THE WALL STREET FOOL
"There is a time for all things, but I didn't know it. And that is precisely what beats so many men on Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily - or sufficient knowledge to make his play an intelligent play." --- Jesse Livermore There is a certain degree of nobility that comes with the act of doing nothing in the business of finance. It is a counter-intuitive trait that does not digest easily with most investors. Yet it is an absolute key building block in the act of creating any formidable wealth within a portfolio of stocks. We are looked at from a very early age not by what we accomplish through stillness, but what we accomplish through action. It is believed that in action is where victory is born. If you are injured by a certain action, then you simply take another action to "get through" your injury, as action is the only way to victory. If, on the other hand, you are injured through the act of stillness, you are automatically labeled as being lazy, incompetent and unable to perform the essential task of taking action. The very act of daydreaming. Imagining. Introspection. They all run completely counter to the key attributes that create success according to popular perception. What is missed by those who constantly preach action, whether in popular books, blog postings or in any form of media is the moments in between when the act of stillness leads to a clear path of action. You cannot have a reason to act at every single moment. Then your actions become diluted within a sea of inconsequential motion. Action should have purpose. And purpose is derived through stillness. In my case, in particular, I have clearly entered a point in the life of the current portfolio holdings (WMIH, HH, IWSY & KFS) that any action taken will be forced. There is nothing to do but sit. Volume is extremely low as all the current portfolio holdings are in between catalysts. To force an action here by attempting to discover momentum that would create basis points would be foolish. It is a negative expected value proposition as it is difficult to duplicate with a high success rate AND it takes away from the key focus of the portfolio that is backed by a strategy seeking asymmetric (overused financial jargon,...
THE RISE OF THE STUDIO-GANGSTER ON WALL STREET
Urban Dictionary defines a "Studio Gangster" as follows: Fake G's that pretend to be from the streets by rapping about it. Much like studio gangsters who are seemingly a thorn in the side of the hip-hop community, there dwells a large band of studio-analysts on Wall Street who will pretend to be bulls or bears by rapping about it, although their raps don't rhyme. They pretend because they simply have no choice. A fervent lust for competent analysis doesn't reside within these individuals, creating a mutant form of trend-follower who will simply hop on the path of least resistance, curve-fitting their analysis to meet the circumstances they are presented with. Just a couple short years ago that the voracity of the bull market was in constant doubt. Numerous reasons were being cited. The same reasons that pop up today at the first sign of trouble: job growth, corporate earnings, inflation, deflation, interest rates, EM concerns, Chinese real estate, fiscal policy, monetary policy, oil prices, Middle Eastern instability, overvaluation. You get the picture. There were very few, if any, who base their reasoning in the devoid and depraved landscape of fundamental, macro analysis that were calling for such levels in the major market averages. Now that fundamental events that worried these studio-analysts to the point of absurdity have vanished into the portion of the heavens that is a loving home for all forms of degraded analysis, the same crowd has reformed themselves into a nouveau bullish class of investor who is patting the back of the market, asking for whatever validation they can get before the tides shift, once again. The problem here is not that these investors signal any kind of long-term top for the markets. They certainly do not. The financial markets can make large groups who are otherwise dull, shine bright. Likewise, they can make those who are bright, look extremely dull. The type of anecdotal sentiment analysis that relies on the bullishness of mailmen and taxi drivers to call bull market tops is just as flawed as the fundamental, macro analysis that drives your typical studio-analyst. Trends persist for far longer than even the most brilliant investor can imagine and they can create realities in price that are far beyond any logical explanation that can be offered at any moment along that path. What these studio-analysts signify is that a degree of comfort has been created in this bull market that hasn't existed over the past several years. This type of comfort can create downside pressure that can be both sudden and surprising in scope when it does come due to a lack of available...
WHAT YOU THINK YOU KNOW CAN HURT YOU
After participating in this bloodsport since the mid-90s, I have discovered that markets rarely make u-turns during the summer. In other words, when a market has been exhibiting a certain behavioral pattern through the second quarter of the year, it won't suddenly jump the curb, attempting to carve out new ground in an attempt to revitalize itself while most serious traders and investors are enjoying the spoils of their success beneath sunshine and colorful umbrellas. In the case of the market of 2014 we know the following from observing it through June: 1. It hates consistency, instead choosing a tedious route forward that involves taking two steps backward for every three steps forward. 2. It hates earnings season, ending January down and April flat, with both months possessing a tremendous amount of volatility. The trend following crowd, who usually can't see past their left toe, are insisting that everything is peachy in suburbia, with plaid dresses, clean undergarments and colorful juice boxes signaling that the neighborhood is safe from prowlers, heathens and the disregarded. The simple act of a market being at or near its highs seems to have brought a tremendous amount of comfort that is not easily dissuaded through a single act of malice. That act of malice occurred today in the form of a steep reversal, ominously led by the SOX and Russell. It is not simply an act of malice, however. It is a luminous signpost at the entrance to a highway signaling that the same dangers that have been existent during every commute home in 2014 still exist. A low volume summer won't change that. In fact, it will amplify it to the point of lavish discontent among those who have become comfortable sitting in the same spot. For a market that hates consistency and has shown disdain for earnings season, there sure are a lot of investors thinking that this is a Lucky Charms commercial and a friendly Leprechaun will magically wave his wand, declaring everything around us "Magically Delicious." This is Wall Street. Markets hate you. They want to kill you. Magical Leprechauns are certainly not allowed. Be careful in...
