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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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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