WHAT IF?
There are no doubts about it, I'm bullish. I was bullish when I started this blog in January 2011, with talk of Nasdaq 5,000 when it was sitting at 2,700. I've remained bullish throughout, with tiny periods of bearish doubt when the markets have become overcooked. The long-term thesis here, however, has and will remain of a bullish variety until the markets tell me otherwise. As those of you who have been reading the past few weeks certainly realize, I am also bullish for January. Despite today's near 200 point drop on the Dow that hasn't changed much either. I continue to believe January will end substantially higher than where we are now. In fact, I believe this week will end flat, in a worst case scenario. That means that we should see a turn between tomorrow and Thursday, at the latest. I do understand, however, that my job isn't to become entrenched in my own ideas, regardless of how well the last 5, 10 or 50 ideas have gone. My job is to realize that there will come periods when I am incorrect and decide how to deal with those periods appropriately. Risk management at its essence. During last week's review, I did have the markets basically being straight up for the remainder of this month. Today's hiccup certainly wasn't part of the road map. With that said, I have to start calmly entertaining the idea that my road map may, in fact, be completely incorrect. Today I was brainstorming the ramifications of my idea of a strong January being disproved by the market and what that would mean for the remainder of 2014. I came to the following conclusions: 1. If January does end up flat to down, then I would take it as meaning that the correction I had planned for mid-year (May-August) may, in fact, occur sometime earlier. Perhaps in the March to April time frame. A flat to down January would be a sign of market that is heavy to the point that it is perfectly content ignoring what is one of the better seasonal tendencies: a bullish January run following an extraordinary year previously. This would indeed be a signal of the market being comfortable with mediocrity during a point in time when it should be shining. 2. A weak January would also be a sign that the sharp, sudden and relatively short-term (less than 2 month) correction that I saw during the May-August window may be more of a shallow, rolling affair. I would guess between 5-7 percent on the downside, lasting around 2-3 months from March-April with June-July being a significant...
THE SURE SHOT
Early on I have a relatively good idea of what my 2014 will look like. Not in terms of performance of the portfolios I manage or the markets, in general. But rather from a standpoint of focus. I am seeing my focus increasingly turn towards quality rather than quantity. This is partly due to where we are in this bull market cycle. And also it has something to do with where I am in my own cycle as an investor. I had a conversation with an investor today regarding prospects for future returns and the engine that will generate those returns. His question had to do with how many ideas I would have to generate in 2014 in order to keep up with my performance of the past couple of years? When I told him that the portfolio you are looking at now is enough to accomplish my target returns, along with possibly 2-3 either new or recycled ideas from the past playing a part in the overall structure of the portfolio, he was somewhat surprised. I told him that I don't need 20 ideas per year that I don't understand completely or am unsure of in order to achieve returns. In fact, if anything, that type of portfolio structure tends to diminish returns as it compromises the quality of holdings within a portfolio. If you know how to perform research, find excellent ideas, learn everything you can about all the key components of that idea and execute a strategy of diligence towards seeing the idea to fruition then why on the rolling hills of Asgard would you dilute the idea by building a portfolio of mediocre ideas? As an investor, you stick to the best ideas and eliminate the rest ideas. Otherwise, you achieve frustration instead of any measure of wealth creation. I'm not trying to be the KRS-One of finance here, by the way. Consistent outperformance cannot be achieved by buying into any facet of traditional portfolio management. How can it? Traditional portfolio management has been proven decade after decade underperform the benchmarks. It can therefore be classified as closet indexing dumbed down. There is no magic in it. Only pain. If you look at the list of published research in the second half of 2013, you will see that I have chosen to become much more selective in only publishing three research reports. It is not that I am trying to avoid finding new ideas. Every single day after the market closes I spend an hour running scans, shuffling through candidates and taking notes on them, just as I have been doing for years on end....
