SEPARATING MICRO AND MACRO IMPERFECTIONS
In participating in the financial markets, we have all made a silent agreement to be subject to the rules of imperfect information. In fact, a better classification would probably be subjective information. In either case, we use a set of data that is highly subjective in nature to make decisions that we hope will positively impact our financial fate. It should be seen as highly unusual then when a market participant who chooses to make his or her decisions public sports a near flawless record. I am always shocked by the nature of fraud that is reported commonly involving investors who believe in a guaranteed return exceeding Treasury yields by anywhere from 500 to 5000 basis points. I am even more perplexed by individuals who choose to pay for information given by financial charlatans who are posting gains not in the 20-30 percent range per annum, but 200-300 percent range. If it were only this easy we would be all be fighting for parking spots at Whole Foods in our Lamborghinis. The truth of the matter is that incorrect decisions, thesis and hypothesis are as much a part of the landscape of the market as a bid and offer. With that said, I have decided to dedicate tonight's post to a study of my micro imperfections, followed by a commentary on how unrelenting and fatal imperfections of the macro variety can be. You can get away with a host of micro imperfections in the markets, but a macro imperfection is death. Let's start with a plethora of my micro imperfections that those of you who have been reading this site over the years have been subjected to: - Recently I have been eating hairy humble pie (mind out of the gutter, please) on TZA. It has been my biggest losing investment in 2013. It shouldn't be a surprise, as we are facing one of the strongest bull markets of recent memory. Anything with a bearish slant will get you killed. Just ask Bill Ackman. - I have been off with AAPL as of late. A lot more off than at anytime over the past couple of years. According to my studies it was supposed to be below $400 by now. I defer. - Off the top of my head, my call on RGR was atrocious. I actually dedicated an entire post titled: The Technical Case For An 80% Drop In RGR Over The Next 12-18 Months Not only was the title too long, but RGR isn't dropping. It is up 5% since I posted this study in October of last year. To be fair, I still have some time...
PREPARING FOR A DROUGHT
An unusual experience came to be in recent weeks. Unusual in the sense that over the past several years it has seemed that taking comfort in fear has trumped the emotion of being driven by greed. When that particular dynamic is in place it results in value creation, particularly in small-cap land where I dwell, that patiently occurs over a very long period. In other words, investors who spot an opportunity have plenty of time to accumulate before the hoi polloi become aware of the opportunity. That dynamic has changed. For the first time in years, I had a brilliant small-cap opportunity that I discovered run away from me within days of its discovery. I have become spoiled by the market of the past several years. It has been a market where I could patiently discover an opportunity, ponder that opportunity for days or even weeks, begin typing my research report, accumulate and then publish the research on my timeline, without worry of a runaway train to the upside jeopardizing this process in any form. That has changed. In addition, opportunities in general are becoming more difficult to discover as entities of all classifications seek validation through wealth creation in the equity markets. Now before you get carried away with feelings of premature contrarianism brought on by the erroneous mindset that an accommodating equity market equals pending disaster, let me remind you of a few relevant facts: 1. The major averages Dow, S&P, Russell are just a few months into all-time highs. Furthermore, these moves are being confirmed by the important "periphery averages", such as the Dow Transports. We are closer to a beginning than we are an end of this rally. I am talking long-term here. Not whether the markets are going to pullback in September of November of this year. 2. There remains a great deal of fear with respect to pullbacks. 3 percent pullbacks are feared to become 6 percent pullbacks. A 5 percent pullback is thought of as being a precursor to a 10 percent pullback. In the case of a 10 percent pullback, there will be talk of Armageddon, with Roubini and Faber leading a band mutant pessimists that only believe in gold, guns and reruns of Bonanza. This dynamic has and will continue to create support beneath the market during compromised periods. 3. Technology hasn't asserted any distinct leadership prowess over the market, as of yet. Technology has certainly been a participant in the rally of 2013, but it is far from leading the charge. That leaves an entire chamber of dry powder for the markets, especially as we get closer to Q4...
