CLOSURE ON THE QUESTION OF WHETHER CARL ICAHN IS HAVING HIS BILL ACKMAN MOMENT
In 2013 upon the public disclosure of a significant position in Apple shares by Carl Icahn I published an article wondering if Carl was having a Bill Ackman moment by becoming involved in what I thought was at that time and continue to believe is a value trap. Turns out it was not exactly a Bill Ackman moment as Mr. Icahn managed a decent return overall. However, for those hapless souls who decided to follow Mr. Icahn into the AAPL trade believing that if his money is invested then their capital will somehow be blessed, the end result was not that great. One of the most dangerous trades on Wall Street has been and will always be following the hot fund manager of the moment into his favorite investment. Typically these types of scenarios end up with that popular manager suffering from reversion to the mean syndrome right when his popularity achieves critical mass. This in turn results in the manager losing money or not doing as well as investors thought, creating resentment upon the salivating herd as they had no doubt that this investment would pay for a pair of jet skis and a fishing trip to Montana. In the meantime, the very same investors who thought they were getting value in Apple were missing out on "expensive" names such as Facebook (a stock I was talking about being at $100 in 2013), Tesla, Amazon and Google, resulting in tremendous opportunity cost all the way around since 2013. In the end it turns out that being an investor who simply follows your favorite fund manager of the moment into investments is no different then being locked in a small dark room. You have no idea where you are going, what is next, or when you will be...
THE ULTRA LONG-TERM PERSPECTIVE
Let's put aside the the multi-month time frame for the market just for a second and focus on the really big picture. This is a good exercise for the simple purpose of maintaining focus, which is a sorely needed attribute among modern market participants. I presented the chart below in January as a means of assuaging the then persuasive fears of a secular bear market. According to the very simple chart below going back nearly 100 years, the markets are in a powerful secular bull market that really just started recently. With that said, there are going to be numerous corrections (you can even call them cyclical bear markets) between 10 to 20 percent that convince market participants of an impending secular bear market that is both long-lasting and deeper than 25% from peak to trough. We, in fact, just had one. And it worked perfectly in that it completely threw market participants for a loop, causing all varieties of sordid analysis of the septic variety that were more or less a product of fear rather than facts. click chart to enlarge What is important to note about the evolving ecology of the markets over the past 100 years is that secular bears have become progressively shorter in duration while secular bull markets have become progressively longer in duration. There are probably multiple reasons for this, most of which has to do with the involvement of central banks and evolving liquidity experiments. Given this evolving pattern is it too far off to believe that this secular bull may last longer than anybody expects? The last secular bull market lasted about 17 years give or take. The one before that about 10 years. Is it unfair to assume that the unintended consequences of what is really the first global concerted effort at providing liquidity at any cost will be a progression of asset prices along both time and scope of returns? According to the chart above, it is not out of the realm of possibility and is in fact, very...
THE MARKET HAS HIT ITS INITIAL UPSIDE TARGET, NOW WHAT?
After pretty much pinpointing the recent market bottom while the rest of those on Wall Street were running around with their faces melting off screaming bear market, we are now at a point in this upside cycle where things will become tricky enough that further analysis is warranted. When we last left off on March 6th, I pointed to the trajectory sitting around 2100 as the ultimate destination over the next few weeks for the current move up. We are now sitting at this minor trajectory as pictured in the chart below for the S&P 500: click chart to enlarge At the same time, the put/call ratio is hitting levels of conviction, expressed through the purchase of calls, not seen since May/June of last year. This very simply tells market participants that bullish conviction has returned to the markets for the first time during this recent uptrend: The minor trajectory pictured in the first chart paired up with excessive bullish sentiment, as expressed through the put/call ratio, more than likely translates to increased sideways volatility moving forward. It certainly doesn't translate into an imminent decline. The upside just becomes more difficult from here. It is similar to a cyclist who has been traveling on flat ground for ten miles and is then met by a two mile climb uphill. He doesn't stop peddling, his peddling just slows a bit. There is enough momentum in this move up that we could indeed chop up towards 2150 before a top of any significance is seen. My feeling towards this rally continues to be one where I feel it necessary to remind myself that the greatest danger is in becoming bearish too quickly. Despite the put/call ratio, there is a general skepticism regarding the prospects for continued upside among market participants. While somewhat anecdotal in nature, a bearish attitude is certainly pervasive among a majority of market participants to take notice. If you're bearish on the market here you have a very distinct problem in that two factors are working against you: The economic data is not bearish enough to warrant an overwhelming of market dynamics to the downside. In other words, earnings aren't terrible, economic growth is decent, the Fed is slowly removing itself from the picture, emerging markets are improving and commodities have firmed up. Market participants are generally looking to sell at the first sign of trouble. Further, they remain prone to imagining trouble being present in places where it does not exist. When market participants become bearish too quickly, taking down exposure and/or shorting the market at the first sign of trouble, while...
