DECLINING BOND YIELDS SHOULD HAVE THE ATTENTION OF EVERY INVESTOR
Of the literally thousands of data points available to investors in order to interpret the language of the markets, at present, bond yields may be the most clear. Following the November election of Trump, bond yields jumped higher in anticipation of fiscal stimulus that was the stuff of FDR's dreams. Infrastructure, jobs, manufacturing, growth...it was all coming together in a potpourri of harmonic, capitalistic opportunity that could only result in higher rates. However, somewhere in between election day and the present, the markets realized that while the president is on one page, the rest of the governing body may be on an entirely other. Never mind the fact that politicians are still unsure of the president's message, at this point. Never mind that Republicans are recently suspicious that the center of influence within his administration may be ultra-liberal New York Democrats. Never mind that policy seems to shift on a whim. The entirety of Congress is unsure what they are dealing with, resulting in our current circumstance. The fact that bond yields are now deciding to fall in the face of the most dynamic fiscal stimulus package since the Great Depression is a resounding no-confidence vote against the current administration. Bond yields, after all, are coming up from historically ultra-low levels that should easily be able to support higher rates if the president's message rang true to the ears of the market. One must surmise then that either the market is deaf, dumb or disenchanted by what has been presented up to this point. Bonds yields aren't supposed to falling at this stage of the Trump presidency. The fact that they are is cause for the perking of ears and the sniffing of the surroundings for investors. Stay...
THE PRIMARY LEADER FOR THE CURRENT BULL RUN HAS BROKEN DOWN
While there is continuing reason to believe that the foundation remains in place for further upside to this bull market, cracks are beginning to emerge in the underlying technical foundation. Earlier in the week I highlighted the primary Trumps trades being in the beginning stages of unwinding. Now there are very obvious signs that primary leadership for the market, at the very least, needs a prolonged period of rest. Below is the chart for the SOX (Semiconductor Index), which has been a bastion of absolute strength and leadership for the entirety of the ascent from the February 2016 lows. The trajectory off those lows, for the first time, has been compromised on a weekly basis. click chart to enlarge When you look at the current market, it's becoming obvious that investors are having a difficult time rectifying increased exposure with a near non-stop symphony of scary headlines. Whether increasing geopolitical risk on virtually all fronts or increased domestic fiscal policy risk, the reasons to sell are numerous, while the reasons to buy are scant. That very dynamic, however, could end up being the bulls best hope. Fear remains too high for any substantial pullback, UNLESS a geopolitical event or overwhelming signals of an economic slowdown interfere with the sentiment dynamic. That sentiment dynamic is best illustrated by the long-term moving averages of the combined put/call, which are telling a story of absolute disbelief in a market at record highs. Whether further upside awaits or a breakdown is imminent, the markets are no longer on the solid ground that allowed for studies like this to emerge in Q4 of last year. It's a coin flip going forward. 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...
ARE THE TRUMP TRADES IN THE BEGINNING STAGES OF BEING UNWOUND?
It always seemed fairly obvious that the markets, for better or worse, would test the entire thesis behind all the Trump trades investors put on after he was elected. From yields, to financials, to the US Dollar, every single perception of what should thrive under the capitalist orgy that is the Trump administration would be put the test. Already some of the "no-brainer" stocks that would benefit the most from Trump have unwound. Surprisingly enough, some have completely unwound. Below is a chart of high tax companies that have the most to gain from aggressive tax cuts, plotted side by side with infrastructure beneficiaries. Both of these baskets have unwound their post-election gains completely, with the high tax basket actually showing a loss since election day as of March 30th. Something else is just starting to gain momentum, however. Some rather trustworthy macro indicators of economic health that should be thriving if growth prospects brought on by massive fiscal stimulus were indeed true are beginning to look like they want to reverse course. 10 year treasuries are gaining ground while the Fed is in the process of raising the Fed Funds rate. Bond investors seem to think that economic growth prospects are tepid at best moving forward. click chart to enlarge And then we have Copper, a leading indicator of economic activity that seemed to love Trump during November up to February, but is now deciding that perhaps the need for material for infrastructure projects won't be coming to fruition anytime soon. Finally, financials have been an enormous beneficiary of all the promises of deregulation ushering in what will perhaps be a golden age for the sector in the years ahead. Yet, there has been some lag as of late and suddenly, financials look like they are perfectly content skipping the formalities of any golden age that has been promised. All of this, at the very least, warrants close watch in the weeks ahead as geopolitical fears become amplified, earnings come in fast and furious and the threat of a government shutdown into the end of the month...
