INVEST OR DIE: THESE TWO LITTLE PIGS HAVE WINGS
***PTGI sold on April 16th, 2012 +36% since posting ***GSIG sold on April 9th, 2012 +6% since posting I have two post-restructuring plays that are worth a gander: - PTGI - Primus Telecom - GSIG - GSI Group GSIG...I was long the company when it was in bankruptcy during 2010, buying initially in the $2 range and riding it up past $10. I sold out in the first quarter of 2011. The company has done nothing but strengthen its position over the past year, while the per share price has literally gone nowhere. Cliff notes version of GSIG investment thesis: overpaid for an acquisition some years ago...caused the company to go into bankruptcy...previous management tried everything to dissolve the equity in the company...activist investors became involved...equity committee was formed...activist investors litigated the matter...activist investors won in court...management ousted...company restructured...equity saved...businesses all intact...a new, experienced management team resides over the company now...generating substantial growth...largely insider owned....undiscovered still to this date. PTGI is a little more complicated of a story. I'll turn it over to Wikipedia for an explanation of what the company has gone through over the past 20 years http://en.wikipedia.org/wiki/Primus_Telecom Cliff notes version of PTGI story: much hyped telecom play in early 2000...took on too much debt...forced into bankruptcy...reduced debt substantially....activist investors have become involved...their business continues to grow...they are a cash flow machine...greatly undiscovered company....was on the pink sheets before the middle of last year...now trades on NYSE. Should the global economy and thus the markets resist the urge to cliff dive in 2012, both of these companies can see substantial upside before year...
6 CHARTS THAT PAINT A CRYSTAL CLEAR PICTURE FOR THE MARKETS DURING THE WEEKS AHEAD
click chart to enlarge
THE GUN: AN INVESTMENT OPPORTUNITY EMERGES IN PRGS
***PRGS sold on March 28th, 2012 +27% since posting It has been awhile since I posted a report on a potential investment in an individual company. Let's see if I can shake the rust off. I came across PRGS (Progress Software) recently. Well-established software companies typically possess two key attributes: 1. Their business is extremely cyclical in nature 2. They are free cash flow machines This means that when a negative cycle kicks in, lowering per share price, it is typically a good time to buy into well-established companies with a history of solid management and free cash flow generation. PRGS has been getting beat up recently as it attempts to transition away from one segment of the marketplace to another. In the meantime, their growth has grinded to a halt, forcing the company to cut forecasts when they announced earnings on January 3rd. This cycle of disappointment has led the company on a rendezvous with the bearish segment of cyclicality within the software sector. The company has fallen from a high of $30 per share a year ago to its current price in the $18 range. Certainly a director within the company thinks it's time to buy as he bought $500,000 worth of the stock for himself on the 11th of January. Let's look at some of the key valuation metrics on a historical basis: click chart to enlarge The most significant risk to PRGS comes with management's inability to execute on their ongoing transition. This would compromise the position of the company and allow competition to diminish their market share, causing management to further lower future estimates. This outcome could take the share price to the $12-$13...