MARCH CLIENT LETTER: RUNNING THROUGH MOLASSES; SECOND TERM ELECTION CYCLE; WHAT TO DO WHEN FEELING BLUE
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Running Through Molasses Being a bit of a stats nerd, it is not lost upon me that the past two years have been a run through molasses. We have seen periods of outperformance that quickly turn into periods of underperformance, leading to a whole lot of nothing accomplished when all is said and done. New ideas have been extremely difficult to successfully implement as the market simply doesn't care. Most recently I have run through a host of investments that have turned out to be net losers, almost from the outset. Of course, the most beneficial decision when observed in hindsight would have been less activity in order to preserve profits. However, the decision to forgo opportunities I deem as being attractive can only be made in hindsight as there were no macro scenarios in my book of outcomes that had small companies underperforming in the manner they have over the past two years. Since April of 2014, the Russell 2000 is down 5%. Worse still is IWC, which is the Ishares Russell Micro-Cap ETF down 12% over the same time period. Further, our longest running investment in the portfolios is down 29% since April 1st, 2014. At the root of the two year malaise is a growing liquidity problem that has become increasingly apparent in recent months. There simply isn't market participation down past a certain level of capitalization. The lower down the capitalization scale you go, the less liquidity you face as an investor. I like to say that T11 Capital is a discovery firm first. Meaning that my system of sifting through the thousands of names that populate the small-cap space occasionally turns up opportunities that very simply aren't on the radar of other investors, institutional or otherwise. This allows us to be first on the scene of companies that are sometimes selling at absurd valuations due to a series of transformative events that have gone unnoticed by investors. What is occurring presently that hasn't occurred at anytime since the 2009 bottom is that the bar for taking notice of how these transformative events change the value proposition of the company has been set inordinately high. It used to be that growth in earnings while tempering fears of a negative event was enough to peak investor interest to create exceptional volume and some upside price movement. In today's market environment, it simply doesn't create the impetus for investors to act. These are very few bidding parties and the offers are extraordinarily heavy relative to how cheap some of...
WHAT TO DO WHEN UNDERPERFORMING YOUR BENCHMARK BY 1000+ BASIS POINTS
I underperformed my benchmark by over 1000 basis points in Q1. Drawdowns never become easier regardless of how many times you have been through them and I have been through a lot over the years. What makes them much more manageable after you get past a certain point in your understanding of markets is the melding of mind with action. To put it simply, experience in finance brings with it a required self-understanding. That understanding of self after a period of time allows an individual to essentially observe themselves, correcting potentially harmful thinking before it has a chance to inflict any real damage. Whereas, the uninitiated simply act on negative mental triggers, the experienced investor recognizes them, understands their origin, accepts them for what they are and moves on. Nowhere else in an investor's career, regardless of pedigree, will you be more susceptible to erroneous action than during a drawdown. As obvious as this assessment may be, the lack of understanding surrounding its importance is expressed through countless investors who have overtraded, overexposed and leveraged themselves into obscurity after a difficult period of performance. This happens as often to professional asset managers as it does your run of the mill retail investor. It is as if adversity converges along a mental line of action that is both instinctive and impulsive in nature. The most effective reaction to a drawdown regardless of methodology is defensive in nature. As an example, previous allocation decisions that call for a 10% investment to an asset, should be cut in half, at the very least. Activity should be stemmed rather than encouraged. Decisions should be simplified and spread out, as opposed to convoluted and copious. The instinctive reaction is one of catching up to dull the pain in as quick a manner as possible. If your method of investment is robust then natural progression of that method should naturally lead to desired results, any "pushing" of the method deviates from its original intent. ...
ALLERGAN BREAKS, HEDGE FUNDS BECOME ENTRENCHED
What's happening at the various hedge funds that own AGN presently is a rigorous exercise to determine value post break-up as well as weigh the possibility of a new suitor stepping into the mix. Inevitably , the conclusion that will be reached is that Allergan is undervalued and remains a takeover target. What is missing from this analysis is that the company is now tainted as the result of becoming a convenient target during an election year when candidates will undoubtedly turn their eye towards an issue that easily garners votes - corporate taxes. We can assume then that the market will begin discounting future earnings as opposed to placing a premium on them. That act of discounting tends to reinforce itself through a reflexive relationship that very often surprises on the downside. When a stock breaks technically it's not simply a line on a chart going through another line giving a negative mechanical signal. It's a clear and concise message by the market. It's a message that the market will tend to discount future results regardless of how fundamentally pristine they seem to be. This is what creates value in the markets when the process is finished but it is also what creates value traps as naive fundamental only types buy the entire way down without a clear understanding of the process. Worth noting and worth watching....
