One of the reasons I write this blog is that it acts as a release mechanism. Hopefully, discussing all the contempt, frustrations, paranoia, despair and euphoria I feel can help ease them. Also, the logical, savy part of me can be expressed and used as a refuge anytime the George Costanza in me tries to take over.
I'm holding a sizable position in hwo.to (for me). The stock looks poised to make a breakout and although that gets me excited I am in no way complacent....quite the opposite as I have to deal with the Costanza paranoia and anxiety as well. What if the markets turn down hard after making such a big move up? What if something unexpectedly bad happens with the company or its main customer? I know deep down these fears and anxieties are irrational and it's actually a good sign that I'm sweating a bit. If you're feeling complacent after a trade, especially a rather large one, you're almost sure to lose money unless of course you had access to inside info which of course is illegal!
The upside pressure is building with hwo.to. Trading volumes are getting heavier and the stock has been inching up approaching the 52 week high of $2. This behavior hasn't happened with the stock in some time. Something is brewing I can feel it. Either the market is finally warming up to hwo.to giving it the respect it deserves or there's immanent good news like a big contract or a merger/takeover. Either way, it looks like a big breakout is coming to $2.25-$2.50. Exciting times but stressful too. It's not uncommon to see small caps like this have a nasty headfake or two to the downside before making the big breakout you're sensing and so if you're one to use stops you can easily see yourself get whipsawed at the worst possible time. When I rode bev.to from .50 to $3.30 there were several of these whipsaws or flash crashes if you will, whereby you would see the stock drop 10-20% in a day for no reason other than some loser who placed a market sell order into thin bids which of course triggered stops and more selling. The stock would then bounce back immediately. In order to be unfazed by these mini-flash crashes you need to be a strong holder and to do that you need to be confident in the fundamentals and the long term story but even when I am, I still can't help but feel worry, despair and frustration. These are the natural emotions that you have to fight every time. I'm sure I'm going to experience this with hwo.to a few times; in fact I already have, but now that I'm sitting on a big position my convictions will be put the test like never before. All this talk about being right and sitting tight, riding the bigger trend will be put to the true test. We will see what I'm made of.
When I analyze hwo.to from a rational point of view it's the perfect stock. It has everything I look for. 1) cheap valuation on a price/tangible book basis 2) low debt 3) under the radar turnaround with positive earnings momentum 4) early, non-parabolic uptrend. As a bonus it even has a juicy 6.5% dividend! The major successes I've had in the past few years, bev.to, gdc.to, isc.vn, tec.to, wzl.to, all had the same features. Most of my duds were because one or more of the above were lacking.
After analyzing the stock I come to the conclusion that it should go to $3 at the very least within the next 9 months and probably sooner. John Templeton liked to find cheap stocks either on a relative or absolute basis. Hwo is quite cheap on both even with the recent advance to $1.86. In comparison to 13 other small Canadian service companies it has delivered the best earnings during the past 4 quarters by far and has one of the best if not the best balance sheet strength and yet the market cap of the company is middle of the pack. With the earnings momentum likely going to continue getting even stronger it makes no sense for the company to be valued as such. On an absolute basis the valuation is even more compelling. It trades at a price/book of only 1.18, with minimal debt (none if you back out cash) and a laughable p/e of 3.3! And the quality of the earnings are top notch because the cash flows have been enormous. Going forward things are looking good. Although Canadian operations may show stagnation or even a decline from last year activity it's only 1/3 of their revenues; the remaining 2/3 is in PNG where things have been strong and will only get stronger which should more than offset any weakness in Canada. Upcomming Q3 should be good and probably be in the .15-.20 range but upcoming q4 and q1 should be especially good for 2 reasons: 1) these are the seasonally strongest quarters for their Canadian business 2) Additional cap ex in PNG this year will start to bear fruit starting in Q4 and will be fully reflected in Q1 going forward. As a result, EPS are poised to be strong in the coming quarters and I conservatively estimate it should result in additional .70-.80share in additional book value at the end of Q1 which means book value would be at least $2.30-2.4 by then which makes a $3 stock price very doable. I don't see how some larger company doesn't come in and offer to buy out or merge with these guys if they keep producing these numbers with the stock trading where it's at even with this latest move up.
Despite all the good things I see with the stock I still can help but worry about what could go wrong. I could always hedge away macro risk via an index put. I will consider that when think the market is vulnerable to a drop greater than 2-3%. As of this point I don't think it is. AAII sentiment yet again showed neutral reading of about a ratio of 1.11 bulls vs bears. I have NEVER seen an IT top with such sentiment especially if the market had recently made a multi-year year. Given market action, it would actually be justified and thus not a cause for alarm if AAII sentiment showed more bulls here. I realize other indicators are not as bullish for the market as AAII - some of which are outright bearish - but as I've been saying lately, AAII remains an important holdout. Meanwhile, market action this week has been quite good for the bulls. The market was very ST overbought coming into the week and so the bears had every opportunity to do damage and they did fuck all so far and now the market has just about worked off it's ST overbought condition with this sideways action. That's a sign of strength and that the market wants to go higher still.
