There Is No Glory Left
Jan09

There Is No Glory Left

What we have on our hands with this buy at any cost, early 2018, stampeding bull run that is already taking out some analyst's year end targets is a "me too" trade at its purest. Whenever the calendar turns a few funny things happen to investors: Those who won last year don't believe they can lose so they hold off on doing any selling. Those who lost last year don't believe they can handle another year of losing so they start buying consensus driven winners from the year past. Those who did neither, in other words, sideline money, believe that since a new calendar year has arrived, they must get into the markets now before analyst projections of a market that is 15% higher by year end come to fruition. And so we arrive at this point right here, right now. The S&P 500 hit 2759 today because investors both retail and professional don't want to be left out from another year of stupendous, mind-eviscerating gains. The peer pressure to create gains on capital by taking on what are extraordinary levels of risk has not been at these levels since 1999. The crypto and FANG generation is beginning to become grounded in the fact that they deserve extraordinary gains by investing in technology innovation simply because they are intent on uprooting the establishment, and these investments symbolize that intent. What is forgotten in the midst of any greed driven run is that markets function on manipulation. Trends are created to be tested. Investor psychology is molded in order to be torn down. Capital is shown a path towards generous returns only to see that path takes twist and turns nobody would originally expect. All of the devious behavioral traits of the markets are currently lying in dormancy. Simply because they haven't shown up for an extended period of time only means that when they do, the force exerted on the downside could be much greater than most any investor is currently prepared...

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Fighting The Suck
Jan06

Fighting The Suck

Powerful secular bull markets will always have a group of esoteric, less than understood assets that capture the hearts of investors, causing ascents in price that sing to their souls. At some point, and we may getting close that point now, it becomes impossible to fight the suck. Smart money, dumb money, family money, institutional money, international money and even loose change in the cup holder get sucked into an acceptance that "I can only win and will never lose." Investors finally succumb to the song of the markets when not only are their friends and neighbors killing it in the markets, but they see many so called "smart money" investor types substantiating that tingling feeling they are getting in their nether regions. And that's the suck that proves irresistible: Individuals can maintain perspective on risk when their friends and neighbors are making money, but lose that perspective when individuals they regard as "smart money" substantiate how their friends and neighbors invest. With that twist of popular opinion comes all types of asset allocation decisions that are viewed in hindsight as reckless. Greed is created through consensus opinion that evolves along an ascending intellectual framework. In other words, it spares nobody in how powerful the suck of capital is towards a particular group of assets. The fact that it is ascending and not descending makes individuals feel that they are making a prudent decision simply because smart money corroborates their behavior the more reinforced a trend in the market becomes. While this bull market still has years ahead of it, there are asset allocation decisions that are being made currently based on a less than well thought out thesis created simply because friends and neighbors decisions are being substantiated by individuals regarded as being bright. Fight the suck....

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Question Everything You See In The Markets Presently
Dec23

Question Everything You See In The Markets Presently

The chorus of individuals who are in a state of speculative induced euphoria is growing louder. It is a chorus as loud as any I have witnessed, including the late 90s dot com bubble. In those days, I had friends and relatives calling me to discuss stocks like QCOM and JDSU. I knew of a prominent physician who started trading index futures, putting a significant percentage of his net worth (he would later lose his home) into a trading strategy that was based solely on the markets continuing to go up. I would go to parties and the sole topic of discussion would be the amount of money individuals were making in the technology boom. 2017 has been much the same, except that we are now dealing with an unregulated, non-traditional asset class, in cryptocurrencies, that has attracted close to a half trillion in investor assets over the past 12 months. An investment that is a prominent illustration of complete disregard for any of the key tenets of investment, whether value, liquidity or viability. Investors are unknowingly playing musical chairs, while comforting themselves with axioms like, "it's the future." It doesn't stop at cyptos, however. The speculative based mania has started to devour the minds of investors to the point that they believe volatility is a relic of the past, creating a surge in assets based around profiting off of the absence of volatility. And then there is, of course, the popularity of the FANG names. If you weren't invested in FANG names in 2017, or perhaps some of the satellite names in close orbit to FANG, you had tickets to the underperformance theater, where crickets are your stars of the night and moldy cheese is the entree du jour. The theme for 2017 in the markets wasn't anything but get to stampeding with the herd or get to having your head stomped into a curb. If you refused the beck and call of the voracious crowds then you very simply sucked. If you had any sense of contrarianism built into your strategy, you missed. It was a trend followers market in the truest sense of the word, eliminating any and everything else from contention for performance. Markets inherently prey on consensus. They have for literally thousands of years. Human nature doesn't allow for the dynamic to change because psychology cannot converge along the same lines without destabilizing the asset base. While investors are celebrating their victories and bragging to friends, the foundation of the investment is literally crumbling beneath them. We are now deep into the crumbling stage. Consensus thinking will be punished, as always. The only question...