WHERE INVESTORS AND INVESTMENT MANAGERS HAVE IT WRONG IN 2014
What follows is the "Looking Ahead" portion of my monthly letter to investors at T11. I have created an email list that sends this report out at the beginning of each month to those interested. The full report contains commentary about the general markets and individual positions held in managed portfolios, as well as overall performance. To be added to the list email me at mail@T11Capital.com If there is one thing I have consistently been reminding myself of recently it is the benefit of keeping an open mind with respect to the general market for the remainder of 2014. It would behoove those interested in capitalizing on equity appreciation for the remainder of the year to follow the same path. The nature of the current market is unlike any we have experienced in recent memory. There is a tremendous amount of dislocation taking place between popular averages, with uncommon divergences becoming the norm rather than the exception. There is also a tendency towards sideways movement that is becoming extremely compressed in nature. In fact, through May 23rd, 2014 is the first time in market history that both the Dow and Nasdaq are within 1% of unchanged for the year through May. Growth names have suffered dramatic corrections. However, the remainder of the market remains content with sitting still. The greatest challenge affecting investors in the current environment is that general market conditions are being disproportionately lumped in with growth related investments. Growth does not constitute but a fraction of the market. Companies like Google, Facebook and Yelp are components of a terrific acceleration in technology. They are not the be all and end all of markets. The current attitude that pervades investor psychology is undoubtedly brought about by past experience. More specifically, the experience of the internet bubble and the credit crisis, where the bursting of two distinctly separate excesses in the economy collapsed everything around them. Similar to a blast wave from an atomic bomb, there was little left standing in the aftermath of each crisis, irrespective of a company's specific merits. It goes without saying then that investors would see to it that in the modern day rendition of a bull market old psychology would pervade the new, disallowing investors the privilege of accurate interpretation of current events. The grace and ease with which the current bull market has dealt with the difficulties in the growth sector during 2014, essentially allowing these companies the privilege of correcting their excesses while the Dow and S&P remain tightly wound, should be seen as an indication of strength rather than a signal that a collapse of ALL sectors is imminent....
SPRINTING SCARED
As the persistence of the current bounce becomes apparent, the trembling, crooked fingers of the average asset manager have become increasingly disfigured rendering them unable to pick up their saltine crackers and grape juice as they ponder ways in which to allocate their cash in a comfortable manner. And that right there is the problem or perhaps, the solution, to the current perception of this recent rally. The comfort level in buying this run up on some of the lightest volume we have seen in years is simply not there. It doesn't exist. Leaving asset allocators no choice but to stew in their own rigidity as they await what may never come. According to the BofA Merrill Lynch fund manager survey released some weeks ago, fund manager cash levels are at two year highs. Nothing Earth shattering in an overly-bearish tone, but still relevant in judging the perception of the current market. When institutions increase cash levels it is because they either 1) believe that equities will become cheaper at some point down the road, allowing them to buy back in over several months OR 2) are unsure in their belief of the equity markets, rendering them unable to make any decisions of consequence as to how assets should be allocated. Cash then becomes the safest bet until the market convinces them otherwise. In both cases, institutional fund managers will have their hands forced by a market that presses to the upside. This is because institutions do not have the luxury of sitting out rallies in their benchmark based on simple theory. Not after what has transpired in terms of under-performance for the past 5 years paired with an increasing array of options for investors to gain exposure to equities without the need for an asset manager that has under-performed greatly. In the current circumstance, you can see a market that is intentionally running away from those who are attempting to coax it back into a position that would provide the comfort needed to gain exposure. Each headline that passes with news of an all-time record high in the S&P 500 is similar to a jab to the gut of the fund manager who is neither comfortable, competent nor desirous of exposure to a creature he frankly does not understand. As averages that have been abhorred as under-performers and dead money in 2014, such as small-caps and growth continue their surge, more pressure will build on those who are under-invested to catch up. Eventually leading to the catch up trade that typically marks short to intermediate term highs in the market. During the entirety of this exercise in articulate buffoonery,...
