*This is a copy of my letter to investors summarizing the month of June.

May monthly report can be found here.

2012 Return: +58.61%

2013 Return: +9.54%

Portfolio June Performance: +4.44% S&P 500 June Performance: -1.50%

Portfolio YTD Performance: +9.54% S&P 500 YTD Performance: +12.63%

Total Return Since Inception (1/1/12): +74.76% vs. S&P 500 +27.73%

Portfolio Highlights For June

- TZA was a position that didn't affect overall performance during the month of June as it gained 0.25%. However, I wanted to mention it first in order to highlight the nature of the performance in the portfolios during a month that was exceedingly volatile relative to anything we have witnessed in 2013. In fact, the decline that took place on the 20th of June was one of the most severe we have witnessed over recent years. On this day, the portfolios were up .02%. During the volatile week of June 17th, the portfolios were relatively steady throughout, witnessing a gain of roughly 200 basis points during a week that saw most asset classes decline severely.

These small data points are significant because they provide validation to the core strategy of maintaining the appropriate levels of both market risk and position risk within the portfolios. Every action that is taken within the portfolios is taken with either position risk or market risk in mind.

With that said, I was extremely pleased with the way the portfolios handled the extreme turbulence of June.

The position in TZA was increased during the first week of June to a maximum allocation of 25%, where it remains through the end of the month.

-IWSY saw its share price appreciate 71% during the month of June. This is on top of a 60% gain in the month of May. The overall position is now up some 170% since it was initiated in late February. There was no fundamental information that caused this price spike during June. It should be noted, however, that this run did essentially start with the conference call that took place in early April. I highlighted portions of that conference call in last month's monthly summary.

I will reiterate the fact that Jim Miller (CEO of IWSY) strikes me as an extremely conservative individual given his past history. The type of aggressive, excited statements he has made regarding the advancements the company has made are not something that should be taken lightly by investors. This is, after all, a veteran of this company, not a fly by night CEO who was brought in to resurrect and recreate, with immense incentive packages attached that are determined by stock performance.

The fundamental news that I believe the share price is in the process of factoring in is either a large contract with a major player in the wireless space (read: AAPL or GOOG) OR an outright acquisition of the company by a larger entity who will add IWSY's technology to an already robust wireless offering.

As a matter of stemming volatility, the position in IWSY was reduced by a third during the month of June at prices in the 2.20 range. This represents a 130% profit since inception just several months ago. The position has obviously swelled in size due to appreciation. Bringing it back down to a mid-sized position from a large position does help to cushion the volatility that comes with having a stock as volatile as this one as a top holding.

- Both JMBA and SBCF were sold at what essentially amounts to breakeven prices from inception. This was done in order to reach target asset allocation levels (75% long is the current target) as well as to raise cash for more attractive opportunities. The strategy that I employ at T11 is a "best ideas" strategy. This means that I do not hesitate to sell good ideas if a great idea comes along. A great idea did come along this month. One which I am currently accumulating and in the process of writing a research report about.

Additionally, the portfolios are concentrated, with no more than 8 positions at a time. I pride myself on being intimately familiar with each company that I choose to initiate. This cannot be done with a portfolio that has dozens of positions within a dozen different industries. There are limits to the amount of knowledge that can be digested on a daily, weekly or monthly basis. Knowing the risks that each company presents extremely well allows for the larger positions to be taken within the strategy while understanding full well the max loss scenario in each position.

To illustrate: In 2012, the largest realized loss was equal to 30% in AUTH during Q4 of 2012. During that year there were 14 winning investments, with 7 losers. The largest realized gain, on the other hand was in excess of 100% in SYNC.

Thus far in 2013, the largest realized loss in the portfolios has been a roughly 18% loss in PXLW from initiation during Q3 2012. The largest realized gain has been a 130% gain in IWSY.

The trade off between gains and losses has been kept at the appropriate levels, with a trend towards increasing the spread so far in 2013. Understanding when to cut a position based on both fundamental and technical data has served the portfolios well over the past 18 months.

Back to JMBA and SBCF. These are both companies that I expect will be appreciably higher in the months ahead. Should I choose to increase exposure they are names that will both be revisited as the liquidity in both should make for a simple reentry.

- HMPR was essentially unchanged during the month of June. The position was increased to a large position during the final week of the month. The trend towards investing in regional banks as their balance sheets continue to see improvement should become a strengthening theme into the second half of 2013. HMPR should see its share price benefit as a result. The minimal risk in the shares given the positive trend towards earnings, a repaired balance sheet and the support of several large private equity firms warrants taking on a large size position at these levels.

Portfolio Lowlights For June

- Washington Mutual Holdings (WMIH) saw its share price decrease by 9% during the month. The selling came on extremely low volume and generally listless trading. From a technical standpoint, I would classify June trading in WMIH shares as a classic "digestive" move following the gains in May. This is typically a continuation pattern for stocks that yields higher prices 3-6 months out.

It should be noted that WMIH has been a large position in the portfolios for most of 2013. The performance of the stock mid-way through 2013 is -5%. It has been mostly small and mid-sized positions that have been responsible for the 9.54% gain thus far in 2013. WMIH then gives the portfolios a large degree of potential for outsized gains during the second half of the year, as the shares remain extremely attractive in terms of pure potential due to both their mortgage reinsurance business and the inordinate amount of NOLs the company has in its possession. The company remains a textbook "hidden asset" play.