14 YEARS OF WAFFLING
I got an email recently from a disappointed patron of this fine venue for market analysis and ideas. The email went something like this: You were bearish when the S&P was at 1260 and now you are bullish at 1290. You are a waffler. Fortune cookies provide more useful analysis than your website. The email was more detailed and colorful than my loose interpretation, but that is how I remember it. I've been playing in this sandlot for quite a few years. In the time I have been trading, a majority of the time I have been in the public eye, so to speak, as I have always had a need to share my ideas and analysis in a public forum. I was blogging before the word blog existed with my first website in 1998. When I formed my fund in 2001, I continued to be extremely transparent with all of my thoughts and analysis. I remember one investor, in particular, who was particularly fond of digging into me about my investment ideas. She was unfortunate enough to invest a half million near the top of my fund's NAV in 2004. Her capital losses would take form of vitriolic emails to my inbox on an almost weekly basis. There wasn't an idea that wouldn't be shredded. On occasion, the emails weren't enough so a telephone was used to communicate the futility of my cerebral functioning. Throughout all of these years, I have always waffled to the displeasure of many. The nature of the markets is to change direction and ideas, therefore, it is only natural that as an active participant you must change ideas with the market if you want to survive. Here is a history of my waffling: 1999 - Came into the year bearish. Didn't switch my stance until a couple of months in. Ended up finishing the year up multiple hundred percent. 2000 - Came into the year bullish. I was bullish at the market top. You know? Nasdaq 5000 top. Yes, that one. I was managing money then for family and a few outside investors, I had one investor invest in March of 2000, near the top tick in the Nasdaq. As aggressive as I was and as bullish as I was, I piled in. I suffered a 50% drawdown by May. I managed to recover all of it and then some in the bounce that took place in June. Remember, volatility was rampant back then and if you knew how to trade and was as crazy as I was, you could make back losses very quickly. I switched to the bear side in July of...
SURPRISE: CALL BUYERS RETURNING TO THE MARKET MAY NOT BE AS BEARISH AS ADVERTISED
The following is the aftermath of the last three incidences of the 20 day moving average of the put/call ratio pulling back 25% from its highs after an abnormally long period of time. In my research, it typically takes 2-3 months for market participants to go from fear driven, excessive put buying to warm and fuzzy call buying. There are rare instances when it takes longer than 3 months. This typically signifies that there is an excess amount of skepticism in the marketplace, as call buyers are reluctant to return to the marketplace. I outlined this study in detail this past week. There have been three instances of a prolonged reversion (longer than 3 months) of the 20 day moving average taking place over the past decade: 2004, 2006 and 2010. I bring this up because we are on the verge of meeting the 25% threshold currently over a prolonged period (longer than 3 months) of time. What can we expect out of the current market now that call buyers have returned? Here are the charts from each of the three incidences over the past decade: click chart to enlarge If this study holds correct, then we can expect a top to approach around the April-May time frame, with the Dow seeing 13,000 and the S&P 1350 before all is said and...
A WORD TO THE WISE: STAY OUT OF YOUR OWN WAY
The recent death of volatility, which I outlined in detail last night, has some very real consequences for active participants within the marketplace. Being on the short-term side of the trading equation is certainly going to become a lot more difficult going forward. Yes, there will be profits to be had. Forget, however, about the 30 or 40 percent gains in leveraged ETFs over a few week time period. The question then becomes how to best extract the type of gains out of the market that will line your pockets in gold, while making sure that you aren't going around harming small animals and terrorizing convenience store owners? In other words, you want the strategy best suited to creating the greatest gains while maintaining the least amount of stress. The good news is that with the annihilation of volatility from the marketplace, the ground may be fertile enough to plant some seeds with a long-term time horizon. This is assuming that volatility will remain contained. According to the study I posted last night, volatility shouldn't return until the latter half of 2012 at the earliest. Volatility very rarely jumps off a cliff as it has recently only to climb back up a short while later. It takes its time in reemerging onto the scene. I don't expect this time to be any different. The bad news is that this process takes patience. 99% of investors get in their own way when it comes to making the type of money that they should out of intermediate to long-term investments. I am not immune from it and I know that you aren't either. I have met numerous professionals who have a difficult time with it. Your skill level, education, social status or number of times you've been divorced have absolutely nothing to do with the fact that you are human. It is in our nature to fear what we have (short-term profits) being taken from us while hoping what we don't have (a situation that you knew would be profitable but has turned into a loss) turns out as expected. As Jesse Livermore pointed out, instead of fearing you must hope and instead of hoping you must fear. You must fear that everyday you are sitting with a loss that the loss can grow into something larger. And instead of fearing your profit will turn into a loss, you must hope everyday that it grows. I am quoting loosely here from memory. But that is the gist of it. It's the long way of saying, "allow your profits to run and cut your losses short." 2012 may end up becoming a...
