Lies, Damn Lies: Rotation Station Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: Financial names have the look of a sector that will be accelerating to the upside during the second half of this month. A majority of financial institutions report earnings this week, which will set the tone for the remainder of the month after what will likely be a choppy week of trading ahead. The overreaction that took place in money center banks, in particular, should become apparent to investors this week, setting a bullish tone if all goes as expected. A short-term allocation into defensive longs is likely a decision with a positive expected value. This doesn't mean I would consider selling some of our more aggressive tech or financial long exposure. What it does mean is that defensive names have lagged this month and with the market decelerating, risk/reward on some names looks juicy. Gold and silver names are in a highly confusing spot. We rode the uptrend in the names for a nice gain in December, liquidating in the new year. Since then, a confluence of conflicting signals has taken place that likely dictate a period of being a bystander on the sidelines watching. Long-term, metals are in a bull market. I will be patiently seeking a re-entry point. It used to be that bond investors were the "smart money" on Wall Street before the information curve flattened. There really isn't a smart money contingent on Wall Street any longer. With that being understood as fact, interest rates are absurdly off base in what their expectations for the economy are. Recession is a near zero probability this year with economic growth moderating, however, still moving along. Ten year yield should be nowhere in the vicinity of sub-3%, yet PTSD of a a repeat of 2008 has caused a dislocation to take place that should be taken advantage of. Nasdaq 100 and Russell 2000 are real close to their first major test of resistance since this rally kicked off. How they handle these areas will be telling. I'll be watching the rhythm of their feet carefully to make sure nobody has become drunk, ready to tip over. The range expansion that has taken place in corporate credit as...
A Portfolio Update: Carrot On A Stick
This past week liquidations in the portfolio: Out of AVGO Out of JPM Out of NFLX This past week additions to the portfolio: Purchased Z Added to TLT short Currently long: COOP, EIGI, INTC, MSFT, PAYC, USB, Z Currently short: TLT While I believe the market is going remarkably higher over the next several months, there are very short-term setups on the bearish side of things that may prove too mouthwatering to pass up in the weeks ahead. There remains a good deal of alpha to be juiced in January from both the bull and bear side of the trade. Just as the market carrot and sticked short sellers on NFLX on Friday with a seemingly alluring gap up on a weak open for the broad markets - enticing them to take the short trade thinking that the gap would be retraced, followed by grinding up the price almost all day - the same dynamic will continue to take place in the general markets. Bears are salivating for an entry point, erroneously thinking that we have embarked on a secular bear market that has dramatic downside left. All indications point to bears being naive in their elementary analysis of the situation at hand. Their persistence will cause the markets to continue grinding higher, until they are forced to capitulate the secular bear theory at new highs for the major averages. In the meantime, investors can take jabs on the short side, but the hooks and uppercuts should be saved for the long side of the trade until further notice. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site...
A Little Market Statistic
First, a little history to provide context. I presented this chart in January 2016, right around the lows that accompanied a correction of the magnitude we have experienced recently. The only difference then is that the correction and subsequent low of 2016 didn't cross the 20% barrier, which is a number that for some reason gets all sorts of hair raising chills and screams from stampeding investors. The article was titled A Dow Chart Going Back 90 Years That Provides Bullish Calm. That same chart I presented in the article then (chart from the article is below) can provide bullish calm now, only this time for different reasons. When looking deeply into what has occurred recently compared to previous periods, it is worth noting the following: We have experienced a 20.21% correction in the S&P from its September top to its December low. This is the 5th time since 1954 we have experienced a 20% plus correction during a secular bull market. Let me explain. In my work, there have been three secular bull markets post-Great Depression. They are labeled as "bull" in the chart above: 1. 1954 – 1968 2. 1982 - 2000 3. 2013 - ? In the 1954 – 1968 secular bull market the following substantial (being defined as a correction of ~20% or greater) took place: 1957: -20.57% correction 1962: -26.40% correction In the 1982 – 2000 secular bull market the following substantial (being defined as a correction of ~20% or greater) took place: 1987: -33.50% correction 1990: -20% correction 1998: -19% correction During the secular bull market that started in 2013, this is the first 20%+ correction we have experienced. What happened in the instances when a 20% or greater correction took place during a secular bull market? 1957 – After the correction, the market was positive 6 quarters in a row, gaining 64% 1962 – After the correction, the market was positive 9 quarters in a row, gaining 58% 1987 – After the correction, the market was positive 8 out of 10 quarters, gaining 60% 1990 - After the correction, the market was positive 11 out of 13 quarters, gaining 62% 1998 - After the correction, the market was positive 4 out of 5 quarters, gaining 55% If this secular bull market was to terminate after only one 20% correction, it would be the first secular bull market over the past 100 years to do so. Additionally, 20% corrections, as demonstrated above, are traditionally buying opportunities, with an average gain of 60% taking place before real turbulence is witnessed again. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts...