ONE FOOT OUT ON TAX REFORM
Donald Trump speaking in an interview with FOX Business that aired today: "You know, if you look at the kind of numbers that we're talking about, that's all going back into the taxes. And we have to do health care first to pick up additional money so that we get great tax reform. So we're going to have a phenomenal tax reform. But I have to do health care first. I want to do it first to really do it right." With these words the president has officially taken one foot out of the water in pursuit of tax cuts. The support for a repeal of Obamacare has faded in light of the intra-party upheaval that caused the first attempt to fall through. Now Republicans have to deal with the fact that their voter base, made of the working class who benefit most from Obamacare, will be left deserted by new legislation, leaving many millions uninsured, alienating a voter base that is quickly pulling back support of a president with some of the lowest approval ratings in the first few months of taking office in history. Trump has to know this. So coming out, basically saying that tax reform is dependent on Obamacare being replaced is setting the stage for an exit on tax reform during the second half of the year. That exit will either consist of a much lower tax cut than most expect, somewhere in the vicinity of 28% for the corporate rate. It is also entirely possible, if not probable, that nothing happens at all, especially if his popularity continues to wane and tax reform gets pushed back to 2018, when mid-term elections take place. And then there is the possibility that the president may have recently realized that geopolitics is much easier than dealing with Congress, making it difficult to focus on the domestic front when there are so many challenges internationally that can be pursued without Congressional approval. Bottom line: Tax reform is hard. Neither Congress or the White House is equipped to deal with hard at the present moment or in fact, for the foreseeable future. Throw in easily distracted leadership and one can see how this goes further and further off track....
QUIET LUSTING FOR A BULL MARKET TOP
There is a certain quiet lusting taking place among investors for a bull market top. The difficulty in creating a logical foundation for a bull market that, according to popular misconception, should have never been in the first place. A bull market that is perceived as being propped up on an artificial platform, buoyed by monetary stimulus, backed by unreasonable valuations, flying in the face of geopolitical fears. The very same reasons the markets should not have climbed in 2011, 2012, 2013 and so on are being cited today. Now this is not to say the market will not correct. Every healthy bull market takes on some measure of correction. In fact, given the nature of this bull market, the next major correction to come will likely fool most everyone into thinking it's the beginning of a substantial bear market. There is, after all, much more "data" to hang your hat on if you're bearish, which serves the counter-intuitive purpose of prolonging the secular bull market. Very simply, it's still too easy to be bearish. It's too easy to look at the numerous valuation measures and determine we have come to far. It's too easy to read the headlines and determine the geopolitical stage is much too unstable. It's too easy to look the monetary policy and determine that the markets won't be able to cope with not having the Fed on their side. It's too easy to look at earnings and determine they aren't growing fast enough to support valuations. Easy, however, doesn't work. Markets are inherently illogical or rather, difficult. Throwing out logical, easy assumptions to gauge the behavior of an illogical, difficult force is an investor's path to mediocrity. Failing to realize that secular bull markets are an expansionary force is a fatal mistake that investors only seem to grasp in the final stages of a secular bull. Let me briefly explain. Expansion during a secular bull market doesn't simply take place in the prices for assets. It takes place in every measure of those prices, as well. An average P/E ratio of 25, for example, could be seen as an extremely rich valuation. However, secular bull markets create new realities for what "extremely rich" constitutes. This goes for everything from sentiment measures, to measures of leverage and of course, valuations. They all expand into areas that are intellectually impossible to conceive or grasp. Abstractions begin to take their form in reality. Therefore, it may be beneficial for investors to begin training their mind in abstract concepts now in order to be able to deal with what is to come. An exercise that is certainly more...
