THE FLAMETHROWER OF INFORMATION, ACTION AND THE MIND
Increasingly our culture has become addicted to processing information. The flood of information makes people connected when in fact they are more disconnected than ever. The connection people desire can only be attained through quality not quantity. The deciphering of the signal from the noise. Instead it seems that individuals who are not the least bit stale-minded are on a never ending quest for quantities of information that they not only are unable to filter correctly, but in fact keep them detached from any consequential outcome. The noise has become the signal, without consideration for the necessity of what is being ingested. This confusion due to an overabundance of information has a chronically negative expected value proposition in a bull market. The reason the expected value is negative is due to the fact that during a bull market the duty of an investor is to sit until the bull trend comes to an end. The value creation proposition that is brought on by ever increasing market capitalization and multiples can only be maximized through an approach that fears losing one's position more than any other emotion. Instead it seems that investors are hell bent on avoiding the next drawdown in their portfolio through cute acts of trading bravado that inevitably leave them in a disadvantageous position relative to the market. An investor in a bull market must manage drawdowns, not avoid them. It is just as reckless to have liquidated a stock portfolio on October 10th due to the fear of an impending bear market brought on by governmental woes and fears of a new bubble, as it is to allow a 10 percent loss to turn into a 30 percent loss in a position that is mismanaged. In other words, the threat to profitability with the act of being out of a bull market is equally as destructive to the potential of a portfolio as it is to have inordinate losses. The act of attempting to preserve equity during a bull run by timing every turn and escaping each drawdown is reckless conservatism and amateurish. Over a long enough period, the expected value of avoiding drawdowns becomes an even proposition at best due to the fact that the market cannot be consistently timed. It is inevitable that an investor will miss a series of upturns due to mistiming reentry. The simple act of sitting tight and treating one's positions as gold is the highly recommended path of action. I know, it doesn't lend itself to the swashbuckling image of a trader with 8 screens flashing information that needs to be processed, digested and acted upon in seconds. The...
SMART MONEY HAS GONE THE WAY OF SPANDEX SHORTS
Being that it is SEC Form 13F (quarterly institutional holdings report) season, I thought that it would be appropriate to remind everyone of what a fruitless endeavor this relatively new found obsession with following the supposed smart money truly has become. I'm not sure what it is about 13F zombies that I find so irksome. Perhaps it is the thought that simply following the popular guys, without any analysis to accompany the investment is somewhat insulting to those investors who put countless hours into investigating, reading and understanding companies before, during and after an investment. Or perhaps it has to with the thought that this concept of simply following "smart money" will lead to inordinately large gains. The lore of smart money had some truth to it many years ago. There used to be an information advantage that institutional managers shared. Information pre-2000 was incredibly expensive to access, which kept anyone without either vast soft dollar accounts or vast real dollar accounts out of the information market. The large funds would pay for access to information that is now accessible for free. They would have access to the opinions and minds of those who now disseminate the same information now for little to no cost at all. In fact, just getting real time quotes pre-2000 was a couple hundred bucks a month. The same fundamental data you can get from Yahoo, Google or Ycharts cost hundreds or thousands of dollars. As the projectile vomiting of information has continued unabated, access to information has become more efficient and less expensive. This inverse correlation between efficiency and expense will continue as the volume of information grows. What will also continue its inverse relationship is the destruction of any edge supposed "smart money" has as the efficiency and volume of information increases. Those who attempt the payment model for information are simply going against the technological grain and will be dealt with by the market. Asking readers to pay for information, regardless of the perception of how valuable it is will not be a sustainable business model because the volume of similar information trumps whatever perceived edge your "valuable" information will bring to the table. If we are all on standing on relatively level ground from an informational angle, then what would be the advantage of simply following an investor into a stock because the symbol showed up on a list of companies they own? Never mind the fact that the fund manager's position could have changed, been hedged or part of a greater "basket" strategy that those who simply follow the 13F won't see. The answer to the question of an investor's...
A POTPOURRI OF SCENTED THOUGHTS
- I mentioned CIDM more than enough on Twitter today so I won't go into it again. All of my thoughts both young and old are chronicled in a relentlessly organized fashion in my monthly reports that I have been publishing regularly for sometime now. - The markets are functioning just as they should and just according to schedule. The strength we are seeing now should continue into the end of November. - There will always be far too many investors who attempt to get cute in bull markets. By cute I don't mean walking around with a bowl of fruit on their heads while juggling rabbits. What I do mean is that investors make a regular habit of outsmarting themselves needlessly. It is a frivolous pursuit and has a negative expected value over the long-term. The job of an investor in a bull market is to sit tight, holding onto their positions as if they are the last remnants of hope for all of mankind entrusted to you for safekeeping. That is all there is to it. The rest is a bouquet of fresh garbage. - The popular technicians have a song and dance that they play for themselves that while amusing, doesn't provide much in the way of profits for those who follow their advice. Popular technical parlance saw the recent move into November as being exhaustive, with several signs of lagging momentum, breadth and various other technical indicators of the coin-flip variety. Those who perform technical analysis without trajectory points as their foundation are similar to quarterback who is playing on field without any hash marks, goal posts or first down markers. The quarterback will have no idea where he is in relation to where he was. That is what most technicians are doing in their analysis. Lost in a sea of inescapable mediocrity. - As far as the length of time this rally continues, I attempted to answer that question during this past weekend's review. For those who don't feel like clicking on the link, the Cliff Notes version is that we don't see a substantial pullback until mid-year 2014. Until then it will be either up or sideways, much like we have experienced this year. That is all I have...