Lies, Damn Lies: Skeptics and Steamrollers Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: Watching the price action in the markets you realize how skeptical investors continue to be by observing the relationship between the US Treasuries and equities. For every downtick that occurs in the market, there is a disproportionate reaction into fixed income. It's as if investor are expecting a bearzombie apocalypse at any minute. Conversely, for every uptick that occurs in equities, bond investors are relatively slow to react proportionate to their buying activities. Apple supplier, SWKS, cut sales and profit forecasts in their earnings report today. The stock was up 5% afterhours as a result. There will be some cuts to guidance at a greater rate than investors happen to be used to. However, it's important to keep in mind that markets look forward and what they might be seeing some months down the road is a lot better than most realize. Crude oil is leading the market. It led on the way down as equities and crude topped almost simultaneously in October and it has led with the most recent breakout. Again, crude is rallying overnight on a bullish data release and equities are following with Dow futures up 120. NVDA has been unusually weak. It may pick up into the end of the week. However, if it remains an underperformer, there may be something devious brewing beneath the surface for the company specifically. Might even worth a shot on the short side at some point. Meb Faber had a tweet today that said the following: Every single 2019 investment outlook: Returns stunk in 18,Economy in 9th inning, The Fed, Recession on horizon, US stocks expensive, Value vs growth, Volatility is increasing, Too much debt, Credit spreads are low, Something about China's economy, Emerging markets cheap. Being a staunch contrarian, it feels like all of these are a fade. However, there is one thing about contrarian theory that must be remembered: Many of the above theories are grounded in sound analysis that will likely end up being correct. However, the route the markets take to get there will be much different than everyone excepts. I agree that emerging markets are cheap. I agree that value is a better bet...
Lies, Damn Lies: Market On A Warpath Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: As detailed in yesterday's note, I have cut all of our exposure to gold/silver names. I continue to believe metals offer some of the best long-term risk/reward setups out there today. However, the current market is so rich with trading opportunities due to the newfound surge in volatility that I need firepower. At a near 80% allocation to metals that I took on in November-early December, that firepower would best be served elsewhere for the time being. I want true "risk on" assets here. I want beta to the general markets. At some point this year I will revisit the metals thesis. With charts like this, you have to take gold seriously given the potential for exponential upside performance in the years ahead. You know why you want "risk on" assets here? The chart below sums it up. Global equity outflows are past the point of the 2008 financial crisis. The difference between now and 2008 is we are in a secular bull market that has been greeted with its first cyclical bear raid since it started in 2013. Let me say that again for the purpose of clarity and emphasis: We are in a secular bull market that has been greeted with its first cyclical bear raid since it started in 2013. That's important because when investors panic during secular bull markets (right now), it is a completely different beast than when investors panic during secular bear markets (2008). The market doesn't take its time in coming back as the foundation of the market is rebuilt during secular bulls. Instead, the market rip that comes typically only leaves bear scrotums behind as evidence they existed in the first place. In other words, it happens so fast that most investors who are attempting to intellectually and emotionally digest this monster will be left holding their tails instead of stock. The current market has forced investors into cash, giving it all the sidelined firepower it needs to move to new highs before the middle of 2019, as those investors come to the slow realization they have been played. One more demonstration of how badly investors have had their minds completely...