THE FINISHING KILL MOVE FOR THE MARKET STILL LIES AHEAD
For those of you who haven't looked over my study from January 16th, it is a good place to start. What we have seen since January 16th is test and minor retest of the trajectory, which has predictably resulted in a convincing rally for all major market averages. Below is my opinion on the S&P 500 going forward: click chart to enlarge The restest of the lows that should occur somewhere in the summer/early fall is a high probability event given both technical, seasonal and macro factors. It should also be noted that the retest has an outside possibility of turning into something more than a retest, which would ultimately resolve around the 1760-1800 level. The situation has the potential to be perilous enough that I have been reviewing various ways to hedge our long exposure coming April/May for the first time in years. I will likely put together a combination of hedges that I will be posting here when I decide to initiate them. I have always been a believer in markets having an inherent tendency towards devious intention. It is rare that a market will witness an open wound among an influential, highly-publicized group in the market without rubbing salt in that wound, while ultimately seeking complete amputation of the limb as the end punishment. Given the fact the market now has its foot on the neck of so many prominent hedge fund managers through devastating results in 2015 followed by equally devastating results to start 2016, a devastating kill move likely remains in the offing. There is simply too much of an opportunity for the market to create the type of loathsome, highly publicized respect it seeks on a frequent basis by finishing what it has started in the hedge fund space via systematic violence in the months ahead. ...
RESEARCH REPORT: 1347 PROPERTY INSURANCE (PIH)
The most recent research report for T11 Capital Management's newest holding PIH is available...
IMPAIRED SOURCES OF INFORMATION ARE INCORRECTLY CREATING CONVICTION THAT WE ARE IN A BEAR MARKET
It is important to keep this one fact in mind when making any observations with regards to the financial markets at present: The predominant factor influencing thinking in the global markets currently is past pain. The current generation of market participants, be they retail investors, fund managers, analysts and journalists have only known struggle in the markets. This type of foundation for the stewards of capital and popular thinking with respect to investing creates unusually adverse reactions to downside volatility in asset prices. A vicious cycle then ensues of fearful headlines, commentary and opinions reinforcing the already existing negativity, which spirals into a black hole of irrational thinking. Against this type of backdrop you very simply have to approach information as if it is emanating from an impaired source. Otherwise, you have no chance to make the most beneficial decisions necessary to create outperformance, as you are mentally blending into unintelligible chaos. In order to discover some clarity and perspective I want to again turn to a source that too few investors bother with: The quarterly chart for the Dow going back 100 years. This chart was discussed most recently in January. Here is the chart provided in the above article: (click to enlarge) If this 16% pullback from peak to trough in the Dow is to be considered a bear market, then what would be call these? 1983 Q4 - 1984 Q2 Dow falls 17%. One year later the Dow is 24% higher at a new all-time high. 1987 Q4 Dow falls 41%. One year later the Dow is 34% higher. The Dow would be at new all-time highs in Q3 1989. 1990 Q3-Q4 Dow falls 22%. One year later the Dow is 35% higher at a new all-time high. 1997 Q3-Q4 Dow falls 16%. One year later the Dow is 31% higher at a new all-time high. 1998 Q3 Dow falls 21%. One year later the Dow is 40% higher at a new all-time high. 2015 Q2 - Present Dow falls 16% from peak to Q3 2015 low. The above are secular bull market corrections that are invariably mistaken for the start of new bear markets. Every single one of the relatively short-lived corrections listed above were accompanied by discussion of various factors leading to the start of a bear market or complete conviction that a bear market had already started. The current correction is the first of this secular bull market. To believe that we are in a bear market is to believe that all of the above highlighted corrections were bear markets, as well. Additionally, to believe we are in a bear market is presumptive,...
JANUARY CLIENT LETTER: STOCK MARKET POST-TRAUMATIC STRESS DISORDER; SOME FACTS; ADOPT A SMALL-CAP SECURITY TODAY
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Stock Market Post-Traumatic Stress Disorder If you are to believe the flock of market pundits currently making the rounds then you would have no other choice but to believe that a new world order is in place. This new world order does not rely on any common sense measures of economic progress or stability but rather dwells in sorrow of past crisis situations in order to arrive at current conclusions. If you have been reading my monthly letters with some frequency then you will recall the dozen or so times I have stated that the the years between 2000-2009, marked by the dual “once in a lifetime” crisis situations of the internet bubble bursting and the mortgage debt bubble following relatively closely behind, has caused post-traumatic stress disorder to become apparent among the current generation of investors. This post-traumatic stress disorder is marked by a near obsession with calamity resembling calamities of the past decade. We have not had a pullback, macro induced or otherwise, that hasn't been a precursor to either a recession, secondary debt crisis or complete global economic collapse since the 2009 bottom. And of course the word “bubble” has now become ingrained in financial vocabulary as a means of describing anything that moves up in a straight line for a period exceeding 12 months. The point being that a majority of the analysis being pressed upon the impressionable minds of a naive and uniformed investor base, institutional or otherwise, is being formed using past traumatic experiences that incorrectly shape future expectations. This current form of thinking is not isolated by any stretch but rather an epidemic. If you are to believe this line of thinking with respect to prevailing market psychology to be true then two things become immediately apparent: Pullbacks will appear calamitous in nature as the feedback loop of past trauma induced psychology meets with current perceived negative developments in the markets. This will express itself through momentum on the downside. Pullbacks will bottom suddenly, with a majority of them being shallow in nature, as a result of a convergence of selling taking place around the same areas due to near identical mental output of a majority of participants. What we have experienced over the past few months has resulted in a pullback of some 15% from peak to trough for the S&P 500. This has been excessive for the current bull market as measured by pullbacks experienced since the 2009 bottom. The reason for the dramatic price action to the downside is that the...