A BULL MARKET THAT HAS YET TO HIT FULL STRIDE
Since I started this project in January of 2011 of self-revelation and transparency in research, I have been sounding a somewhat one-sided horn of bullishness. This has, of course, been sprinkled with intermittent warnings of impending doom when the market has been overcome by investor greed. The message, however, has been decidedly bullish in nature from the onset. Articles like this one: "6 Reasons To Be Long-Term Bullish," published in January of 2011. And charts like this one, published a few weeks later, talking about Nasdaq 5000 in the next few years cemented my bullish views from the very beginning. I've never wavered the entire time, insisting that the market had done its work poisoning the hearts and minds of the investor class to the point that it could move up unencumbered for the long-term. Here we are starting 2014 with the market increasingly showing its bullish hand with an exuberance and ferocity that we haven't witnessed for sometime. I've had to step back frequently and ask myself whether this type of behavior should cause me to pullback on my bullish expectations? Every single time I receive an emphatic "NO" from the resident investment committee sitting within my mind. A market that has gone up X amount of percentage points over X amount of years is never a reason to sell. Those pundits who consistently pound the mantra of overvaluation, irrational exuberance and pending economic collapse are a breed of investor who are pessimistic by nature. They have no choice but to believe in the mantras they chant like a voodoo princess in a grass skirt. Increased market caps only cause them to cling onto their fearful ways tighter without regard for any message the market is trying to send. Their only care is that a time will come when this all ends. What happens in between isn't of concern. Those of you who weren't around in the 90s, do yourselves the favor and go read the Silicon Investor message boards from 1996-2000. You will see a strong bearish contingent who neither saw the extent of the bull market that they were in nor cared to profit from it. Instead, their goal was to create a sense of intellectual superiority by coming up with statistical viewpoints citing the reasons why the bull market shouldn't be. Each tick up in the averages reinforced their viewpoint. In 1999, they went silent. In 2000, the bull market was done. We are nowhere close to a mass, full-fledged realization of the power of this bull market. Institutions remain underinvested. Retail investors still don't care about the stock market. Investors globally are still perfectly happy sitting...
2014: A GLIMPSE OF MIDNIGHT IN A PERFECT WORLD
Us equity types have had it easy in 2013. We haven't suffered much of any pullback whatsoever. Bears have been disparaged, dissected and pilfered from to the point that they populate a small leper colony surrounded by dying weeds and various reptilian lifeforms. The nouveau rich investors of the social media sector abound as whatever is related to the sector bounces up in ways that are only comparable to the mid-cycle of the 1990s bull. With 2014 upon us, the comfort with which bulls operate has been growing. With that growth has come a certain confidence in the form of increasing bullish forecasts. Gone are the days of low single digit growth forecasts. Investors are demanding a certain level of chutzpah from their local, neighborhood analyst. You must realize by now that Wall Street forecasts are only an articulate, analytically driven reflection of the popular sentiment of the time. In other words, what Wall Street analysts do is gift wrap what investors are feeling in pretty words and a colorful bouquet of statistics, passing it off as original thinking. It is, in fact, group thinking that only serves the purpose of driving trends. Wall Street will never tell investors to be bearish in a soaring (think 2000) bull market. And it will never tell investors to be bullish in a brutal (think 2009) bear market. I won't be alone with my bullish forecast, no doubt. I am bullish on 2014, despite the fact that I have more company than I have become used to over the past few years. All that means is that we are mid-cycle in a bull market. There is really nothing more to read into it than that. All the knee jerk sentiment analysts that simply believe that bullish talk equals a reversion to the mean forget that markets do tend to reward investors at times. Markets are not always as difficult as 2000-2010. There are loyal, angelic markets. And there are demonic, nefarious markets. An investors job is to know which type of market we are in and act accordingly. Where will the surprises be in 2014? I think in two places: 1. 2014 will not be as smooth and effortless for bulls as 2013 was. After Q1 up until about August, a window opens for a relatively sharp, precipitous and unexpected pullback that will be brutal. It will likely be called a mini-crash by investors. Probably to the tune of 10% plus on the downside within a couple of weeks. It will likely be macro driven, with Fed policy being cited as a key reason for the violent reaction of the markets. 2....
THOUGHTS ON STRATEGY AND COMMENTS ON A COUPLE HOLDINGS
It goes without saying that investors are excessive in their lust for action in the financial markets. The simple act of sitting is one of the most powerful gifts an investor can have. Yet what we have are a large group of information obsessed investors who can't decide which investment will best suit their needs because of the inability to differentiate between the signal and the noise. It is a modern day plague that is one of the bigger liabilities to an investors equity. I monitor my results extremely closely. Not just such obvious measures such as performance relative to a benchmark. But also the number of ideas I am generating. The number of ideas I filter out due to the opportunity not meeting my requirements. The number of trades I make per month and per year. In going over 2013 results, the number of trades I have made has dropped by some 50%. The number of new ideas I have generated in 2013 versus 2012 is down 40%. My filter has become more stringent in its requirement for investment, not allowing a number of opportunities in the portfolio that would have made the cut in 2012. Yet, the results in 2013 are substantially better than 2012 which saw a gain of 59%. Quality beats quantity. The general theme here is one of selective, measured inactivity. It is essentially trend following as applied on the micro level of choosing quality misunderstood, murky opportunities in my method in particular. The point is that you, as an investor, allow the market to do the heavy lifting for you, as it is only too willing to do during a secular bull. You come to the realization that you can only get in the way of superior investment results during such conditions. I'm laying low. Have no need to look beyond the concentrated portfolio of names that make up our current holdings. Brief comments about two of the names in the portfolios. I'll have more in the monthly performance review in the New Year: WMIH - I have received a number of questions regarding future valuation here. I believe it is extremely difficult to put together a valuation model because we have no idea what form their future business will take. I do however believe that the most common methodology of simply valuing the NOLs minus X% discount is misguided. What we know about WMIH with the KKR deal is that it has now gone from a point of imagination of what can be done with the shell to consummation. The only question that needs to be answered is what form (insurance, bank,...