HERE IS WHAT SEEMS TO HAVE BEEN MISSED IN THE EVOL CONFERENCE CALL
EVOL is an investment that has been in the portfolios since July. Here is the original research report issued at the time. The company is extremely well managed. The executive team there seems to very deliberate in the actions they are taking, whether acquisitions or other use of the cash they are so good at generating. The DSA technology that is the bread and butter of the company seems to gaining efficiency and acceptance in the marketplace. Despite the run it has seen since July, I don't see much risk in the share price here at all. Let me demonstrate why by highlighting a few points from the conference call. To understand what follows you must first understand the way EVOL's revenue model works. When EVOL signs a new DSA customer it includes a license for a set number of SIM activations. Once the activations are spent, the customer must then renew their license with a new set of activiations that EVOL refers to as FUAs (first use activations). FUAs are a 100% margin product. They are all profit. Here is what seems to have been missed in the conference call: EVOL management: As we look to 2014, we expect to see more FUA renewals. And with the -- and with that, we expect to see the corresponding impact on our top and bottom lines. And while this FUA renewal did help our margins in Q3, during the quarter we did incur fees for our acquisition of Telespree Communications, a transaction I'll talk about in just a minute. Yes, 4 are in FUA. So we've had one in FUA for a long time. Now we just got the second one. And numbers 3 and 4 are coming right along, I mean, momentarily. Cameron M. Wright - Jay A. Fishman, Ltd. Okay. So you just got the second one with 2 close to the pike? Thaddeus Dupper - Chairman of the Board, Chief Executive Officer and President Yes. We -- number 2 came online in Q3 for FUAs. And customer 3, I don't know if it's Q4 or not, but it's close. And customer 4, I think we're forecast for Q1. Isn't it, Dan? Daniel J. Moorhead - Principal Accounting Officer, Principal Financial Officer, Vice President of Finance & Administration and Secretary That might be Q2. But it's coming in, yes, the first half 2014. So we feel good about our DSA funnel. We're making progress in the M2M space, and we think both will contribute, of course, DSA more than M2M, significantly in 2014. Thad, can you just quickly go over the carriers that are in reload mode next year and just an...
THE BUTTER KNIFE POSSE
Here is one guy that gets it. Brian Belski at BMO Capital Markets has this to say: "We believe performance patterns alone are not enough to justify directional market calls," he writes. Almost all bull market corrections are triggered by a Fed rate hike or a spike in oil prices, and both of these conditions are "nonexistent in the current environment." "Instead, investors should consider the macro and fundamental backdrop along with risk-taking levels to determine whether or not the performance is justified. From our perspective, the data simply do not support the correction talk and we remain committed to our optimistic market outlook through year-end and into 2014. As such, we believe those investors waiting to “buy on the dip” are likely to be disappointed." I'll leave the debate about the causes for major corrections, whether Fed related, oil related, jobs related or government related up to the macro specialists to argue. Belski sees macro threats as being "nonexistent" from his perspective. He may be right. I want to add one more facet that I don't hear mentioned very often. What if instead of the traditional thinking that says this bull market started in 2009 and has reached maturity after a near five year run, this bull market is actually in year one? What if the technical progress we have made in 2013 is actually the real kick-off to this bull market, with the move up to 2012 simply being further probing of the decade long range faced by the S&P and Dow? This has been something I have been reminding readers of on a fairly consistent basis, but the traditional thinkers on Wall Street that attempt to impress with consensus driven projections that have no relevancy to an investors bottom-line will always get this type of bull market wrong. Not sometimes. Always. They will always be too conservative. They will always become pessimistic early. They will always cite valuation, sentiment and earnings as a reason to abandon the trend towards prosperity that the market is only too happy to share. It is simply too dynamic a situation to be judged by a traditionalist. It's like bringing a butter knife to a fight with a hyper-advanced group of space aliens. The butter knife just can't keep up with the dynamics that surround it. The plague of Wall Street as it stands currently is that they have the start of this bull market all wrong. If they cannot judge the start, how can we expect them to be able to judge the end...
