THE CURRENT STATE OF AFFAIRS
I find it odd that the news flow has turned into a fountain of bear semen slowly impregnating the minds of all those who are unfortunate enough to listen, while the market is sitting close to 4 year highs. Why is this odd? Let's look at the market from the standpoint of the average mind. What I classify as the average mind are not seemingly naive retail investors who are easily fooled into either the latest greed driven fad or fear driven panic. The average mind also encompasses the institutional investor on Wall Street; be it a hedge fund manager, mutual fund manager, analyst or any of the other titles that are chosen. I have personally consulted with numerous hedge fund managers and analysts over the years. There are very few who are qualified to go beyond the menial duty of creating a spreadsheet or PowerPoint presentation in order to create the image of brilliance that is - in all reality - completely hollow and vacant in nature. If you were to have the ability to peer into the mind of those that populate the Wall Street analyst and hedge fund community you would come to the swift conclusion that the only thing of substance is the hollow nature of the methods used to create an image in order to sustain the fleecing. Back to the average mind. There are few investors who haven't been caught in the negative-euphoria of the current news flow. Whether it is the fear of a retrenchment in earnings. A slowdown in the general economy leading to increasing joblessness. The continued deterioration in Europe. Fear of an economic catastrophe in China. The flow of information at present does not allow one to rationalize a four year high in the Dow. This comparison chart certainly doesn't seem to confirm the news. If anything, in the case of the Dow, it completely refutes the current news flow. It also is a clear indication that global capital now sees leading developed markets as the sole refuge. It is no coincidence, therefore, that the Dow and the Dax are top performers this year: click chart to enlarge Forgotten in the flood of information that is absorbed on a daily basis is one very simply truth: Bull markets do not end in the midst of news cycles that emanate a foul odor, allowing all those who are walking by to avoid soiling their shoes. Bull markets invariably come to an end during positive news cycles that create the necessary set of circumstances to allow the market to decline in as lubricated a means as possible. The average mind be it retail or institutional...
A NEW SMALL-CAP INVESTMENT OPPORTUNITY UNDER REVIEW
This website is a tool for you and an outlet for me. It allows you to acquire knowledge that can prove profitable, obtain a different perspective on the financial markets and hopefully learn a lesson or two along the way. What is does for me is allowing the opportunity to take erratic thoughts that have no particular dwelling and solidify them within a confined space that is always accessible if I should need to reference the how, what and why of a particular situation. We are, therefore, achieving a mutually beneficial path towards fulfilling each other's goals, the foundation of which lies in becoming better and more profitable investors. In performing the research that has been a part of my daily routine for the better part of 17 years, I came across a new potential candidate for investment recently. The very first thing I do when my filter spits out a new potential candidate is to look at the price action. From there, I look into the fundamentals of the company, reviewing everything from the 10-K, to the insiders/executives and the history of the company. Midway through the process I will realize that I have a viable candidate when I begin to sense a certain excitement. At that point, I cannot wait for the market to open in order to begin bidding for stock. I experienced this exact feeling earlier today. Barring the discovery of information that completely decimates the thesis behind this opportunity, another small-cap name will be added to the portfolio in the coming weeks. I am 100% invested, which presents a certain quandary. I refuse to utilize leverage the same way I cannot bring myself to walk past an inferno after taking a bubble bath in super unleaded gasoline. The proper course of action here is obvious. I will simply trim from the weakest names in the portfolio in order to have enough of an allocation for a starter position in this company. There is not an activist angle at work here. It is more a conceptual play, similar to the potential I saw in SYNC on both a product and fundamental basis some 60% ago before traders realized that SYNC wasn't Justin Timberlake and his friends taking their former boy band public. With the previous six paragraphs being said, I will formally be presenting the investment before the end of this coming...
WHAT REALLY HAPPENED WITH SYNC TODAY?
