Four Sectors That Actually Offer A Risk/Reward Opportunity To Investors
As we move onto the full on trade war chapter of our current novel, it's important to realize where the risk is in the current market environment. The ubiquitous dance of optimism very often hides the underlying risk investors are facing. This circumstance is no different. It can be said with a better than coin flip degree of certainty that the current economic environment is healthy in more ways than one. It can also be said that a market pullback can occur without any tangible interference in the economic machine that is currently spinning. A market pullback of severe consequence will likely be systemic in nature, relying on easily exploitable inefficiencies that are currently taking place in what has become a largely trend following approach to asset allocation masked as something more sophisticated. A majority of technology names are fraught with risk having coaxed nearly every asset manager to believe they have to keep exposure if they want to retain employment. Large cap financials also seem susceptible as they have become the "I have exposure to the markets but I don't have the guts to invest in tech" trade. Actual opportunity does exist, however, regardless of your stance with respect to the current condition of the market or economy. In no particular order: Property casualty insurance names have caught a tailwind as they face a number of positive fundamental factors that buoy their income statements. Private equity names are taking on a completely transformed business model to a great degree, taking the place of investment banks like Goldman that have mutated into god knows what over the past several years. KKR continues to be my favorite name in the space, acting like it is closer to a beginning of a powerful uptrend rather than any conceivable end. Specialty finance companies, whether select fintech names or mortgage servicing companies are transforming finance in a very deliberate manner. In the case of mortgage servicing, during the first half of the decade investors realized the profit potential of the business model of essentially becoming a government sponsored debt collector, until the very same government decided to step in because the companies were growing too fast. The government has stepped back greatly with a virtual dismantling of the CFPB. The power of their earnings model will be realized in the years to come. Single family residential REITs are attractive. There is not another sector of the market that is positively correlated to interest rates (as interest rates rise less individuals can afford homes, forcing them to rent); positively correlated to most any economic condition that doesn't involve a skyrocketing unemployment rate; has vasts...
The Herding Of Wall Street Around FANGs
Simpleton contrarianism is dead in the markets. At least for the time being. What is simpleton contrarianism? The best current example: Believing FANGs will fall simply because everybody is invested in them. The markets have moved up multiple levels in the meta-game ladder to allow such a simple thought to be rewarded. The degree of difficulty has evolved. The game has shifted. Simpleton contrarianism cannot, however, quantify the precarious nature of what is occurring. Zoom out for a moment and look at the developing market landscape from an adversarial standpoint. The markets have managed to convince managers of ETFs, hedge fund managers, investment advisors, domestic retail investors, foreign retail investors, sovereign wealth funds, pension funds, analysts and investment banks that FANGs are their best chance, without question or equivocation, to outperform the markets. There has been a herding, so to speak, of the entirety of the investment community, with a near religious fervor, into what is possibly the most concentrated allocation of investments in the history of Wall Street. This allocation controls not only the future returns of investors, but to a great degree performance of the economy, psychology of consumers and the mental output of investment managers in their attitudes towards other investments. In other words, as long as these investments continue to perform, they have no reason to do any digging. The common wisdom is the path of least resistance until it isn't. Question is what happens when it isn't? The path towards any conceivable exit within such a narrow door will be impossible to navigate adequately. This means that any attention paid towards a tangible method of controlling risk will be an exercise in futility. At the same time, the downside will be as sudden as anything we have experienced in the past several decades. The entirety of the pullback, whether 20, 30 or 50 percent can happen within a very short time frame due to the dynamics involved. While the price patterns for companies like AMZN and FB are irrefutably bullish going into their Q2 earnings reports, that is only a small portion of a much more significant story. The markets have effectively gathered investors of all shapes and stripes into one small room, convincing them all that their best interests are being served by being gathered in the same place, with the same portfolios, at the same time, with the same expectations. And investors are only too happy to listen, forgetting the fact that if there is one thing that has been historically consistent about the financial markets, it's that they punish consensus opinion. The more significant and compelling the opinion, the more severe...