THE PROCESS DRIVEN INVESTOR
The only way to avoid frustration in the markets is to become rooted in your process. I don't need to know what your process is nor do I care. It doesn't matter, really. What matters is that your process takes the place of becoming attached to daily results. Following the process. Judging daily results by how well you remained grounded in the process. That is one more barrier that good investors must cross in order to become great. I've mentioned countless times how I measure my decision making by the long-term expected value (EV) of the decision. I don't isolate each decision to buy, sell, hold, increase or any number of options I have on a daily basis individually. Instead, I look at the EV of the decision when weighed against my own process. When you become rooted in the process, having confidence that the EV of your decisions will fall onto the positive side of the statistical meter over the long-term, then you can avoid frustration to a great extent. It is the frustration that comes with being rooted in results that disallows investors from functioning properly once they hit a rough patch. All of the ills that stem from frustration in the markets can be rooted in paying attention to raw results instead of attention to the process. Attention to the quality of the decision itself, as opposed to the immediate result of that decision is where peace with the markets is born from. Knowing the EV of each of your decisions comes with time and experience. The intimate understanding of your own process. The more familiar you are with each facet of your process, the better your results over the l0ng-term. A guy like David Tepper or Bruce Kovner understands (consciously or not) the EV of each decision they are making when weighed against a long-term sample of similar decisions according to their process. Get your process right. Get your mind right. Get your focus right. Results will...
4 LONG-TERM CHARTS THAT WILL OPEN YOUR EYES AS TO WHERE THE INTENTIONS OF THIS MARKET LIE
click chart to enlarge
IN THIS MARKET ATTEMPTS TO CONVINCE INVESTORS TO SELL SHOULD BE BOUGHT
The same group of rudimentary-minded analysts of short-term movements in the markets are declaring today as an obvious end for the run we have experienced since the October lows. Citing among other things, the various sentiment measures such as AAII and the put/call ratio that have been consistently keeping investors off balance for the entirety of this rally. And then there is the obvious technical perfection of a bearish kind that came with today's steady decline into the close. It is as if the market is going out of its way to sell the bearish theme to the gaggle of price driven investors that occupy the current market. Why is the market so eagerly selling the message with today's technical debacle if its intentions are as nefarious as some think? Isn't the intention of the market to deceive through slight of hand as opposed to warn through blatant acts of violence against investors? This is the classic example of the obvious trade being the wrong trade in the market. The depth of my argument doesn't end there, however. Here is the technical picture from an alternative point of view: 1. I took the time to look at single bars in the Nasdaq Composite where the open was the high for the day, followed by a close at the lows for the day that exceeded a loss of 1.5% versus the previous close, as we experienced today. I excluded gap downs, as these are typically event driven as opposed to momentum driven declines. There have only been four prior incidences in 2013 prior to today. In all of the incidences to date, the market bottomed no more than 4 days after the blatantly bearish bar formed. Here is a look at the chart showing each example: click chart to enlarge 2. In yesterday's post, I touched on the fact that the Nasdaq 100 had not even come close to touching the trajectory in an attempt to retest. While this was very bullish behavior, the fact that we caved in today doesn't negate the bullish scenario at all. In fact, the market is now taking part in a standard retest of an important trajectory before moving higher. I would have preferred a continued consolidation followed by a move higher. This, however, still fulfills the bullish requirements for continuation to the upside: 3. The Russell has been leading the march down over the past several days. Take a close look as to what is dead ahead. The bottom end of the channel that has been supporting the...
PREPARE FOR THE NITRO CIRCUS
This market is about to get resoundingly silly in nature. It is enough to want to make a grown man want to exercise leverage into a high-probability trade that is screaming "come get me" in a financially sensual French accent. Unfortunately, I am bound by the incontrovertible laws of expected value (EV). As outlined earlier today, I make my living by being on the right side of EV not some of the time, but all of the time. Put simply, statistically sound decision making. While the trade itself is of a high probability, my decision to take on such an arrangement for the portfolios I manage is not cohesive with the various moving parts that make up the process. And it is the process I am concerned with more than anything. My mental makeup doesn't mean that your hand has to be swatted away from whatever device you are using to infiltrate the markets, however. Here is what I am seeing: - The consolidation that I expected for the Nasdaq 100 after breaking the key trajectory has not even come close to touching the trajectory in an effort to retest. Instead, it has simply moved into a tight sideways range ABOVE the trajectory as it prepares for the next leg up. Astoundingly bullish behavior. - What this pugnacious demonstration of bullish bravado is screaming into my open ears is that the combination of a bullish Q1-Q3, middle of Q4 seasonality, brilliant technical picture and very little in the way of potential fundamental headwinds for the rest of 2013 is simply too powerful a bullish concoction for the markets to ignore. They don't even want to give a little bit back, allowing those misfits who were not reading this website on October 10th the opportunity to make up for the grave error of not having sufficient equity exposure. What is dastardly about the current bull trend is the fact that it is being led by the Ben-Gay index of equity securities. Namely: Utilities, basic materials, consumer staples. The stuff that old men with statements held in trembling hands have great pride in holding for a majority of their lifetimes. In other words, the stuff that I have no exposure to whatsoever. But never mind that, I have already come to terms that to every ebb there is flow. My time will come shortly. In the meantime, I will manage the in...