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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ARE THE TRUMP TRADES IN THE BEGINNING STAGES OF BEING UNWOUND?
Apr13

ARE THE TRUMP TRADES IN THE BEGINNING STAGES OF BEING UNWOUND?

It always seemed fairly obvious that the markets, for better or worse, would test the entire thesis behind all the Trump trades investors put on after he was elected. From yields, to financials, to the US Dollar, every single perception of what should thrive under the capitalist orgy that is the Trump administration would be put the test. Already some of the "no-brainer" stocks that would benefit the most from Trump have unwound. Surprisingly enough, some have completely unwound. Below is a chart of high tax companies that have the most to gain from aggressive tax cuts, plotted side by side with infrastructure beneficiaries.                       Both of these baskets have unwound their post-election gains completely, with the high tax basket actually showing a loss since election day as of March 30th. Something else is just starting to gain momentum, however. Some rather trustworthy macro indicators of economic health that should be thriving if growth prospects brought on by massive fiscal stimulus were indeed true are beginning to look like they want to reverse course. 10 year treasuries are gaining ground while the Fed is in the process of raising the Fed Funds rate. Bond investors seem to think that economic growth prospects are tepid at best moving forward. click chart to enlarge   And then we have Copper, a leading indicator of economic activity that seemed to love Trump during November up to February, but is now deciding that perhaps the need for material for infrastructure projects won't be coming to fruition anytime soon.   Finally, financials have been an enormous beneficiary of all the promises of deregulation ushering in what will perhaps be a golden age for the sector in the years ahead. Yet, there has been some lag as of late and suddenly, financials look like they are perfectly content skipping the formalities of any golden age that has been promised.   All of this, at the very least, warrants close watch in the weeks ahead as geopolitical fears become amplified, earnings come in fast and furious and the threat of a government shutdown into the end of the month...

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ONE FOOT OUT ON TAX REFORM
Apr12

ONE FOOT OUT ON TAX REFORM

Donald Trump speaking in an interview with FOX Business that aired today: "You know, if you look at the kind of numbers that we're talking about, that's all going back into the taxes.  And we have to do health care first to pick up additional money so that we get great tax reform. So we're going to have a phenomenal tax reform.  But I have to do health care first.  I want to do it first to really do it right." With these words the president has officially taken one foot out of the water in pursuit of tax cuts. The support for a repeal of Obamacare has faded in light of the intra-party upheaval that caused the first attempt to fall through. Now Republicans have to deal with the fact that their voter base, made of the working class who benefit most from Obamacare, will be left deserted by new legislation, leaving many millions uninsured, alienating a voter base that is quickly pulling back support of a president with some of the lowest approval ratings in the first few months of taking office in history. Trump has to know this. So coming out, basically saying that tax reform is dependent on Obamacare being replaced is setting the stage for an exit on tax reform during the second half of the year. That exit will either consist of a much lower tax cut than most expect, somewhere in the vicinity of 28% for the corporate rate. It is also entirely possible, if not probable, that nothing happens at all, especially if his popularity continues to wane and tax reform gets pushed back to 2018, when mid-term elections take place. And then there is the possibility that the president may have recently realized that geopolitics is much easier than dealing with Congress, making it difficult to focus on the domestic front when there are so many challenges internationally that can be pursued without Congressional approval. Bottom line: Tax reform is hard. Neither Congress or the White House is equipped to deal with hard at the present moment or in fact, for the foreseeable future. Throw in easily distracted leadership and one can see how this goes further and further off track....

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QUIET LUSTING FOR A BULL MARKET TOP
Apr11

QUIET LUSTING FOR A BULL MARKET TOP

There is a certain quiet lusting taking place among investors for a bull market top. The difficulty in creating a logical foundation for a bull market that, according to popular misconception, should have never been in the first place. A bull market that is perceived as being propped up on an artificial platform, buoyed by monetary stimulus, backed by unreasonable valuations, flying in the face of geopolitical fears. The very same reasons the markets should not have climbed in 2011, 2012, 2013 and so on are being cited today. Now this is not to say the market will not correct. Every healthy bull market takes on some measure of correction. In fact, given the nature of this bull market, the next major correction to come will likely fool most everyone into thinking it's the beginning of a substantial bear market. There is, after all, much more "data" to hang your hat on if you're bearish, which serves the counter-intuitive purpose of prolonging the secular bull market. Very simply, it's still too easy to be bearish. It's too easy to look at the numerous valuation measures and determine we have come to far. It's too easy to read the headlines and determine the geopolitical stage is much too unstable. It's too easy to look the monetary policy and determine that the markets won't be able to cope with not having the Fed on their side. It's too easy to look at earnings and determine they aren't growing fast enough to support valuations. Easy, however, doesn't work. Markets are inherently illogical or rather, difficult. Throwing out logical, easy assumptions to gauge the behavior of an illogical, difficult force is an investor's path to mediocrity. Failing to realize that secular bull markets are an expansionary force is a fatal mistake that investors only seem to grasp in the final stages of a secular bull. Let me briefly explain. Expansion during a secular bull market doesn't simply take place in the prices for assets. It takes place in every measure of those prices, as well. An average P/E ratio of 25, for example, could be seen as an extremely rich valuation. However, secular bull markets create new realities for what "extremely rich" constitutes. This goes for everything from sentiment measures, to measures of leverage and of course, valuations. They all expand into areas that are intellectually impossible to conceive or grasp. Abstractions begin to take their form in reality. Therefore, it may be beneficial for investors to begin training their mind in abstract concepts now in order to be able to deal with what is to come. An exercise that is certainly more...