MARCH CLIENT LETTER: CONFUSION IS THE PATH OF LEAST RESISTANCE; LEGISLATIVE MORASS; SOME INTERESTING CHARTS
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Confusion Is The Path of Lease Resistance It remains an extremely simple exercise to look at the circumstances surrounding the current evolution of this bull market and determine that it cannot last. Not much has changed since the inception of this secular bull market in 2013. Doubting the ability of equities to ascend remains the path of least resistance. While it is true that bull markets climb a wall of worry, that wall of worry is often times built on facts that markets do not immediately become concerned with, instead choosing to revel in glorious optimism without concern for what lies dormant in the background. In fact, one of the lessons of experience in finance is that markets very often take longer to react to important developments than one would suspect. The emotions of the day very often take precedent over relevant facts, whether micro or macro related, that have very real consequences for the economy, earnings etc. The markets do a wonderful job of behaving in a nonchalant fashion as important changes occur that immediately concern market observers who then decide that given the markets predominance in one direction, their concern is unwarranted. The important fundamental shifts occurring in the background never go away, of course. They simply lie dormant awaiting the moment when the emotional tank of investors moves to empty. This applies to individual stocks just as much as the broader markets. Individual stocks, especially in my favored category of sub-$500 million in market cap, can take months or years to awaken to fundamental developments that have been percolating in the background while the stock price languishes causing a majority of investors to think that their analysis was wrong, when in fact, their analysis was simply on delay. Companies can often times experience multiple years worth of gains in just a few months as they catch up to the fundamental realities that investors suddenly awaken to. Much like a badly dubbed Chinese Kung-Fu movie where the words are heard before the mouths of the actors begin moving, there is an inherent delay in individual equities and the markets in realizing important fundamental developments. More often than not, the confusion that most investors experience is a result of this delay, giving rise to often used descriptive terms to describe the markets such as illogical, counter-intuitive and contrarian in nature. Markets may, in fact, be much more logical than we realize. However, they are also much less efficient in factoring in relevant developments than we realize, as...
WHAT TO EXPECT GOING INTO MID-YEAR FROM THE MARKETS
The last time I posted any kind of chart here was on October 30th, in a posting titled," An Unorthodox Long-Term Indicator Is About To Scream Buy." The general premise, in a nutshell, was that the market was about to embark on a 20% rally over the next 12 months with very little chance for a drawdown from that point. This was at SPX 2100. Now that the SPX is closing in on 2400, it's time for an update to see exactly where we should see an intermediate term top that will interrupt the current sense of nirvana. click to enlarge Given the current trajectory of this run, it is not unreasonable to expect 2500-2550 on the S&P 500 by June or July. Depending on how the market responds to this important trajectory point will determine what happens from that point forward. There remains little reason to bring in long exposure presently, other than obtrusive contrarian indicators and valuation markers that are inherently prone to range expansions during secular bull markets....
PIH IS COOL AGAIN
Have been adding to our position in PIH since last week when it was announced that 1) the company would be making their long awaited expansion into Florida to write homeowners and wind-only coverage 2) Larry Swets Jr. CEO of a previously researched company and investment of ours KFS would become Chairman of the company. Mature Florida property and casualty insurers are selling well above 1 times book in most cases and above 2 times book in a few cases. PIH all the meanwhile is basically being neglected in a dark, moldy closet trading at less than 1 times book, despite have some pretty outstanding prospects for accelerating return on equity dramatically moving forward, while currently maintaining an overcapitalized balance sheet that will assist greatly in the process. This conservatively positioned balance sheet also mitigates a great deal of risk for shareholders at these levels. A diversified geographic base also mitigates the worry of having too much exposure to disaster prone regions such as their primary market in Louisiana. The company nevertheless has been effective in their reinsurance strategy, having faced an inordinate number of weather events over the past few years in Louisiana. Additionally, the company has an activist presence with Fundamental Global, PIH's largest investor. Although shareholder activism by hedge funds has now become more of a marketing strategy as opposed to an investment strategy, Fundamental Global has waged some successful campaigns in the past, proving to be beneficial to shareholder interests over the long-term. Maintaining growth in Louisiana while responsibly underwriting policies in Texas and now Florida should easily yield a near 20% return on equity, which will result in a premium to book value reflecting this new growth. A 1.5-2 times accelerating book value is easily achievable here upon some relatively straightforward execution moving forward. And, of course, barring any anomalous, weather related events. In a market of premium valuation, PIH remains an attractive, undiscovered proposition. 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...
