will drop more steeply than any other company's in history." http://www.businessinsider.com/facebook-valuation-2011-4 I'll add one that I remember vividly myself from shortly after the time FB IPO'd in what is emblematic of hedge fund research in this era: $4 target...