A Portfolio Update: Getting Longer
At the very core of my philosophy with respect to investing is that markets inherently push investors into terrible decision making cycles by functioning in a highly counter-intuitive manner, taking advantage of emotions and thought patterns that are rewarded in most other endeavors. If one believes the aforementioned to be fact, then one must also believe that the entire ecosystem that has been developed around Wall Street is simply a further tool to foster terrible decision making that run counter to an investor's best interest. The news flow, the analysis, the talking heads, the hedge fund manager who has four yachts. Everything that is seen and heard drinks from the same well. As a result, in order to successfully navigate the terrain, an investor very simply can't believe anything that is prominent within the popular news cycle. That very same news cycle has been existent since the beginning of time for the markets. Now more than ever, that news cycle is instantaneous. Investors still lose massive amounts of capital by feeding into it. If there is such a thing as fake news, Wall Street invented it. Bringing me to the point of this note: The hysteria that has developed around a weakening economy, recession, yield curve, corporate debt etc. will be viewed as silly by the middle of 2019. It is typical of a news cycle that is curve fitted around price action, which further drives the news cycle and feeds further into the price action. In other words, a self-reinforcing vicious cycle of poor research that leads to poor decisions among investors. The markets, as dictated by the purest form of information possible - price - are telling a completely different story than what most everyone is talking about currently. It's a positive divergence that should lead to higher prices in the weeks and months ahead. This has led me to take profits on our gold and silver names, a trade we took approximately 1,000 basis points out of in roughly one month time frame. The decision to remove metals for the fund has nothing to do with my long-term opinion of their viability as an investment. I continue to believe that metals represent one of the best risk/reward investments in the market today. However, I am focused on performance. Over the next several months, our capital is better served in investments that are heavily skewed towards "risk on." That means that I want beta in our portfolios. I want to be exposed to the equity markets because I believe they are about Space Shuttle it out of this atmosphere in the next few months. We've taken positions...
Lies, Damn Lies: Stocks In The Buy Zone Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: AMZN has reversed convincingly. While it may have a few more tricks up its sleeve, the December low should hold in January. Safest buypoint in some time not just for it, but FANGs in general. Took a position in AVGO on Monday. Demonstrating wonderful relative strength within technology. Relatively safe way to get exposure to semis. Traditional and plain vanilla, yes, but BRK.B allows exposure without normal concerns for volatility. A conservative consideration for exposure to the financial space. BTG is an example of the convincing strength that took place in mainstream gold names during December. The pattern looks set for continuation as it is becoming apparent that a weaker U.S. Dollar is the release valve the global economy needs to sustain growth. C is in a low-risk short-term buying position. The compression in price/book for financials is overdone. Q4 results should be relieve some of that pressure. Every market bottom has its hook. A hook is the primary market average that will lift the rest of the boats. For this market bottom, the hook is the Nasdaq Composite. It has managed to reverse at an important technical level, which will give the rest of the market averages the courage to push forward. GOOG is another FANG name that looks to be setting up for a push higher during January. Economic data and earnings will be seen as strong enough to justify purchasing growth at 30%+ discounts. Not buying JPM on a 20% pullback will only be seen as a mistake for most large cap fund managers when it's down less than 10%. Unfortunately, buying into points where fear and misinformation is at its greatest point does not present a situation comfortable enough for a majority of those who manage money. And this is why they underperform. If you're comfortable doing anything, then odds are something is wrong. Was talking to a bodybuilder at my gym recently who was training for a competition. He told me that whenever he feels good, he knows something is off in his training regimen. Whenever he's uncomfortable, he knows he's doing it right. MSFT falls in the same category as JPM. Large cap...
How Everything That Happened in 2018 Now Makes Technology Names A Screaming Buy
The general theme I attempted to convey more than any other during 2018 was that everything changed this year. In fact, before I started sounding the horn on how different 2018 and beyond would be, I penned a note about why the markets would generally suck for the remainder of 2018, calling for the S&P to hit 2,200 at some point this year. While we got close to 2,200 last week, the bottom for the S&P was 2,346. Financials were cause for concern basically all year. In February, I discussed why financials were setting up to lead the market down in 2018, highlighting the fact that all of 2017's gains could be erased in 2018. Here is the yearly chart for the XLF (financials ETF) showing that all of 2017's gains in financials were erased in 2018. In April, I called for exponentially higher prices in crude oil. A call that was abhorrently incorrect. Energy has so many geopolitical cross-currents that I have always found gauging its price movement a difficult endeavor. It's one of the few sectors I refuse to trade as a result. One area that I have made a recent u-turn is with respect to my bullishness on private equity names, specifically KKR. Whatever economic ills may strike in 2019, private equity is ill-suited to deal with the confluence of difficulties that lie ahead. In May I said that KKR has long-term compounder written all over it. I no longer believe that to be the case. In July, I discussed how all of Wall Street was being herded around the FANG names, in preparation for mass slaughter. It goes to show that whenever Wall Street has everybody on one side of the fence, it's most likely because they want everyone to be set on fire simultaneously, with the least amount of effort to empty individual coffers of capital. More recently, I made the case for owning gold stocks. Republishing a research report sent to my investors in our November letter. December was the best month for gold in two years. That trend of outperformance is set to accelerate in 2019 as gold is literally in the perfect spot where all roads lead to higher prices. I was premature in my bullishness for the markets in December, believing that the back end of the month would see substantially higher prices, with the popular averages ending the month in the green. That was very obviously incorrect. I was also incorrect in believing that that the window for a sustainable rally had closed, as discussed in this note on Christmas day. So now that we know that everything did change...