What had previously been considered a hidden gem was suddenly discovered with an unbridled fervor that had me scratching my head in the morning. I, of course, expect the best out of every company that possesses enough qualities to grace the grounds of my managed portfolios. I do expect, however, a more dignified attitude towards value creation. In the case of SYNC, today was downright violent. It wreaked of behavior led by a band hooligans who were either uncontrollably greedy in their want of shares. Or, positive news that led to a sudden influx of new investors. I tweeted early in the morning that I suspected a fat fingered fund manager had been sloppy in his buying habits and shown his hand far too early. This turned out NOT to be the case, however. Via email, I received an urgent correspondence this afternoon informing me of a group that had released a recommendation on the stock. This group allegedly has a bevy of members who have no qualms regarding urgent accumulation in thin companies. I am not going to pass judgement on this group. I am only concerned with how they are going to influence my current investment in SYNC. You see, I originally mentioned SYNC on March 22nd when it was trading at $7 per share. I published a brief research report on the company one week later. One of the attributes I listed at the time was the fact that it was an undiscovered name in an industry that is attracting a lot of attention...that being online streaming television content. The fact that it has been discovered doesn't surprise me at all. It was expected. The value creation process from this point becomes much more complicated, however. SYNC has gone from an undiscovered value play to a momentum-driven trading stock that has already attracted a host of short-sellers. The value creation process will continue. SYNC will realize its potential. Whether that value is in the $15 range or $30 range remains to be seen. Recognize that the calm, disciplined old man you saw a few weeks ago has now turned into a tyrannical dictator with unpredictable, murderous tendencies. Volatility will be substantial from here. SYNC today became involved in a whole new ball game with a whole new cast of characters. That doesn't change the fundamental promise of the company, but it changes significantly the road map that it will take to get there. Adjust...
STRATEGIZE APPROPRIATELY: THE NEXT LEG UP COULD BE MAGICAL
Now that I have downtime while awaiting the arrival of relatives so that I may share in their grievances regarding all aspects of existence, I have had an opportunity to take a look at what could transpire in the week ahead. The very first thing that came to my mind while shuffling through the forty odd charts I browse several times per day was the fact that the market could indeed be setting up for another period of steady grinding action to the upside. The rally, thus far, has taken on the shape of something that we are familiar with in 2012. That is an environment that is devoid of all volatility and only cares to move in one direction that starts with a U and ends with a P. Should we be in the midst of the beginning of a third leg to the upside off of the 2011 lows, you should bear in mind that third legs have a tendency to become a great deal more unstable while in the meat of the trend. They also have a tendency to be where the bulk of gains are made before a more significant pullback is observed. For that reason, you do not want to be NIT over the next few months. A NIT is a poker term defined by Urban Dictionary as: 1. Someone who's so afraid to lose a bet that they have to be coddled and convinced for an hour that they're going to have a great time and probably win, too. Eventually they may play, but by the time they get on the table the stakes are so low the table-time will eat any winnings you make. 2. someone who won't play unless they have a guaranteed sure win. 3. someone who'll squeeze a dollar 'til george's eyes pop out of the paper. In the stock market, a NIT can be defined as a person who hops on a trend when it is in the process of maturing and the news flow is the most positive. Also, an individual who places their stops far too close. This forces the person out of a position prematurely and doesn't allow them to participate in the greater trend. For purposes of this posting, the second item is of greatest concern. This next leg will be a point in time where stops should have a very liberal cushion in order to prevent sudden volatility from getting you out of profitable positions. You will feel like an Albanian gimp if you miss out on another 20 percent in upside over the next few months because you bought into the news...
THE COMPETITIVE ME AND PRUDENT ME ARE AT WAR TONIGHT
As I grow older (now sitting at the ripe, old age of 36) I have found that there are two predominant truisms that exist in my life. I am growing more and more regimented by the hour. I can tell you right now what I will be doing on Sunday at 3pm. I have essentially lost all sense of spontaneity and excitement that marked much of my life up to several years ago. At this point in time, however, this is exactly who I am supposed to be. I'm not sure if this will lead to me spinning out at the age of 65 and becoming an old womanizing drunkard. I suppose I will deal with it appropriately if that should be the case. Perhaps it won't need to be dealt with at all. I have also gone even deeper into my fascination with statistics. I've always loved tracking numbers. You cannot dislike numbers if you want to be in this profession. You will sit for hours each day watching them flash red and green. Then when the market closes, you will see more of them in the form of data regarding companies. Your life becomes one prolonged statistical soap opera. My performance is one thing I watch closely. I was putting together my numbers for the year tonight and was disappointed with the +13% number that has marked my year thus far. It is a little more than 100 basis points better than the S&P. Years ago, however, I would be up some 20 plus percent in an environment similar to this one. The one primary difference is the fact that I no longer use leverage. That accounts for the difference. It also accounts for the fact that I will be around 12 years from now. I won't blow up a hedge fund that was on its way towards gathering enough assets and putting together performance that would have allowed me to live in a diamond encrusted cave, surrounded by giant monitors constantly streaming news in 14 different languages, all of which I could understand because I would be willing to throw money away on endless Rosetta Stone lessons. I also have the means of counteracting myself. I didn't have that before. By counteracting myself, I mean that I have mechanical systems that take me out of the game when the market begins to skid. It is a three step process that I may discuss one day. But it allocates into cash and hedges automatically when A+B=C. I don't override it. I just listen like a robot. That is another means I have implemented to add longevity and insure...