Revisited: Financials Are Setting Up To Lead The Markets Down
In what seems like an appropriate moment to bring the subject back to life, a follow up to my early February article titled "Financials Are Setting Up To Lead The Markets Down" seems due. Despite the recent strength in technology and small-caps, a continuing stench continues to envelop the equity markets. Everything from the tumultuous relationship equities have developed to interest rates to the general market action, which is being defined by volatility as a result of illiquidity. The only path of seeming consequence for investors is to pile into a simpleton group of investments that define the current socioeconomic landscape. The justification to invest in the FANG names, as the most obvious example, is based more on a reluctant acceptance that you really have very few other options as an investor. The only other options are lesser versions of FANG names that have provided more substantial returns, however, carry with them not only more risk, but the responsibility to perform due diligence in order to be able to understand your investment. Momentum in the FANGs spills over to various technology based small cap names and voila...bulls suddenly have justification for all the other ills underpinning the economy and the markets. The theory that small-caps and technology leads bull markets is good one and a proper one, for that matter. It has been substantiated statistically over time. However, may I remind you dear reader that the equity markets are neither static or kind. And for that reason, such suggestions, at this point in the secular bull market cycle, should be greeted with a fair amount of skepticism, at a very minimum. Back to financials: click chart to enlarge Since the last time we checked on financials in early February they have gone nowhere. It seems like nowhere remains a best case scenario for them moving forward. The ramifications for the broader markets remains a general malaise that will likely only be broken by downside volatility that could become exponentially larger as we enter the summer...
Opportunity Found: Specialty Property Casualty Insurers
The property casualty space is one I watch closely for a number of reasons: It's an industry that doesn't change much and is largely insulated from technological disruption Good management matters in insurance. So the ability to evaluate management remains a relevant art in the sector. The good companies in the sector can compound capital at an admirable rate, causing well defined uptrends that tend to be smoother and last longer due to the steady growth dynamics involved. Good management can capitalize on float to aide return on equity. In an rising rate environment this becomes an even more tangible advantage. So when I see a number of the names I watch closely in the sector begin putting together inspiring technical patterns, while fundamentals are improving in a rising rate environment AND insiders are buying in all the meanwhile, it becomes something that deserves some attention. Here are a few that deserve more attention than they are getting outside of the insurance nerd circuit: Let's look at what management at these companies are saying regarding recent earnings: UIHC: "Q1 2018 saw a continuation of some very positive trends at UPC Insurance, excellent and balanced organic growth, solid and improving non-cat loss ratios, and stable or increasing average premiums. Because of these and other favorable trends, we were able to produce almost $25 million of EBITDA and over 13% annualized ROE in a seasonally low quarter and despite cat losses from winter storms in both the Gulf and Northeast regions." "Highlights of UPC’s first quarter 2018 included GAAP net income of $8.4 million or $0.20 a share, non-GAAP core income of $17.3 million or $0.40 a share, total revenues in excess of $180 million, an increase of 47% year-over-year and we saw continued improvement in loss ratios and our combined ratio." "Some additional insight into UPC’s revenue growth for the quarter includes gross premiums written of $280 million, up 66% year-over-year; net premiums earned of $163 million, up 52% year-over-year." And here are some highlights from commentary given by management at UVE regarding their most recent quarter: "We’re pleased with our results for the first quarter. Overall, we reported net income of 40.1 million and diluted EPS of $1.12 for the first quarter of 2018, which equates to an annualized ROE of 34.6% for the quarter. We reported excellent top line growth in the first quarter with 10% growth in direct premiums written including 7.2% growth within Florida and 32.7% growth in other states." "Net investment income was 4.8 million, growth of 77% from the first quarter of '17. The increase is the result of higher returns from our...