FINANCIAL ACROPHOBIA RELATED TO THE ISSUE OF “WHEN”
In life, "when" matters. If your coworkers see you out drinking at 8pm, they will consider you a fun loving guy who enjoys himself after work. However, should your coworkers see you out drinking at 8am, they will consider you an alcoholic who probably won't be their coworker too much longer. To illustrate further, if you take a plate of warm cookies to a new neighbors house at 3pm, you will be considered hospitable and kind. If you take a plate of warm cookies to a new neighbors house at 3am, you will be considered creepy, weird and possibly get shot depending on your geographical location. Yes, "when" does indeed matter in life. In the markets, however, the issue of "when" is much less relevant. This is contrary to the popular wisdom that insists on timing being such an important facet of the investor experience. Obsessing over "when" for investors is one of the biggest stumbling blocks to profits. It creates trepidation, doubt and anxiety that would not come into the equation if the issue of "when" was left in the realm of life and out of the realm of finance. In the past, I've touched on what truly separates an amateur investor from a professional investor. It surely is not a degree, a certificate, any level of training or anything pedigree related, for that matter. I have seen retail investors that could have been all-star fund managers. I have seen fund managers who shouldn't be trading a $20,000 retail account, let alone a $200,000,000 portfolio of retirement assets. True Wall Street professionals, I have found, are much less involved with the issue of "when" in the traditional sense. They are able to buy high and sell higher. They are able to look at the issue of "when" in a much more relative sense, as opposed to the traditionally minded investor who comes into the Wall Street arena with the same tools he uses in everyday life. The very same tools that Wall Street inherently preys upon. Much along the lines of fear and greed. The same emotions that will keep you out of a dangerous part of town at night and keep you motivated when you want to give up. These emotions have no place in the investment world. They are stumbling blocks. The obsession over "when" falls right in line with fear and greed as a classic stumbling block for experienced and less-experienced investors alike. Let's take the market of present day as an example. "When" is killing the average investor here. They are looking at the market from a standpoint of 2009, when the Dow was...
LAND OF CONFUSION
Is there anything more delightful than a market that obstructs, perverts and distorts the view of participants to the point of complete befuddlement for every asset class at the expense of professional returns? In case you had to think about the answer here....it is a resounding NO. Markets that choose to take the path of most confusion are always the most profitable as that is where the opportunities for outstanding returns are born. Since a majority of market participants both professional and casual tend to rely on confirmation bias reinforced through consensus analysis, anything deviating from an A+B=C path tends to rile the uninitiated pseudo-intellectuals who tend to dominate this business. In other words, they cannot function properly from a cerebral standpoint when confronted with dynamic scenarios. It is only natural then that a vast majority of hedge fund managers are underperforming the markets this year, last year and all the years in between and out between. This has been the most dynamic environment for investment thesis of anytime in recent memory. The markets were supposed to crash a hundred times between now and the 2009 bottom. We were supposed to be driving a horse and buggy around this time, while relying on song and folklore as entertainment for our families after a supper consisting of freshly slaughtered moose and homegrown potatoes. Everybody got it wrong. Not just the bears, such as Dr. Doom and Nouriel Roubini, characters that are the financial markets version of Mickey Mouse and Donald Duck, respectively. But the bulls got it wrong, as well. They simply didn't stick around long enough to truly enjoy the fruits of this bull market. How many fund managers were bullish in 2009 and have managed to keep up with their benchmark from that moment? That number is less than 5%, I would guess. Most likely, much less. Here we are again at a point in time when consensus thinking is being challenged from both sides. Neither the bullish camp or the bearish camp have much clue as to what path to take from here. The confusion is, again, what will create the opportunity. What we have here and now is as follows: - A seemingly reactionary rally in the markets as they hit key support levels. Reactionary rallies are subject to retracement a majority of the time. - A perfectly symmetrical test of support on the S&P, Nasdaq Composite and SOX. It is rare to see such a symmetrical, perfect test of support, followed by the bounce we have seen this week. I have said in the past when a market is symmetrical in its behavior it is...
WHY HELL WEEK WAS A GREAT WEEK
Excuse my tardiness. I was in Europe this past week and was pressed for time to put any fingers to the keyboard. As I fly over a remote part of Northern Canada that looks like a meat locker in the shape of a country, I am compelled to make up for the lost time now. From a market perspective, last week was splendid. It was the kind of week that tells investors whether they are simply biding time until the next downdraft wipes out their profits or if they have a properly constructed portfolio of stocks that is nuclear proof. As a responsible steward of capital, a week like last and especially a day like Thursday must be viewed as your hell week or hell day. The day where the market puts your portfolio through the ultimate test of endurance. If it buckled, then you go back to being a cadet. If it held up, then you are one of the elite. One cannot simply take a 2,3, or 4 percent down day that comes as a result of being inappropriately exposed to a market with increasing risk, shrug the shoulders and go back to watching The History Channel. When a portfolio suffers at the hands of the market then it is an indication that the portfolio is not fit to handle current market conditions. Investors must learn to view performance in absolute terms in order to even begin the process of managing risk correctly. The view that "the s&p fell 3% and I only fell 2.5," needs a bar of soap and an open mouth to put it in. Last week was your test. If your portfolio experienced volatility that matched the market, then you are incorrectly positioned. If your portfolio experienced volatility that was more than the market, then you are idiotically positioned. Thursday was a day that I will be discussing in "Portfolio Highlights" in the monthly report as it was not only a green day, but suffered from little of the volatility that plagued the market. It validates the method of risk control used in my portfolio management strategy even further...for now. I qualify that statement with "for now" because I realize how quickly that very validation can turn into Chinese water torture. Adapt or...