JUST A LITTLE BIT MORE AND I’M BACK TO 100%
I'm still awaiting the fateful turn of my short-term trend indicator back to buy mode in order to be 100% long. There is a 25% cash position sitting in the accounts just begging to be have its turn at the track. Soon enough that cash will be put to work judging by the shape of things here and now. As to where I will allocate additional resources? It will likely be in the current names, with GSIG and ATNY leading the pack. As far as the possibility for achieving considerable risk-adjusted returns that don't have me wishing I had joined the US Postal Service at the age of 19 for purposes of job security and peace of mind, GSIG and ATNY are the leaders of the pack. For those who are perfectly alright with the excessive variability and trajectory of returns, then high beta names like YELP and SYNC continue to provide opportunity. I have positions in all of the aforementioned as all of you know. I commented on Twitter today about the awesomeness that was SYNC's earnings today. Perhaps awesomeness is an exaggeration. Their quarter was NOT an Appleesque blowout. However, it was a solid quarter that further substantiates my research into the company. The original research can be found here http://www.zenpenny.com/?p=3794 The general market still seems to be caught in ping-pong mode. You can see how closely the market is paying attention to the trajectory points I have been mentioning from the action in the 30 minute chart here. click chart to enlarge Give it time. Just a little more...
THINGS ARE BEGINNING TO LOOK AWFULLY STANDARD
My short-term trend indicator is damn close to turning right back up here. I am thinking one or at most two good days have it going back into bull mode. Intermediate and long-term indicators remain firmly in buy mode. I put some cash to work last week in GSIG and a new position ATNY. Both of these are positions I am willing to go large into. SYNC, YELP and CIS are more speculative, which is why I want to keep them contained. In case you didn't notice, the volatility in all three of the aforementioned names has been considerable over the past couple of weeks. While I am an advocate of embracing risk, you must also have the sense to know how to allocate into risk properly. Putting a large percentage of assets into volatile names that have recently IPO'd or are based in China isn't the appropriate means of cultivating a peaceful disposition so as to keep from malicious acts against small dogs, poor drivers or unruly neighbors. When all is said and done, my feeling is that this pullback will be looked back on as being awfully standard is scope and breadth. I touched on the fact that I thought this pullback would be a shallow one a couple of weeks back. Nothing has occurred between then and now to convince me otherwise. There are certain technical points that I would like to see hold. I am perfectly open, however, to the possibility of obnoxious shenanigans for which the financial markets are famous or perhaps infamous. Here is one terribly standard technical ping-pong event occurring in the Nasdaq click chart to enlarge Yeah. Super standard stuff. The latest round of short-term infatuated zombie-tards just can't get away from group think. They couldn't do it in 2005. They failed miserably in 2002. They failed again in 2000. And once more in 1996. Only difference now is that it is an entirely new group. A testament to the fact that the market is the world's greatest high pressure garden hose. Rinsing shit from the cracks of sidewalks before another dog comes along, dropping off a whole new set of turds to be rinsed. Don't be a...
RESEARCH REPORT: THE COMPELLING CASE FOR PURCHASING SHARES OF ATNY
I've been accumulating shares of ATNY since early last week. To date I have taken on a medium sized position to start and plan on making it a large sized position in the weeks to come. The reasoning behind investment in the name is compelling when taking into account all the factors. There is a value angle, an activist angle and most importantly, as you will learn, there is a knowledgeable team guiding the company forward in an effort to maximize shareholder value. ABOUT ATNY API Technologies Corp. designs, develops, and manufactures electronic systems, subsystems, RF/microwave, secure systems, and information assurance products and solutions for defense, aerospace, and commercial applications. The US, Canadian and United Kingdom Governments’ Departments of Defense (directly and through subcontractors) accounts for approximately 50%, 2% and 5% of the Company’s revenues for the three months ended February 29, 2012 (72%, 4% and 7% for the three months ended February 28, 2011), respectively. In the most recent quarter ended February 29th, 2012: Revenue of $70.7 million for the quarter ended February 29, 2012, up from $24.6 million in the quarter ended February 28, 2011 Operating income of $4.3 million compared to an operating loss of $7.2 million in the comparable quarter of 2011 Adjusted EBITDA of $10.8 million (15.3% margin) for the quarter ended February 29, 2012, versus zero in the prior-year period and $11.4 million (15.2% margin) for the quarter ended November 30, 2011 Implemented $23.8 million of annualized net cost reductions during the last 12 months GROWTH THROUGH ACQUISITION Thus far you can see that we have a defense electronics manufacturer that seems to be cutting costs and increasing the top/bottom line numbers over the recent past. The story goes far beyond these simple facts, however. ATNY has been achieving growth through acquisition. Since 2011 the company has merged with or purchased five separate companies. As a result, they have become a prime mid-level player in their space, setting them up as a target for acquisition by a top-tier name over the next 12-24 months. On January 9th, 2011 the company completed a complicated merger with SenDEC via Vintage Capital Management. That merger effectively resurrected the company through a doubling of revenues, allowing ATNY to pay down debt, reestablishing a Nasdaq listing (traded on bulletin boards prior) and implanting the head of Vintage Capital as CEO of ATNY. THE ROLE OF VINTAGE CAPITAL MANAGEMENT AND BRIAN KAHN Vintage Capital Management, as described by their website is a value-oriented, operations-driven private equity investor specializing in the defense, manufacturing and consumer sectors. What Vintage Capital Management does basically is to take large stakes in defense related...