THE CURRENT STATE OF THE MARKETS: WHAT HAPPENS ON WALL STREET STAYS ON WALL STREET
In the May 11th edition of "Current State," the conclusion after various points of analysis was that the markets were poised to break higher after digesting the breakdown in key growth names in a graceful and elegant manner. With last week's close at record highs for the S&P 500, the market is slowly revealing its hand to a mostly unconvinced constituency that is more concerned with harboring psychological scars of the past than profiting aptly from the present embodiment of a bull market. This fact is revealed in both the volume and tedious nature of the price action. There is by no means a rush for entry back into the markets by those who feel that equities contain a disproportionate degree of reward from this point forward. In fact, it has been a hallmark of the current bull market to tiptoe to the upside in a manner that has caused concern since the very beginnings of this bull market in 2009. The tiptoeing nature of this bull market continues to cause confusion for investors who have been brought up in the school of violent moves to the upside coming about on above average volume. A trait of the markets that was left behind in the 90s alongside Pets.com, CMGI and Iomega. The modern day secular bull market is built on such a wide array of available options for equity exposure that it would be foolish to think that volume would be able to be interpreted as it was in the past. Additionally, there is a chronic absence of conviction among market participants that shows up in both volume and price action. Let's start by looking at a weekly chart of the Dow, which is setting up as powerful a pattern below a critical area of resistance as can be found: What is important to note about the weekly Dow chart above are two things in particular: 1. The extremely tight nature of the consolidation above the previous short-term highs from the middle of last year. 2. The extremely tight nature of the consolidation below the extremely important generational trajectory that has its origins at the 99-00 bull market high. The fact that the Dow has chosen to put together one of its tightest shows of consolidation in recent memory below a generational trajectory is extremely bullish. It tells of a market that may actually run from here further than any of us expect. Moving onto technology next. According to the Nasdaq Composite, the downtrend that has plagued the market since March is now officially over. The obvious target for the Nasdaq is the old highs right around 4370. The...
SIDEWAYS
For all the posturing, conjuring and theater that the markets make available to viewers on a continual basis, this past week gave spectators absolutely nothing. The markets went up, making those of us predisposed to bullish thinking assume the jovial position. The markets went down, making those of us predisposed to bearish thinking assume the emboldened position. The S&P ended the week down 1. Not 1 percent, but rather 1 point. It seems we have entered a phase of the market where we are in a sideways range, within a sideways range that is further within a sideways range. We are sideways on a yearly basis, as 2014 has been more or less flat. We are sideways on a quarterly basis, as Q2 has been more or less an exercise in accomplishing nothing for the markets except a wide variety of predictions by its participants. We are sideways on a weekly basis, as previously discussed. We are sideways on a daily basis. Even the intraday action was sideways, as the markets went up a bit, down a bit and ended up going nowhere. This type of indecision typically gives way, in a rather sudden fashion, to a new short to intermediate term trend. In my case, I believe that trend will be to the upside as discussed last week. The sideways nature of trading changes nothing in the hearts and minds of investors. If anything, it makes them more resolute in their prevailing beliefs. The wonderful part of sideways price movement is that you can assign any variety of indicators to the movement and determine for yourself whether it is bullish or bearish. In other words, a sideways market puts most popular means of determining a bullish or bearish trend in a compromised position. Due to the fact that they are compromised, it is incumbent to the operator of the indicators, whether fundamental or technical, to exercise an increasing amount of interpretive analysis that typically falls along the line of the prevailing bias of the operator. Sideways markets don't change minds, they just create a further hardening of them that will only give way when the dam breaks. I will post some interpretive analysis of a bullish bias...
THE CURRENT STATE OF THE MARKETS: WHAT IS OBVIOUS IS OBVIOUSLY WRONG
In looking over the situation facing investors, at present, it seems we are all faced with a series of relatively simple judgments to make in order to assess the portfolio allocation that would create the greatest expected value going forward. The decisions are as follows: 1. Does the fact that the S&P 500 is pinned to its all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 2. Does the fact that the Dow Jones Industrials and Transports are pinned to all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 3. Are both of the above mentioned questions negated entirely by the fact that the Nasdaq and Russell have been demonstrating the exact opposite behavior? In other words, both the Russell and Nasdaq have been declining with volatility attached to the move. The third question is the most important as it seems to garnering the most attention. More importantly, it is creating the most fear and emotion among market participants. Before we get to the indices that have broken down, here is a look at the S&P 500 on a weekly basis. The most important aspect of the current price action is the fact that volatility is so well contained along a key trajectory (in blue) and directly below another key trajectory. The behavior strongly suggests that the S&P is eyeing the trajectory (in red) sitting around 1950. A move of some 3% higher from current levels. In a very simple sense, the S&P 500 is telling us what to think. In this case, it is telling us that the issues of the Nasdaq and Russell are of no concern. It is the choice of market participants to believe that there are shadows lurking behind every corner. Volatility demons with jagged teeth looking to rip into the flesh of investors. That is an issue of investor imagination, rather than reality. The answer according to the S&P 500 is very clear if you choose to accept it: The markets are preparing to move higher. Let's look to see if the Dow agrees with the S&P 500. This is a look at the Dow on a monthly basis. What you see is an incredibly bullish picture the Dow is painting when you zoom out with a monthly view. Especially given the fact that it is occurring below a key trajectory that has acted as resistance for the 2000 top and the 2007 top. At present, the Dow is simply consolidating along this trajectory with a series of tighter monthly ranges. This is a continuation pattern in the direction of the primary trend. And it...