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Concrete Below
Dec18

Concrete Below

You know the market has become a get what you want, free for fall when even the "me too" names are stuffing the pockets of investors. Generally speaking, there is a sub-group of popular names in every market cycle that investors pile into primarily because they are 1) popular 2) they have lagged the leaders. They are comfortable to buy because they haven't really moved. It feels right...and feeling right is typically wrong in speculation. The markets force investors to chase leaders for a reason. FB, GOOG, NFLX have been forcing investors into uncomfortable buying decisions for years now as they ascend an ever steepening ladder. They are bull market leaders. You have to pay a premium to participate. It hasn't felt "easy" to buy any of the market leaders for sometime now. They inherently force decisions that suck for investors because you feel the rug can be pulled under you at any moment. Comfortable buying decisions on the other hand are not rewarded in normal market conditions. So when you see names like TWTR moving up, which has been a darling of investors seeking a comfortable way to play growth, there is a certain skepticism that should greet the move. The skepticism isn't a judgement on the company in one way or another. Rather, it is a judgement on the market for essentially giving up gains to anybody that walks by. More specifically, it's a judgement on the market cycle and where we are within it. This isn't the safe, cushion laden buying environment of a few years ago. It is a different beast entirely. There are no cushions. Only hard concrete below....

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May Client Letter: Sunshine & Rain; Are Millennials The New Phase 4 Investor?
Jun12

May Client Letter: Sunshine & Rain; Are Millennials The New Phase 4 Investor?

What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Sunshine and Rain The obstacles to the continuance of this bull market are not so much data driven as they are emotionally driven. Every bull market brings with it an abundance of worrying factors that drive investors to the sidelines, thinking that an avalanche of adverse circumstances will take away whatever profits an investor has accumulated during the bull run. Since the beginning of this secular bull market investors have been bothered by a confluence of data that lend credibility to the thought that a collapse was imminent. It is only recently that investors have evolved from that line of thinking into a more solid foundation for investment. That foundation has allowed the market to move forward, nearly unencumbered since the election. At the very same time, the confidence created by such a foundation has, for the first time, opened the doors to extreme volatility that isn't currently being reflected in the popular volatility gauges. The fundamental foundation for investment that currently exists is based on fiscal stimulus measures that are varied in method. They encompass everything from incentives toward domestic manufacturing to infrastructure spending, with foreign allies recently stepping up to the plate to assist in the financing of such projects. Of course, tax cuts are being rightly seen as the master key towards unlocking a treasure chest of corporate profits. The current White House has very obviously been the trigger for the tectonic plates beneath the markets shifting substantially since the election. Therefore, it would make sense that when the current administration is threatened, the markets would feel threatened, as well. It would also make sense to consider that when the current administration is encumbered by investigations into their conduct, regardless of the merits of the investigation itself, that markets would accurately surmise that a delay in the fiscal stimulus agenda is a very real possibility. In fact, Goldman Sachs came out recently with a completely modified forecast for what lies ahead for tax legislation, saying the following: The probability that tax legislation will be enacted by 2018 has fallen further, in our view, as a result of recent events. The last few weeks have taken a toll on President Trump’s approval rating as well as support for Republicans in Congress.... Over the last week, the President’s approval rating has averaged around 40%, and Democrats have led generic ballot polls over the last week by an average of 11 points.   It is also not clear how much support there will be for a simple tax cut....

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Putting Everything In Context With 6 Charts
May21

Putting Everything In Context With 6 Charts

The US Dollar has now given up nearly the entirety of its post-election gains. An economic divergence suggesting that the post-election confidence in economic policy is waning. click chart to enlarge   In the meantime, yields have once again taken the road less traveled (or the road driven to death dependent on how you look at it), threatening to once again move into the 1% range, which is one of the biggest macro surprises as we move towards the halfway point of 2017. A move below the 2% support area seems to be imminent.   Transports refuse to be a participant in the celebration of U.S. economic vitality, as they are lagging in a worrying fashion, with future prospects of a move below 8,000.   And financials, while not looking as ominous as Dow Transports, are putting in a classic head and shoulders pattern with increasing distribution taking place on the XLF as the right shoulder forms. This is very simply a confirmation of the pattern. Individual blue chip financials are further confirming the pattern in the XLF as they look at be susceptible to weakness going forward.   Long-term view of the Nasdaq 100 here. The trajectory going back to the 1990 low has marked support, resistance and acceleration of trends in the past. I suspect that given the reluctance of the NDX to clear above the line in a hurry, via a substantial acceleration, that the trajectory will act as a force of gravity, pulling the average below the trajectory over the next few months. A move below 5,000 on the NDX wouldn't be unusual in the least bit. In fact, it should be expected.   The SOX faces a similar issue. It is now below its trajectory, with the trajectory acting as a point of resistance. This indicates an early change in trend for what is an extremely important leading indicator for...