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WHAT TO EXPECT GOING INTO MID-YEAR FROM THE MARKETS
Mar15

WHAT TO EXPECT GOING INTO MID-YEAR FROM THE MARKETS

The last time I posted any kind of chart here was on October 30th, in a posting titled," An Unorthodox Long-Term Indicator Is About To Scream Buy." The general premise, in a nutshell, was that the market was about to embark on a 20% rally over the next 12 months with very little chance for a drawdown from that point. This was at SPX 2100. Now that the SPX is closing in on 2400, it's time for an update to see exactly where we should see an intermediate term top that will interrupt the current sense of nirvana. click to enlarge Given the current trajectory of this run, it is not unreasonable to expect 2500-2550 on the S&P 500 by June or July. Depending on how the market responds to this important trajectory point will determine what happens from that point forward. There remains little reason to bring in long exposure presently, other than obtrusive contrarian indicators and valuation markers that are inherently prone to range expansions during secular bull markets....

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FOLLOWING UP ON THE “SCREAMING BUY” SIGNAL FROM OCTOBER 30th
Jan22

FOLLOWING UP ON THE “SCREAMING BUY” SIGNAL FROM OCTOBER 30th

When we left off on October 30th, I posted an interesting study that pointed to the markets being a screaming buy, with an average gain of close to 17% over the next 12 months. Being that we are up roughly 10% since the study was posted, I thought it would be appropriate to post a follow up, along with some relevant notes. Let's start off with a philosophical discussion: Bull markets are meant to be invested in not traded. There is more money wasted and opportunities lost by investors who simply attempt to avoid the pain of a pullback in a bull market. The pain and pleasure of the ebbs and flows of bull markets shouldn't be avoided, but rather, understood. The understanding comes in the form of observing the natural tendency for markets to correct while knowing a correction does not constitute a secular reversal. It has been 6 years I have been telling any investor who would listen that this bull market should be bought and embraced for sometime to come. That message has not changed and it will not change at any point on the near horizon. There are still multiple years of gains ahead, into the end of this decade and perhaps further. In fact, the upside from here remains on par with the potential I saw in 2011, when the Nasdaq was at 2500. In the meantime, the markets are at a complicated inflection point. We are up against some substantial resistance areas but sentiment is just beginning to turn into the bullish camp on a long-term basis. Typically when that sentiment turn occurs there is a prolonged period where what is obvious becomes obviously right. In other words, contrarianism fails while consensus excels. That was the point I was attempting to convey in the article from October 30th, titled An Unorthodox L0ng-Term Indicator Is About To Scream Buy Going back to the same indicator mentioned in that article, the 260 and 600 day moving averages of the put/call ratio, you can see in the chart below that the crossover just happened. Again, this indicates we are entering into a period when consensus bullishness will prevail much to the disappointment of contrarians:   Next up, we have the Dow, which has broken out above a key trajectory point with this recent run since November. This is a very real breakout with significant ramifications. This is the beginning of the second leg up for this bull market that has the Dow moving much higher over the next 2-3 years.   The stick in the wheel comes in the form of the Nasdaq which is camping...