FEBRUARY CLIENT LETTER: A MAGNIFICENTLY PERILOUS ALTERATION IN THINKING
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. There are preconditions to this current phase of the bull market that will only become obvious in hindsight to most investors. Those preconditions involve the price that is to be paid for the nearly unbridled enjoyment of the past several months by a majority of investors. That enjoyment is a marked change over any rally of the past several years, going back to 2009. As with any change, there are tradeoffs to be made for beneficial conditions that involve new participants with a completely reformed mental attitude towards the markets. Whereas from 2009 to late 2016, there was the perpetual hum and sway of skepticism towards the markets, the rally from November 2016 to present has disposed of skepticism, fear and trepidation, in exchange for optimism, jubilation and to a certain extent, greed. The entire framework of the rally, therefore, has been altered from November 2016 forward. The price to be paid for this alteration in the framework or code, if you will, that is underlying the current rally is likely one that most investors are unprepared to face. That price comes in the form of increasing, sudden volatility on the downside that will become more frequent and pronounced as the rally continues. Gone are the days of simple 5-7 percent pullbacks with the occasional 10 percent pullback that is met with an almost immediate trembling fear taking over market participants. The fundamental backdrop does not justify getting scared after a 10 percent pullback any longer given that investors now have concrete fundamental facts from which to justify buying dips. Since the markets are hell bent on inflicting the maximum amount of pain to the maximum number of participants, the shakes have to increase in amplitude. The dips have to command the emotions of investors before they reverse. The same investors that were hedging, selling and selling short stock after a 5 to 10 percent dip in the markets now have the following logical assumptions to draw from that simply didn't exist at anytime from 2009 to late 2016: I will buy the dip in financials because deregulation will increase profitability I will buy the dip in financials and insurance because increased interest rates expand profitability I will buy the dip in industrials because there is a resurgence in domestic manufacturing I will buy the dip in industrials because infrastructure spending will boost earnings I will buy the dip in oil & gas names because domestic energy production is a priority for the current adminstration I will buy the...
JANUARY CLIENT LETTER: THE THING ABOUT CONSENSUS VALUE
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Some of the greatest opportunities in the financial markets are those where value is allowed to be cultivated through an incentivized management team. The more difficult to assess the value of a company, as a result of a mix of esoteric assets and restructured operations, the more likely it is that the market will misrepresent the value of the company. The smaller the market cap, the greater the discrepancy in value. The aforementioned are all fairly obvious points to the experienced investor. Obviously, in areas of the market where less individuals and institutions are paying attention, those areas will be prone to substantial dislocations in value. And perhaps even more obviously, individuals are driven by incentives. Without them we become lackadaisical, mouth-breathing neanderthals that would be perfectly content spending our days trying to beat the high score in Candy Crush. Incentives drive human behavior, creativity and in the end, the realization of value in undervalued corporations. What is missing from the formula is everything that takes place in between the realization that value exists in a company and an incentivized, experienced management team put in place to expertly help in realizing the value. There are literally countless individuals who have spotted the correct alignment between value and incentives, yet there are few who are consistently able to outperform the market. The realization, in fact, that a value/incentive aligned situation exists is very often a consensus event. A consensus value event is one where a majority of individuals observing the company believe that value exists in the corporation and eventually the share price will be substantially higher. A consensus value event is not attempting to pick the bottom in a violent, macro driven decline in oil, for example, as we experienced exactly 12 months ago. A consensus value event is also not attempting to pick the exact bottom of the financial crisis by purchasing a basket of stocks in March of 2009. These are contrarian value events, which is a topic for another letter. The difficulty investing in a consensus value event comes from an inherent conflict with the basic functioning of the financial markets, generally. Consensus is essentially an abomination in the financial markets. Markets will go through inordinately painful measures that completely lack any rationality to eradicate consensus allocations and investments in the markets. In fact, many popular quips exist that attempt to simplify the action: The markets can stay irrational longer than you can stay solvent; losers average losers and so on. In order for the markets...