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APRIL CLIENT LETTER: TAXES; EMOTIONAL SPIN CYCLE; WARREN, TED & TODD
May06

APRIL CLIENT LETTER: TAXES; EMOTIONAL SPIN CYCLE; WARREN, TED & TODD

What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital.   Taxes Like most in the business community, I have been keeping up closely with the tax debate. It carries a special place in my heart as I carry the double edged sword on my back of having to potential to benefit from passage of Trump's tax plan while having a primary investment that will benefit more from its failure. The one page tax manifesto that took 100 days to develop was underwhelming to say the least. There are a multitude of issues that won't allow for passage in its current form, whether the fact that favoring pass through entities for the lowest corporate tax rate of 15% while leaving the top individual tax rate above 30% creates millions of wealthy individuals who simply funnel their income through corporations. Or the fact that even with the most generous dynamic scoring, the tax plan is a plague to the deficit within an already deficit laden government. JP Morgan economists Jesse Edgerton and Daniel Silver had this to say about the issue of deficits, "The Congressional Budget Office has scored every 1 [percentage point] reduction in the corporate tax rate with a budgetary cost of about $100 billion over 10 years," Silver and Edgerton wrote. "Thus, reducing the corporate tax rate from 35% to 15% would be scored as adding about $2 trillion in deficits over the next 10 years." In order to incorporate a deficit of this nature into the budget over the next 10 years it will require bipartisan support. Dangling the carrot of childcare benefits within the tax plan, as one example, in order to entice Democrats was a valiant effort. However, short of making the state of Florida a habitat for endangered seals while giving families making less than $50,000 a year a new Cadillac, President Trump will have a difficult time having a single Democrat supporting a tax plan that favors corporations that are already making record profits and wealthy individuals that have benefited inordinately since the end of the financial crisis. The only other way for the tax bill in its current form to pass is through the reconciliation process, which would avoid a filibuster by Democrats in the Senate. The dilemma here is that the reconciliation process doesn't allow for a projected increase to the deficit 10 years after the implementation of the plan. In other words, the Trump plan, in its current form, is virtually impossible to pass. The plan will need to become more deficit friendly in order to be implemented. Meaning,...

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THE VALUE INVESTOR’S DILEMMA
Apr18

THE VALUE INVESTOR’S DILEMMA

I don't talk about our positions anymore. Well, scratch that. I do talk about our positions, but only in my monthly letters to investors and during meetings. I've underperformed the markets pretty dramatically over the past 12 months. That's not the reason, however. We are now at a point in this bull market where real opportunities - I'm talking about those that fit my criteria of 300-400% upside in exchange for 20-30% downside risk - are nonexistent. I'm able to find potential doubles out there on occasion, but nothing that warrants replacing any of the names in our current portfolio that have upside of, at least, 200% long-term with minimal downside. Additionally, the rich valuations and excessive risk that needs to be taken to open up a new position in a company that I invariably will understand to a lesser degree than any in our current portfolio makes the framework for new opportunities that much more thin. In other words, something extraordinary needs to pop up to be worthy enough of investment. It didn't used to be this way, of course. In years past, new opportunities would pop up nearly every other month. There were plenty of opportunities in the markets for substantial upside that required very little risk to enjoy. Go through the research section of the website to see all of our past investments. Many of them have doubled, if not more. A few of them have completely fizzled, but we were fortunate enough to sell most at a nice profit in years past. In 2017, I'll be lucky if I write two new reports on small-cap opportunities. I certainly expect to write one, most likely during the second half of the year, once the froth disappears. That one new opportunity may not be necessary, however. Circle of competence and the benefits that are enjoyed by that circle is severely underestimated by a majority of investors. The fact that there are thousands of investments to choose from makes investors think that they need to be Wall Street's equivalent of a Renaissance Man, with a broad swath of knowledge, ranging in investments of all types. That doesn't work, but for a small contingent of professional investors who typically have large staffs. Being an individual investor who attempts this only confuses the process, leading to excessive risk taking, dilution of process and ultimately, plain equity induced confusion. In terms of that circle of competence, there are about 20 companies that I have invested in over the past several years that I have a thorough understand of and am completely comfortable with. Going outside of that circle, again, will require...

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DECLINING BOND YIELDS SHOULD HAVE THE ATTENTION OF EVERY INVESTOR
Apr17

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...

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THE PRIMARY LEADER FOR THE CURRENT BULL RUN HAS BROKEN DOWN
Apr15

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...

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