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WORTHWHILE PURSUITS FOR INVESTORS GOING FORWARD
Jun26

WORTHWHILE PURSUITS FOR INVESTORS GOING FORWARD

There is no glory in blazing a trail down the beaten path of macro-induced pessimism in the financial markets. The S&P was within spitting distance of a new all-time high on Thursday, before the elderly population of Great Britain decided that they wanted to set their skiff adrift in choppy waters at 2 a.m. after a night of drinking pints at the local pub. In other words, a trip into the unknown with completely random consequences in the time ahead. The markets, of course, reacted because of the shock value of such an unexpected move. However, it is our choice at investors whether to believe the reaction or put it in the category of a temper tantrum due to being frightened by extraneous circumstances, yet again. What you will have over the next few months are prophecies of cataclysm, brought about by a disintegration of the European Union, throwing the entire developed world into a state of fiscal and monetary retardation. What will most likely occur with the markets in response to the perception of impending doom will very likely be what we have experienced during the first half of 2016: A wide ranging sideways chop that is meant to confuse investors through a maligning influence. The markets aren't going anywhere this summer. They may very well make a new high in the next few weeks. The S&P may move down to 1900-1950 by late in the summer. However, amidst all the calls for termination of the financial system as we know it, the end result will be near nothing. The attraction to the 2000 level for the S&P should remain constant in the midst of the baboonery. In time, the expansive sideways range we have been experiencing in the major averages should give way to a new leg up for this bull market. The entirety of my mission is to discover the most advantageous form of investment to gain alpha from this eventuality. I don't believe there is necessarily another worthwhile pursuit an investor should be focused on, lest they enjoy dwelling in consensus opinion and investment, which unsurprisingly, remains uninspiring in its creativity. 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...

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WE ARE EXPERIENCING MANIPULATION OF MARKET PARTICIPANTS AT ITS GRANDEST
May15

WE ARE EXPERIENCING MANIPULATION OF MARKET PARTICIPANTS AT ITS GRANDEST

There is a certain repugnance attached to the current market that is being expressed in price action almost perfectly. Contrary to popular wisdom, the act of being disgusted with the financial markets doesn't necessarily have to be expressed through the outright liquidation of a stock portfolio. It can arguably be better expressed through frustrating price action that leaves both sides of the market furious at their inability to cope with current conditions. Welcome to the market of 2016. This dynamic is nowhere better expressed than a look at the Nasdaq Composite, which is a symphony of degradation in psychology expressed with red and green bars.   There is no glory in battling such a colossal miscreation, only pain and regret. Fortunately, it seems that market participants have grasped this concept as the long-term put/call ratio is nearing points of fear only seen during severe economic contagion of one form or another in the past.   What is important to realize is that given both of the dynamics expressed above it will be impossible for market participants to correctly surmise when it is appropriate to become aggressively bullish again and stick to that position. The psychology of defeat expressed through complete frustration as revealed in the current price action will be looking to sell rallies just at the time they should be bought. When it comes to the essence of what the markets are attempting to accomplish at this juncture this may be it. Positioning participants to consistently make the wrong move (sell stocks) during what will be a period of time when making that move will prove extremely costly due to the persistence of the uptrend that forms after this prolonged consolidation for the major market averages. It is impossible to pinpoint when that move up will begin. I don't think it will be anytime between now and September. Sometime in Q4, possibly Q1 of 2017. In the meantime, there is more work to do in manipulating those easily manipulated so that the supply exists on the way up to satisfy the voracious appetite for stocks that is sure to...

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THE INTERNAL CONFLICTS FOR THE MARKET THAT LIE AHEAD
May04

THE INTERNAL CONFLICTS FOR THE MARKET THAT LIE AHEAD

This is one of the more difficult spots of the bull market to date given the various crosscurrents that exist. Let's look very logically and unemotionally at what has happened to date: We started the year by having one of the worst first quarters on record midway through, only to bounce perfectly off of a key support area as pessimism was at historic extremes. We have seen a substantial bounce take place that has reconfigured sentiment, although bearish sentiment (or perhaps more aptly an unwillingness to commit to the market on the long side) is still pervasive among investors. Nevertheless, the market paid attention to a very minor resistance point at S&P 500 2100 which has resulted in a very standard pull back over the past couple of weeks. So we're basically stuck between a major area of support down around 1880 for the S&P and a minor area of resistance around 2100. This range-bound action is occurring just as technology is disassociating itself from any general trend in the market with a significant bias to the downside. Other sectors continue to show relative strength, but with the weight of a bearish technology sector the market will inevitably become sloppy. This becomes even more the case during what is going to be an illiquid summer trading season as hedge funds continue to face redemption requests in the midst of general confusion among managers while retail investors remain perpetually absent. Add to that general bearish sentiment among a majority of investors marked by deep skepticism and incessant fear within what is sure to be the Barnum and Bailey's of presidential elections and you have the formula for a stock market that only wants to hurt you. This is not a statement of bearish or bullish significance it's a statement of malicious intent against both sides of the trade. A sideways market that is running 100 miles per hour to nowhere while wearing flip flops, skinny jeans and some stunner shades. In other words, a market that makes no...

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