THIS STUDY MAY PROVIDE THE FINAL WORD ON THE PATH OF THE MARKETS FOR 2012
All pertinent notes are in the chart. Examine diligently. click chart to enlarge
A FASCINATING INTERPRETATION OF THE PUT/CALL RATIO: VOLUME 1
Those of you who have been following my postings for more than a few weeks know that I am fond of interpreting the put/call ratio as a means of gauging market psychology and spotting potential reversal points in the market. I have come up with many methods of interpreting the put/call ratio based on different studies relating to trend, seasonality, volume, mean reversion and length of time. I wanted to share one study as it pertains to the current market environment. I have determined that not only is it important to look at the levels of the put/call ratio but the characteristics the indicator exhibits as it moves up and down through different phases of the market. I use varying moving averages only for my put/call studies. The raw data is too erratic and needs to be averaged out over periods of time. The studies are always a work in progress. The more I investigate them, the more nuances I find in seemingly straightforward data points. One recent discovery is that extreme levels of pessimism as measured by the put/call will obviously have different rates of reverting back to their means once sensibility returns to the market. The rate of reversion can give important clues as to the intention of the market. It makes perfect sense too. If participants are jaded enough by the recent price action, they will take their foot off of the put buying pedal but will be hesitant to go full steam into buying calls. This causes the moving averages of the put/call ratio fade slowly over a period of months instead weeks. On the other hand, if market participants are optimistic about a recovery, the reversion of the moving average will take place much more quickly. This opens up the market to weakness much earlier than the former example since market participants are loading up on calls while shunning puts, thinking that the worst is indeed behind us. In a majority of the cases, the reversion of the put/call ratios takes the speedier route, most often not taking anymore than 3 months to hit the fateful 25% reversion (20 day MA) from the high mark. I have found that between 22% and 25% reversion is where the greatest potential for the market to begin showing weakness lies. That is UNLESS the reversion takes longer than 3 months. If the 25% threshold takes longer than 3 months to meet, then market weakness seems to start at a much later date. The markets basically continue grinding up right through the bullish sentiment. Here are three of the most recent examples in 2004, 2006 and 2010. The...
JANUARY 10th: PORTFOLIO UPDATE
In the premarket, out of TZA for a roughly 2 point loss. Out of FAZ for a roughly 4 point loss. Holding SCO only.
A CONTINUED LACK OF VOLATILITY WILL DEMAND A CHANGE IN STRATEGY
Volatility is a bear's best friend. A lack of volatility can become a bear's worst enemy. It slowly grinds your positions into fine powder one agonizing minute after another. I bring up the subject of volatility (or a lack thereof) because of the fact that there has been a remarkable change in the characteristics of the market over the past few weeks. This low volume grind that we are experiencing is reminiscent of all the prior low volume, grinding bull markets (dare I say it?) of the past. They grind up through negative economic data, adverse macro events and right up through ultra-bullish sentiment. It's not something that you can afford to fight if you are a stubborn short. I am not sure if I qualify as a stubborn short as of yet. I initiated my short exposure on December 23rd. I haven't been adding into strength, choosing to simply wait things out. Now it has gotten to a point where I am being forced to fold my hand both as a means of controlling risk and as a means of refreshing things. I have no problems with holding my crude oil short. The equity shorts (FAZ & TZA) will be closed on opening strength tomorrow morning. By all indications, futures are pointing towards a strong opening currently. If we are indeed entering another prolonged period of low volatility, short-term trading strategies will be turned to mush. What will work is intermediate to long-term equity strategies. I will be making my short-term strategy a smaller portion of the portfolio and allocating a majority towards intermediate to long-term equity positions as I did during all of 2010 and the first half of 2011. I am putting together some research on a small-cap name that I will be presenting here by the end of the week. It possesses all the attributes I look for in a long-term investment: positive cash flow, restructuring angle, highly incentivized management, a solid prior history and it's greatly ignored/undiscovered. That'll do it for...