DECEMBER IS A TALE OF TWO MARKETS
To begin the typically bull friendly month of December, I decided early on that this month would be a tale two markets. The front half of the month providing the necessary strength to get everybody excited about the standard year end rally. And just when greed would be extending its hand for that very last dollar, the market would punish investors by pulling out the rug, creating a second half of the month downdraft. Instead, the market has decided to turn into a swindling thief of sorts by turning this well thought out scenario of mine on its head. The market has not started December on a positive note, insisting on greeting market participants as if they have no rights to any further riches that it will provide. This type of obnoxious trickery at the hands of the market has led me to believe that the scenario I envisioned to start the month will work in reverse. Instead of witnessing a second half swoon, we should see a second half rally. Enough of a rally, in fact, to take the S&P 500 up to 1820 to close out the year. Despite what you may hear, there is still too much money that has missed out on stocks. Instead choosing to be stuffed into any other asset class, namely of the fixed income/money market variety. That money is looking for an entrance into this market. Any type of rebound into year end will cause it to chase as the belief that 2014 will start strong is already deeply embedded in the psyche of the investor class. With a January rally being a high probability event, I simply don't believe for a second that the markets will allow investors a comfortable buying opportunity into the final weeks of trading for 2013. Any continued weakness from here makes the buying opportunity in anticipation of a January rally overly-comfortable, if that makes sense. In other words, the market is making it too easy to take advantage of that high probability/profitability event. With that said, what we saw today should be the extent of it. We could see some slight weakness into the end of this week. However, come next week, the tune of the markets should change from bearish to decidedly bullish. Let's see what the river card...
HOW CURRENT MARKET LEADERSHIP TELLS US THIS BULL MARKET HAS A LONG WAYS TO GO
I made a reference on Twitter Friday to how late stage bull runs are always led by frothy, growth names as opposed to consumer cyclical and basic material type names. In late stage bull runs, near 200 point Dow up days will have momentum names like YELP and TSLA leading the charge. There is a psychology to this frame of thinking that has more conservative names left behind while more aggressive names shine. When bull markets mature, participants become extremely comfortable in the bed that has been made for them. This means that they feel cozy enough to make moves that can create the greatest gains in the shortest amount of time. High-beta investing to the fullest. Invariably, more conservative sectors will get left behind. During strong up days is when the tendency of investors becomes the most evident because that is when greed will surface. So on Friday we had a strong up day, but the "new school" momentum names didn't shine. In fact, they lagged considerably. Instead, classic market sectors like basic materials, healthcare and consumer staples led on Friday. What does this tell us as astute observers of the market? 1. The market is being led by institutional investors as these sectors are their stomping grounds. When was the last time a guy at a cocktail party was boasting about the prospects of UnitedHealth Group? Institutional investors piling into conservative names is not what creates market tops, instead it creates market sustenance. It's a behavioral continuation pattern, if you will. Leading to the next point. 2. Speculative fervor is nowhere near reaching a culminating, mouth splitting, volcanic inspired blow off point. From volume, to price action, to sector leadership, none of the indications are there. 3. Retail investors are absent in a big way. Retail is always the final piece of the puzzle to an important speculative market top. In 1999/2000 it was retail that was leveraging up and driving stocks like Pets.com, Garden.com and CMGI through the roof. In 2006/2007 it was retail home buyers, with little to no experience in the marketplace, flipping homes without having the credit worthiness or knowledge to determine prudent risk. Retail is the hard cheese to any cushy situation in creation of monetary units. And retail buys buzz worthy names in bunches during strong up days. Retail is still licking the wounds from the double stock and real estate debacle of the past decade. Watching the market closely during strong up days can reveal a lot about the feelings of investors. The feeling currently continues to be cautiously-optimistic as judged by how participants are treating individual sectors on powerful...