PERUSING THE LABYRINTH OF LEAKS THAT INVESTORS ENJOY
In the portfolios that I manage my concern, focus and energy is consistently on the equity curve that my strategy provides. A sloppy equity curve is a reflection of an inconsistent strategy. Think of it logically: The equity curve of your account reflects the sum total of your decisions as judged by the most accurate, unbiased judge of all....the financial markets. There is no identity in this dark pool of self-serving personalities who are chasing dreams in various stages of completion or degradation. The markets don't care about your skin color or hair color. They don't care if you walk like a monkey or stand upright. They aren't concerned with who you slept with last night or if you've never slept with another human being in 46 years. The only concern of the financial markets, as expressed through the creation of monetary success, is if you have made the correct investment decision at the correct time. When both of those factors - investment decision and timing - manage to be in sync then truly wondrous, beautiful things can take place within an investment portfolio. BUT...the issue of investment decision and timing must be expressed with a consistent output. When it is not, then an erratic equity curve becomes the result. Something along the lines of what you see from a Richter Scale during a 7.1 earthquake off the coast of Indonesia. Consistency in strategy, execution and mental state are the three factors that will result in a consistently upward slopping equity curve. Anytime your strategy starts switching from A to B to R to Z then your equity curve will show the result. This is a leak in your game and your equity curve exposes it. Anytime your execution begins to suffer as a result of indecisiveness built on the foundation of a lack of confidence then your equity curve will show the result. Another leak in your game that your equity curve will strip naked so that you can see all the lurid details of your inefficiencies. Anytime your mental state moves from a place of peace to chaos your equity curve will show the result. Paul Tudor Jones recently said in an interview that if one of his traders is going through a divorce he will yank his money. Mental state matters perhaps more than anything else. I recently visited with an old friend who was attending the Altegris Investment Conference in Carlsbad. He used to manage outside funds but now manages his own money exclusively. He told me that when he managed outside funds he would purposely employ buffers between him and his clients so that...
PORTFOLIO UPDATE: WANDERING IN THE LAND OF THE ABSTRACT AND IMPERFECT
There are many facets of traditional portfolio management that I believe are ineffective. One of the most serious offenses against the habit of effective portfolio management is sticking to an investment thesis that is being disproved by the market, clinging onto statistics of a fundamental nature that inherently lag price. There isn't a disaster in investing that has not had the words "but the fundamental outlook seemed so great," attached to it. Just ask those who bought AAPL at 600+ last year. Or real estate investors in Las Vegas and Miami in 2006. Or even the investors who were clamoring to buy BAC at 50+ in 2007. All of the aforementioned modern day lessons in cultivating capital losses have an investor attachment to a fundamental scenario that is on the edge of a cliff in common. You won't find clues of what is to come in any 10-Q, press release or investor presentation. Often times, management at the company doesn't realize that the the land is shifting beneath their feet. The greater wisdom of the financial markets is the only tool that accurately surmises when a fundamental shift of dramatic proportion is occurring in any one industry or sector. And the greater wisdom of the financial markets is only evident in price and volume. If you sit around and wait for a press release or analyst rating to get you out of a failing company or industry you will be getting out with every other Joe who is searching for the exact same information you are in order to make an effective decision. This isn't kindergarten recess we are talking about here, where you get hugs for scraping your knee and sliced fruit when you need a snack. This is capital allocation where your capital is up for grabs the minute you place into the arena of the finance. There are no hugs here without a kick in the groin. And any sliced fruit you are offered will likely be laced with arsenic. The ability of the investor to accurately gauge and react to information is what creates the difference between success and failure. The information necessary to make the decision that sets you apart from the stampeding herd will always be abstract and imperfect in nature. It is conceptual rather than factual. And that is why so many who are successful in every other endeavor they have attempted fail so miserably in finance, trading, investing or whatever you choose to label it as. Wall Street is a consistent exercise of making decisions using abstract, imperfect information. There is nothing in the "real world" that prepares one for such...