Tesla Is Setting Up For A Move To 500
Of all the hateriffic stances on Wall Street, the vitriol constantly spit at Elon Musk and Tesla is the most pronounced. It is so pervasive that I have heard baseball dads at my son's games, who have no type of analytical or Wall Street background, talking about Musk being in over his head. The Elon Musk hate, skepticism and disbelief has leaked past the pseudo-esteemed gates of Wall Street, making its way into the general consciousness of the masses. I'm not here to argue the genius of Musk, other than to allow his lifetime track record to speak for itself. I am here to argue that in a vast majority of circumstances, companies that are as hated as Tesla don't simply hang around all-time highs allowing short sellers to get comfortably positioned month after month after month. If you wanted to sell short Tesla, goaded on by the daily influx of bearish verbage, Tesla has done nothing but accommodate you. Every single bearish headline, proclaiming imminent bankruptcy, fraud, production issues and distractions, has been met by a stock price somewhere around the 300 range give or take. Tesla is basically handing bears their golden ticket to an open casket viewing at its own funeral, allowing them every opportunity to express their bearishness at what are considered rich prices. Unfortunately for the bearish crowd such expressions of generosity by the markets are typically nothing more than deception. Comfortably allowing positions to be initiated and maintained while a bombardment of bearish news rains downs day after day allows markets the perfect opportunity to wage a game of mental twister, as the crowd that was so sure of imminent doom is met with a substantial test of their will down the road. That test for Tesla bears is coming. And that test will likely take the stock close to 500 within the next 6-12 months. 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,...
KKR Has Long-Term Compounder Written All Over It
My investment style can be best classified as boring. I don't turnover portfolios very often. Our largest holding has been the same position for close to six years now. I rotate between a familiar universe for investment. Every so often I add a new name to that universe while removing an older one. One name I have been following for quite sometime is KKR. Actually, I have been following a majority of the private equity names that are listed publicly because investors, very simply put, don't understand them and even loathe them, to a certain extent. Loathing creates value. Misunderstanding a sector creates further value. Being in what's considered a boring sector adds steroids to the value consideration. There is value in private equity currently. KKR is perhaps the most dynamic name in the space given their investment banking approach towards private equity, with considerable growth taking place, not just in traditional metrics such as assets under management, but growth in their capital markets desk, which is pursuing deals in competition with the likes of Goldman etc. KKR announced this past week that they are converting to C Corp from a partnership structure. Why is this important? No more K-1s. Investors despise complicated tax reporting. K1s kept many investors away from KKR. Currency for acquisitions. A traditional C-Corp allows KKR to have a much more valuable equity currency if they decide to expand through acquisition. This allows for more aggressive growth over the long-term. Expanded universe of investors. The current partnership structure is prohibitive to ownership. A C-Corp allows for mutual fund participation, as well as inclusion in various indices. Aside from the fact that KKR is basically a mini-Goldman now that it is taking on a C-Corp structure, the stock remains tremendously undervalued. As far back as late-2016, the private equity names have had undervaluation written all over them. Despite the 50% gain from this point, shares of KKR remain undervalued, especially in light of their conversion to a C-Corp. For example, it should be noted that since going public in 2010, book value for KKR has nearly tripled. Assets under management have quadrupled, with further acceleration in AUM in sight. And they have consistently posted a return on equity in the mid-teens. The stock price, in the meantime, has only brought in a little more than a double during that time period. Along with the transition to a C-Corp, the company also doubled their stock buyback to $500 million authorized. Is KKR going to make the hair on the back of your neck standup while tying your underwear in a knot? Absolutely not....