Lies, Damn Lies: Armageddon On Pause Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. These are simply thoughts (some completely random) as I attempt to connect the dots: Insider buying is now at an 8 year high according to Bloomberg. "The last time insider buying spiked in this fashion, in August 2011, the S&P 500 was in the middle of a 19 percent retreat before staging a 10 percent rally in each of the next two quarters." Insiders are very obviously witnessing the fact that on a corporate level everything is fine. The weakness in the markets hasn't trickled down into the economy as of yet. Whether in two quarters from now those very same insiders are wishing they had put their cash in a bank CD due to a falling stock price and sudden economic weakness is another question entirely. Insiders are just as likely to blow it as anybody else, keep that in mind. For the time being, however, this is another indication that corporate earnings will calm the markets a bit in Q1. Short interest in various industry ETFs is plunging, which is basically the equivalent of soldiers putting down their guns in the middle of an oncoming assault. Either the soldiers have lost their minds or they don't think the assault is worth fighting against. The XLB (materials sector etf) is at a 4 month low in short interest. XLK (technology sector etf) is close to a three low in short interest. XLP (consumer staples) is sitting at a multi-year low in short interest, as well. From a purely contrarian perspective, this is a problem. Among developed countries, the United States is certainly an outlier when it comes to debt. This fact puts the Federal Reserve in a precarious position should another economic crisis take hold. In any case, the U.S. Dollar will be the most apparent casualty. The Fed expanding their balance sheet had a stupendous effect on equity prices. How can we logically assume then that through extensive global central bank balance sheet tightening, this effect won't reverse to an extent? We have already seen that in 2018 as the Fed's expanded tightening starting in October of $50 billion per month was accompanied by a market top. Europe climbs onboard the QT train in 2019. While the markets could very well...
Lies, Damn Lies: OMG Edition
Every day I go through roughly 200 stocks/indices/indicators, several times per day, looking for signals, attempting to connect dots and ultimately, hoping to find risk/reward situations that create outperformance. The title Lies, Damn Lies seems appropriate as when the markets want to reveal any kind of truth, they first do so through blatant lies. Conversely, whenever truth appears apparent, there is likely to be deception involved. In other words, markets are a thief and must be treated like one whenever attempting to interpret their message. These are simply thoughts (some completely random) as I attempt to connect the dots: The inherent conflict that has existed between the Fed and White House is nothing new. In fact, there have been numerous times throughout history when the Fed is pursuing tightening in monetary policy while the White House is spearheading an aggressive fiscal campaign. The Fed will remain true to its mandate, spoken or not, irrespective of interference from the White House. Whether Trump can actually have Powell removed is another subject. Should the markets continue to slide in 2019 I can't see him not making a valiant attempt. Bid to cover ratio on recent 2 year and 5 year treasury issuance is extremely thin. In other words, there is little demand for U.S. debt. Foreign central banks and institutions are stepping back due to negative dollar hedged returns, leaving only U.S. institutions, such as banks, pensions etc. to do the bidding. This dilemma will only be amplified in the new year as funding costs for the U.S. are set to increase. The next version of QE, if it comes, will look nothing like the last. Expect yields to jump and the dollar to dive. The theme in 2019 may just be "how the Fed lost control of the financial markets." What happens when 401k statements and hedge fund capital balances are seen by investors in January? There will be redemptions galore. If your financial advisor is down in line with the market this year then they are a premium priced ETF with a voicebox that regurgitates news on a daily, weekly or monthly basis. 2018 flipped the market into an environment where skilled investors can generate alpha. I expect it to remain that way for years to come. Chinese conglomerates have been on a global buying binge driving up everything from real estate, to equities, to nightly high end hotel charges. Their appetite for accumulation seems to be shifting to a more nationalistic tone, however. This could turn into a very real theme in the years ahead. An article on it here http://www.globaltimes.cn/content/1133609.shtml As much as the markets have turned...