3 “WHAT-IF” SCENARIOS RACING THROUGH MY HEAD ON A LOOP
Two weeks ago I presented a case for the market beginning the process of forming the second counterfeit move below the generational trajectory dating back to the 1930s. I think that this counterfeit should be complete within the next week or two, with May seeing some of the positive momentum that marked the first quarter returning to the market. There is immediate attention being paid to the potential for European Crisis Games Part 8. All the meanwhile, the market seems to be in a kind mood allowing those who are worried the luxury of cheap protection, whether in the form of options or the various leveraged ETFs that are out there. I somehow doubt it will be that simple. They don't ring bells at market tops and there is a lot of bell ringing here. Tops are indeed a process. If we are at an intermediate term top here, this one will be no different. It will likely jostle around until July when it decides a direction. I am trying to resist the temptation to believe that we are headed for another August-September swoon. However, my mind keeps going in that direction as if I am Pavlov's dog and the market keeps ringing a bell. I have to keep my mind open here. Here are some "what if "scenarios that cross my mind in brief flashes of brilliance: - What if this is a year marked by shallow pullbacks such as the one we are experiencing currently, followed by a move to slightly higher highs? This chop and pop scenario will keep a lot of people off-guard and insure that a majority of investors keep biting their nails waiting for the bottom to fall out. - What if we encounter a V top? That would mean that the recent top is as high as the market goes. My mind immediately counters this by thinking that there are too many chicken littles out there waiting for the sky to fall for this scenario to be plausible. We have a bunch of jaded fund managers out there that run at the first sign of trouble. That is not how V tops are made. I don't like this scenario. - What if we consolidate within a wide trading range for the remainder of 2012? The market essentially trades like it did in 2004-2006. That was a stock pickers market. I remember that because for nearly two years I had a terrible run that cost me a hedge fund that I liked quite a bit. At that time, I couldn't pick the right stock if it was floating in front of me with...
THE COMPLETELY IRRATIONAL REASONS WHY I BOUGHT YELP STOCK TODAY
You cannot rationalize the current $1.5 billion market cap for YELP. That is why I tweeted earlier that this is purely a concept type investment rather than my typical value/restructuring play. I bought into YELP for numerous reasons. Here is my thinking: Social Media in 2012 reminds me of where the internet was in 1996. I was sitting at a trading desk for Waterhouse when Yahoo went public. I was surrounded by traders who were skeptical. I had customers who called in and were even more skeptical of the prospects for this burgeoning industry. Why the skepticism? There were no metrics or relative comparisons. When you tried to put together the numbers they just didn't add up. The market couldn't assign or rationalize a proper valuation. The same problem is evident in social media. Here we have companies going public with market caps that are blowing people away. The words "fraud", "overvalued" and "hype" are often attached to these companies. Rationalizing a nearly two billion dollar market cap for YELP is impossible. Rationalizing a nearly eleven billion dollar market cap for LNKD is mind-blowing. And rationalizing a one hundred billion dollar market cap for Facebook seems outrageous. Rationality fails in these situations. The market proves it time and time again. Yet traders continually turn to rationality in an effort to decipher the mystery of the newest and greatest sectors that consistently cause over-thinking charlatans and articulate incompetents to look mediocre at best and foolish at worst. I've spent years using YELP to help assist with restaurant reviews and anything else I want an opinion on in the service space. If an individual was to come to me pre-IPO and ask me to guess what the market cap should be? I would not put it past $500 million. $1 billion seems absolutely absurd. $1.5 billion seems like insanity. Now here is where I am different than most. When I see that my internal compass is off by so much, I don't keep walking in the same direction knowing that I am correct until I fall into the mouth of a volcano. I begin wondering why it is that the market thinks of a company like YELP 200% differently than I do? That 200% is a premium that the market is assigning to the company above and beyond what the normal mind considers acceptable. In addition, that 200% premium to what the normal mind considers acceptable keeps most out of the stock and attracts short sellers. The perfect combination of events to have a clean and steady uptrend that further reinforces doubt until that singular moment where realization of what the market...