SOME QUICK THOUGHTS
- Anytime a near 30 year member of the board of any company makes a purchase in the common stock it is worth noting. In this case, it was Bruno Di Giulian, a member of the board for BBX, which is one and the same with portfolio holding BFCF due to their impending merger. A purchase for nearly $50,000 took place last week. A relatively paltry amount, but nevertheless notable given where the company has been and the history of Mr. Di Giulian with BBX/BFCF. - I don't want to sound like a broken record, but I suppose I am a reflection of market conditions in 2013 which have been very repetitive in nature. There is nothing to dislike about the current market structure from a technical point of view. It is brilliant in nature and portends higher prices going forward. The Nasdaq Composite being an important leader of the bull movement is especially well put together here. - The Dow Transports are another leading index that is doing nothing but putting out a fantastic set of rhythms for investors to dance to. If you choose to be a wallflower when such music is playing that is a you problem. - The Facebook, Yelp and Tesla complex continues to be uninspiring in nature. I don't see much up in the immediate near term for these names. The downside will likely be tempered as well given the strength of the general market that should persist in December and throughout January. Q1 of 2014 should see a change in behavior for the better here. - The Nasdaq 100 is an index I have been referencing for its leadership qualities over the past couple of months. It continues to have tremendous technical prowess, as it is one of the stronger averages here. I'll go over all these technical points in the chart review coming later. ...
MY INTERNAL PROCESS, NAKED.
There is a certain sense of worth that can be derived from discussing openly errors that have been made in one's own analysis. I have purposely made the past few years of blogging and Tweeting about the markets as transparent as possible. I date everything I do in terms of chart work. I provide monthly updates as to my opinions of each investment I have discussed. I provide detailed research of each new investment that is made. With this type of transparency readers get to view what have been mostly good results, with a sprinkle of flea flickers that have been bungled along the way. I have the need to discuss the bungled plays of this past year due to the fact that I am facing a slight bit of mental anguish regarding a decision that was made in Q1 of this year. By pouring out my heart and soul it should act as a type of exorcism that will abolish this anguish for good while creating understanding of why such an error in judgement took place. This year there hasn't been much that has gone wrong. Nearly every name that I have profiled in published research is positive with the exception of JMBA. Leave it to the most simple business concept of all - making juice from stuff that comes out of ground - to ruin what would have been a perfect record in 2013. Of course, the S&P is up near 30% this year. It is difficult to go wrong with that type of backdrop for decision making. There has been individual analysis that has been faulty. AAPL certainly didn't go the way I expected. If it was left to my analysis the unimaginative investors who choose to have AAPL as part of their portfolio would have been looking at a $350 stock price. I can't have ill will towards a company that is so widely held during the holiday season, however. Anything that allows for an increase in quality and quantity of gift giving because of the magic of the wealth effect can only be praised. It is a virtuous cycle of monetary delight...until it isn't. What has been the most costly (back to my ill fated decision in Q1) was the dumping of MITL at near breakeven in the $3 range. I profiled MITL in a research report published January 14th. In the final paragraph of the report I said: A $6 stock price can very simply be attained by remaining consistent in their current efforts. Between $10-$12 will take place over the next 12-24 months on any perceived acceleration of their initiatives, which I believe will...
THERE IS GOOD REASON TO BE LOOKING AHEAD TO THE FIRST HALF OF 2014 RIGHT NOW
*This is from the "Looking Ahead" section of the monthly summary I am currently working on and will be posting tomorrow. As far as comfortable market environments go, the stock market of 2013 has been a series of mattresses that investors keep rolling over onto as each month passes. The daggers that often times fall from the ceiling when investors are most unsuspecting seem to have been put away as the market has humbled itself before the feet of investors in an expression of sorrow after the torturous decade that was 2000-2010. To over-think a market of this nature is to misunderstand the market at its essence. There are those who will always be involved in the minutia of understanding every component that creates an uptrend, which invariably leads an investor astray. The problem as it will always stand is that Wall Street is filled with the over-thinking type who has been born and bred into an environment of detailed analysis. That detailed analysis doesn't hold up in dynamic environments. This is the exact reason so few have embraced this uptrend and furthermore, so few have been calling for it over the past few years. There was no piece of traditional analysis available that would have pointed to such an outcome. It was an outlier that investors both amateur and professional are unable to recognize. If they are unable to recognize the beginning of such a bullish event, how then can market participants depend on these same individuals to provide guidance going forward? It is like an evolutionist being the keynote speaker at a religious conference on the topic of the location of the Garden of Eden. And that is exactly what market participants face going forward in the various voices that are attempting to guide asset allocation here: A group who didn't recognize anything leading up to this point now embracing the bullish movement. This type of misguided guidance, if you will, creates the various stages of an uptrend. You will notice that during the initial phase of the uptrend meaning the past 12-24 months, there has been very little in the way of downside volatility. There has been very little in the way of a full embrace that could lead to downside volatility. Severe downside volatility occurs only when one of two things occurs: 1. A macroeconomic or geopolitical shock takes place 2. The embrace of an uptrend takes place led by those who were skeptical at the beginning and often times throughout the middle stages of the uptrend. When those types who were utilizing erroneous analysis to judge a market finally decide to toss their ideas to...