Since inception in July of 2012, WMIH has appreciated 60%.

- CIDM announced a relatively positive earnings report and what I would classify as a glowing conference call. The company's transformed business model is beginning to show significant influence on the revenue side of operations. Everything from their movie distribution business to movie releasing business is moving in the right direction, setting the company up for significant profitability in the future.

During the conference call there seemed to be an emphasis on the potential for dilution in order to grow their film assets. In fact, the word dilution was mentioned 8 separate times during the conference call. Promptly following the release of earnings, on June 25th (earnings were announced on June 19th) the company announced a mildly dilutive capital raise through an underwritten public offering.

I'm not normally critical of management, allowing them great leeway to make the necessary adjustments that will create future success. However, the decision to essentially give away their stock at what are extremely depressed prices in exchange for the capital to acquire further film assets does not present the proper risk/reward trade-off. My estimate of upside in the company is between 300-400 percent from these levels over the next 12-24 months, at a minimum. The return on investment from film assets is highly questionable to match anything that will be gained through appreciation in the stock.

Management of CIDM is either overestimating film assets value or underestimating upside in the stock price. Either way, it is a poor decision from a management standpoint. Further, it is a decision that won't sit well with the current investor base.

As a result of this development, I reduced our position in CIDM to a small position during the month of June.

Looking Ahead To July

As we are now halfway through 2013, we can look at the year to see the prevailing trends that have become Wall Street meme over the past six months. Furthermore, we can gauge how these prevailing mindsets will influence behavior through the remainder of the year. In applying contrarian philosophy to the markets, a blanket approach is no longer sustainable or profitable. There is a greater degree of discretion necessary to find the opportunities that are being distorted through a belief that has become accepted as fact when it is anything but.

Looking into 2013, there is one general theme, thus far, that is blatantly obvious: Equities are in a bull market. This is a very elementary statement that even a 12 year old child could make through observation of the past six months of trading. However, the observation doesn't necessarily equal belief. You and I can observe a group of individuals gathered around a table talking to spirits. The observation of their discourse with an invisible entity residing somewhere in an alternative dimension does not, however, equal a belief that what we see is actually taking place. We are simply observing.

This distinction between observation and belief is an important part of investing in 2013. You see there are many individual and institutional market participants that have simply become observers of this bull market. There is, on the other hand, very little belief in the grounds for such a run during the year. The observing of a bull market does lead to sentiments that can be interpreted as bullish. In fact, these sentiments will show up in the various surveys that track investor opinion of the markets. However, when it comes to expressing sentiment in the most relevant means of all i.e. allocating assets towards equities, two things end up happening:

1. Either the allocation takes place on a very light basis or not at all


2. A substantial allocation takes place but with a hair pin trigger for tolerance of a pullback

When there is no belief in an entity, whether financial, spiritual or individual then any setback whatsoever, regardless of relevance, depth or truth will cause a reversion to the mean of skepticism. This puts investors back into the observer category. They become, once again, bullish observers of an uptrending market.

This phenomenon, regardless of any survey or opinion poll being brought to the forefront of investor attention, has very much been ingrained in the bull market of 2013. The complications we have seen in achieving any kind of sustainable pullback, which at this point would be considered healthy, are complications born out of investor observation as opposed to belief in what is occurring.

Popular belief says that the absence of pullbacks within a bull market are a result of fundamental occurrences that reinforce the strength of the bull market. This popular belief is false.

An absence of pullbacks within a bull market comes from the dynamic relationship between investor observation and belief. Significant pullbacks (classified as nearing the 10% from peak mark) are low probability events when a majority of investors are in the observational as opposed to belief category during strong uptrends.

The mechanics of a significant pullback are lubricated by belief among investors. When there is an abundance of investors that are convinced of a certain outcome then the mechanism that drives market behavior, manifested in the form of volatility, becomes agitated in such a way that large holes in price become a significant danger for investors. This is further exacerbated by concrete belief not allowing investors to react quickly enough to contend with an agitated market.

What contains downside volatility in every pullback involves the dance that takes place between observers and believers in the market. When all of the observers have turned into believers then whatever selling takes place is met with an absence of bids as short sellers have been indoctrinated into the believer category, causing the removal of valuable bids from the marketplace that can contain volatility. Furthermore, there is a lack of observers that are seeking to buy into a market because they have become believers who are fully allocated, no longer maintaining the capital to bid.

In other words, when there are only believers in a marketplace then the foundation of that market becomes hollow. A balance between observer and believers is an essential component of a healthy bull run, with shallow pullbacks.

During the 2013 bull market, there is an abundance of observers and some believers. This will allow for pullbacks to occur that are normal, but not excessive. In fact, these pullbacks may seem too shallow for most to digest, a clear signal that the observer/believer balance is alive and well.

The end of this trend of shallow pullbacks will come when either a negative fundamental event occurs that is overwhelming to the dynamics of the relationship, often times manifesting itself through a sudden, steep and dramatic fashion. OR when there is a significant minority of observers and an abundance of believers. This typically manifests itself through a blowoff top of some sort.

The next time an individual tells you they are bullish, the next question should be, "Observational or actual belief?"


Ali Meshkati

Author: admin

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