PORTFOLIO UPDATE: SEARCHING FOR SUGAR MAN
If you haven't seen the documentary, "Searching For Sugar Man" it is well worth your time. Much like this bull market, it is the story of a highly-talented artist that went largely undiscovered for decades except among the people of South Africa who thought of him among the greatest singers of all time. While I am unsure of whether the people of South Africa are driving this rally, I am sure that this market is highly-talented. I am also sure that the potential of this market is largely undiscovered by investors. A statistic blew through my Twitter feed earlier today that went something like this: The Dow has not experienced 3 down days in a row for the past 100 days, which is an all-time record. I painstakingly went through the daily chart of the Dow to see where the 100 day mark started. December 31st is the date this 100 day period began. There is some important information coming so pay close attention to what I am about to say. First, let me remind you that I have been talking about the generational trajectory points on the Dow for years now. Ever since I started this website, a break of the generational trajectory points was what I said would lead to great things. There are countless examples on the website. Here is one from August 2, 2012, where I said the following: "The power of these generational trajectory points is clearly demonstrated here. As is the importance of a break above 13,500. A break that will usher in a brand new bull market lasting for years to come." The full article from August 2012 is here http://www.zenpenny.com/the-power-of-trajectory-points-starring-the-dow/ Now back to the 100 day thing. December 31st, 2012 is the date this 100 day period began, to repeat myself. On January 2nd, 2013 the Dow took out the first important generational trajectory. This was the one that originated at the 1932 lows. On January 17th, the Dow took out the generational trajectory that originated at the 1937 highs. What does all this have to do with the 100 day record we are in the midst of? The 100 days without more than two down days is a confirmation that the market recognizes the scope of what has occurred here in 2013. This is the beginning of an extended period of strength of US equities. By extended, I don't mean weeks or months. I mean years. I mean that this is 1982 or 1995 or 2002. The market is talking through its actions thus far in 2013. Nobody seems to care though. All that seems to occupy the minds of...
A PIRATE’S LIFE FOR ME
The current market is a bandit. Better yet, a pirate. It isn't giving itself away too easily so that riches are bestowed upon every participant who dares to open the coveted treasure chest of the market. It isn't making the voyage too difficult so as to dismay or dissuade investors from making the trip. It is giving away gifts. It is taking away treasures. It is chuckling, spirited pirate who seems to have a lot more behind the curtain than people care to believe. Here are some observations I am making regarding this piratical market: - If you look at the major averages on a long-term basis, using weekly or monthly charts, the scope of the breakouts that is taking place in 2013 begins to smack you in the face. If you can't see it, then you don't know price. As difficult as this is to believe, we are closer to a beginning here than we are any conceivable end. I'm talking long-term here, not whether or not a correction will take place over the next few weeks or months. - Bringing me to my next point: Yes, the market is overdue for a correction. What do you have to gain by insisting on and planning for that correction right here? Nothing. I have had one firm signal this year to hedge exposure via TZA in February. It didn't work out and I quickly moved on. Since then, I haven't had anything close to any signals to get short or hedge long exposure. There is a rather surprising contingent of market participants who remain (it has been months now) insistent that a significant correction is around the corner. These are the clueless and inexperienced among us. Pay them no mind. - The easy money on the long side of AAPL expires on Friday. After Friday, I have AAPL becoming a choppy, irreverent drunk. A short opportunity will come down the line. It is not here yet, however. - Portfolio exposure remains significantly under where it should be at this point. In fact, it has been this way a majority of 2013. 60% long and 40% in cash is the current allocation. I'm in the process of putting more to work in a new name. Opportunities that offer the proper risk/reward simply don't exist here. I'll have details on the new name later this week. - If you did not check out the interview with David Tepper on CNBC today, please do so http://www.cnbc.com/id/100734343 - Anybody thinking about what US oil supplanting OPEC does for the US economy long-term? If not, get to thinking. Here is the story http://www.bloomberg.com/news/2013-05-14/opec-spare-capacity-to-surge-amid-u-s-shale-boost-iea-says.html - TSLA is an...
WHY AAPL JUST HAD ITS MOST SIGNIFICANT WEEK SINCE APRIL 2012
First, a history of the price target that was just hit on the dot for AAPL: - On January 23rd this chart was posted showing the next logical area for support as being the generational trajectory from the 1987 high for AAPL. The price target this trajectory pointed to was 400-420. - As AAPL got closer to the trajectory through a routine of steadily dripping lower, on March 4th this chart was posted bringing greater clarity to the ultimate downside target revealing 390 as being the destination for any sustained attempt at a bounce. The low on April 19th was 385.10. Last weekend I posted an article titled, "AAPL: Downside Price Target Achieved, Now What?" In the article I discussed one of the expected results of hitting an extremely important level of support is high volume. While we didn't get that volume surge last week, this week we certainly did. In fact, it was the biggest weekly volume surge in AAPL shares since April of 2012. This is important not simply because volume finally decided to show up in AAPL, but WHERE that volume showed up gives away a ton of information. Here is a detailed look at AAPL on a weekly...