A DEEPER LOOK INTO THE COMPARISON BETWEEN THE MARKET OF 2014 AND 1996
Comparisons to the bull market of the 90s can certainly act as a point of guidance for the current market. One analog that been getting increased attention is the comparison between 2014 and 1996. Here is a look at both markets from a price perspective: If you look beyond pure price movement and the similarities in terms of the number of years we have been rallying at present compared to 1996 etc., you will notice one striking characteristic in the internal dynamics with 1996 vs. 2014. In 1996, before the internet really became a buzzword, with companies like YHOO and AMZN either just coming to market or being pre-IPO, the semiconductor stocks were the go to momentum plays. They powered the Windows PCs that you would run on your desktop that would get you onto AOL or Earthlink. Companies like MU, LRCX, LSI and AMAT ran the show back then. They were technology. They were momentum. When you wanted returns in excess of the benchmarks you went into these names. Much like the FB, YELP and TSLA of our current market. Something peculiar began to happen to the semiconductor names around late 1995, really gathering momentum by the middle of 1996. They completely ran out of steam,with a majority of them suffering declines far greater than 50% from their 1995 peaks. These were stocks that had appreciated hundreds, even thousands of percent the previous few years. Investors were all in, not realizing that serpents thick, scaly tail was being wound up to knock them head first into the deep ravine below. How much had semiconductor names made investors? LSI Jan 1993 $2.69 per share October 1995 $29 per share MU Jan 1993 $1.89 per share October 1995 $40 per share AMAT Jan 1993 $1.05 per share October 1995 $6.39 per share INTC Jan 1993 $2.72 per share October 1995 $7.52 per share Investors were happy. Too happy, in fact. The stocks stalled in October and began declining in earning in early 1996. By August of 1996 the declines in the stocks of the companies mentioned above were as follows: LSI -66% MU -75% AMAT -53% INTC +23% one of the few exceptions of the group For a majority of the time that these growth driven leaders of the market declined the S&P 500 did nothing, as you can see above. The decline in semis only interrupted the upside momentum in the market by stalling the uptrend, creating a frustrating, sideways market....
THE CURRENT STATE OF THE MARKETS: MACRO IS DEAD, GROWTH IS ALIVE AND IMAGINATIONS ARE WARPED
Macro is dead. Paul Tudor Jones, perhaps one of the most famous macro investors of our time, confirmed this fact at today's Ira Sohn conference with a presentation titled: “Manic depressive trading in a volatility-compressed world.” He did say during his presentation that, “Macro trading is about as difficult as I’ve ever seen it in my career." The reality of coordinated, global central bank intervention has taken its toll on all the key components that make up the bread and butter of the large macro investors. We are increasingly living in a micro world, where focused themes in technology and financial innovation will drive extraordinary capital gains for investors. At this moment, the markets are in a digestive phase that has seen key momentum or growth based names suffer extraordinary punishment in the past couple months. All the meanwhile, the general market (SPX, DJIA) has held up remarkably well, being poised for new all time highs in the days and weeks ahead. The strength being shown by the general market averages while technology, biotech and to a certain degree, financials have all experienced extraordinary losses should be seen a positive sign by investors. It is by no means a precursor to any type of financial cataclysm in the form of evaporating stock prices in the months ahead, as you have been led to believe by the gallivanting pundits that occupy media of all type. It is of key importance to have perspective during periods of time where confusion reigns supreme. Perspective in the case of momentum driven names comes in the form of zooming out a bit and looking at their performance thus far in 2014: FB +12% GOOG -6% NFLX -6% TSLA +44% YELP -13% ZNGA +1% To those claiming that growth has imploded, I ask if they would like a wax with their brain wash? This is not an implosion but normal market behavior during a secular bull. Those who regrettably and perhaps, naively chased these names up during Q1 are being taught a very basic lesson of bull markets: Chasing momentum is a punishing sport. Further, those who are complaining of the punishing circumstances surrounding growth names in 2014 have simply arrived at the masquerade ball late and without the proper costume. You can see in the chart of TSLA below that it has just today pierced a short-term trajectory to the upside. It should also be noted that the recent multi-month sell-off has been occurring on consistently diminishing volume. A very standard pullback by any stretch. I would also put a tremendous amount of weight in the simple fact that TSLA is one of the best performers in...