Markets Have One Problem Only Moving Forward…
The cost of money is going up. There is no need to dissect the markets any further for the remainder of 2018. It's a game changer in that the entirety of this bull run has been built on the foundation of endless liquidity brought about by nearly free dollars poured into the pockets of investors and corporations. It wasn't that long ago when we were all talking about the unprecedented nature of a negative interest rate environment. Investors were attempting to explain to each other how getting penalized for holding cash would influence future investment decisions. It was a concrete fact that this would be the environment we would be facing over the next several years. Then something unexpected happened. The election of Trump is at the beginning stages of setting off a wave of fiscal stimulus measures that serve to amplify the unprecedented global liquidity party taking place this decade. If inflationary pressures weren't a concern during the monetary stimulus phase, then they have now been brought to the forefront of investor's attention now that multiple layers of stimulus exist. Investors celebrated initially, with a 2017 that saw a near unprecedented bid beneath the markets that led to the possibility of even a 5% decline in the major indices being regarded as an outlier. Now that the euphoric stage is over, investors are left to mull over the real economic effects of layers of stimulus all being pushed into the economy at the same time. For the first time in literally decades, inflation is set to become the next big economic problem. Investors are just starting to demand a greater return on their government debt instruments to make up for the threat of inflation. And so we have a problem that the equity markets will take the rest of 2018 to digest. The cost of capital is increasing while investors and corporations have a disease of dependency on cheap capital. The outcome of such a discrepancy is uncertainty that translates into downside volatility until investors can become comfortable with their feelings...
Crude Oil Is About To Complicate Our Financial Lives
While most are discounting the possibility of anomalous events taking place in this new era of low volatility, group think, crude oil is but one component that is shaking its finger from side to side threatening to force acts of dynamic thought. This month of April has been the most significant for crude since it broke down in 2014. Of course, we need further confirmation in the months ahead by either holding onto the gains or accelerating them. It does look, however, like we could be seeing the beginning stages of a move to 160+ for crude oil. This is being further confirmed by yields, which are pointing to inflationary forces bubbling or perhaps, boiling over. click chart to enlarge Everything has changed in...
Everything Has Changed in 2018
The foundation of the markets for the entirety of this bull market has undergone a massive shift in 2018. All the meanwhile, a majority of market participants are stuck in level one, simpleton thinking mode, which has grabbed the collective hands of equity investors, guiding them blindfolded to the edge of a cliff, with promises of paradise on the horizon. All of the reasons equity investors have to be bullish is based on knowledge that is abundantly obvious and therefore, already completely baked into the picture being presented. Irrelevant, in other words. Earnings? Irrelevant. Tax cuts? Irrelevant. Fiscal stimulus? Irrelevant. Deregulation? Irrelevant. All of these well known hooks to hang your hat on if you're bullish were fantastic in 2017 because there was actual doubt surrounding their implementation and relevance. What we have now are the following emerging facts that investors are unsure of how to interpret, therefore, warranting concern over their future relevance: The secular bear in interest rates may be over. Commodities, led by energy, are entering a significant uptrend. The financial markets are structurally unsound and untested due to prevalence of passive products dominating investment landscape for the first time in history. All the meanwhile the S&P 500 is carving out a bearish pattern below resistance: And the most relevant leader in technology is telegraphing substantial weakness in the sector moving forward: Oil has experienced a substantial breakout in recent weeks. It may just be getting started: Leading to the final piece of the puzzle...yields. The yield on the ten year saw a minor rejection this week right at the 3% mark, which just so happens to coincide with a multi-decade trajectory point. An eventual substantial move above 3% is an inevitable conclusion to this saga. With a strong likelihood of something in the 3.5% range by year end. It's time for investors to take the macro picture very seriously, as the old tune of earnings and corporate prowess are due to take a backseat to inflation and interest rates. 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...
This Is What A Repugnant Market Looks Like
The chart below is of the S&P 500. This gives as clear an indication of the repugnance of the current situation as any, with eventual bearish consequences once earnings season is over. (click chart to enlarge) This remains a market that is prone to readjustment as everything from the potential permanency of a higher interest rate environment, to governmental and geopolitical fears reinforce price weakness. As discussed in the notes of the chart above, past May into the summer and fall really have the potential to make the volatility we have experienced recently look like a relatively calm period in comparison. 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 should not construe any discussion or information contained herein as personalized advice from T11 Capital Management LLC. Visitors should discuss the personal applicability of the specific products, services, strategies, or issues posted herein with a professional advisor of his or her choosing. Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding capital markets or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in, the transmission thereof to the user. With respect to information regarding financial performance, nothing on this website should be interpreted as a statement or implication that past results are an indication of future...