It's a fucking nuisance for me right now to have to worry about what the general markets do. Although hwo has been trading fairly independent of the markets in general, that can change if we were to see major downside. So, for the sake of prudence and sanity, I will put on hedge once I think the market is ripe for at least some moderate downside. When in doubt though, I won't hedge because despite being heavily in hwo, I have an offsetting cash position and as I said, hwo has been trading fairly non-market correlated as of late. If and when I'm hedged, it would remove a lot of the irrational anxiety I'm feel sometimes. I suppose I could hedge right now for the sake of prudence and to quell my paranoia but that would be a quasi-emotional trade.
I know what I'm doing is close to crossing the line from boldness over to reckless and maybe some of you think I have already crossed it, but you know what? When you see those rare, golden opportunities come your way whether it's in the market or in life you have to try and take full advantage and whip out those brass balls. The greater risk in my view, is not taking full advantage.
Friday, September 21, 2012
Sunday, September 16, 2012
Weekend Ramblings
Anytime the market makes a new 52 week high I like to get a sense of what the crowd is thinking. Are they embracing it or are they shunning it? I see a bit of both but more of the latter. This morning on BNN I saw a few pundits/fund mangers basically throw their hands up in the air saying "I give up. You have both the European and US fed providing unlimited intervention and so you don't want to fight that". One guy talked about how this is the most hated bull market ever (something I've been saying for some time) and there's scrambling going on by fund mangers who are underinvested to get exposure before the quarter is over. They are buying grudgingly and in a somewhat panicked way. That to me suggests there may be weak hands getting in at the same time when the most stubborn of the top pickers have been blown out and so that could set the stage for a ST shakeout soon. On the other hand, there is still no shortage of anger and resentment from those who have been on the wrong side of the market since 2009. Still no humility, still the same angry, condescending quips about Bernanke from those (and there's plenty) who have been trampled by this bull market. I expect the permabears like Zerohedge and Hussman to go ape shit with their commentary this weekend.
This type of market situation is very tricky. It's very difficult to chase the market when it has spiked up like this but at the same time as I said the other day, NEVER short a market that has just made a fresh multi-year high no matter how overbought you think it is. In late August I saw a few people claiming to have made bold trades betting against the market. One guy who goes by the name "optionsmygame"....ya right.... claimed to bet his entire HELOC on Sept 72 QQQ puts at around $5. Those puts are now worth $3. If he wasn't bullshitting and actually did this trade, he is screwed big time unless the markets tank huge next week. I talked about how I've been seeing too much top picking lately despite some warnings signs of a ST top. Seems like too many people were still trying to game the top and the "September is the weakest month of the year" trade and now they are wiped out. Once September options expire next week, we may have seen the last of the top pickers cleaned out for good as they have been blown to bits these past few weeks while late to the party fund mangers chase stocks before the quarter is over. That would make the market ripe for a shakeout in early October but you can never underestimate the stubbornness of these top picking losers...I'll be watching for evidence of such.
So, sooner or later there will be pause and perhaps even a big shakeout but if you look at this from a longer term perspective, there's still plenty of room for the market to go a lot higher. I've been saying the following ad nauseum for a while now....Bull market tops in the past have been marked by high confidence and tight monetary conditions. We have the complete opposite of that right now. Everything from consumer confidence levels, equity fund flows, what your neighbors think about the economy, the books you see in the business section at Chapters and anecdotes from the media all indicate without a shred of doubt that there's pessimism not confidence out there. Next you have monetary conditions which are the most accommodating in history. This suggests conditions for an ongoing bull market are still quite strong. The thing that would potentially sabotage this bullish cocktail would be if there is some major disaster in fiscal policy. I suppose the "fiscal cliff" could be such a thing but from my experience, any major concern as telegraphed as this fiscal cliff ends up turning out to be a non event. Y2K fears is a perfect example. The reason why such fears never come to fruition is because of the fear itself....it motives a swift response by authorities to defuse it before it becomes a reality.
So the big question is what do you do now? At this point any buys you make need to be LT ones such that you could be a strong holder if right after you buy you get caught in a market shakeout. Know yourself. Keeping some powder dry or hedging will help you be strong holder. I made a bigger commitment to hwo.to on Thursday which is the only position I hold right now. I still have a sizable cash position to offset it though. I have a couple names on my radar but for the sake of prudence I won't be in hurry to add to them unless I see the market settle down and I get the price I want. I may also put on an index hedge soon.
This type of market situation is very tricky. It's very difficult to chase the market when it has spiked up like this but at the same time as I said the other day, NEVER short a market that has just made a fresh multi-year high no matter how overbought you think it is. In late August I saw a few people claiming to have made bold trades betting against the market. One guy who goes by the name "optionsmygame"....ya right.... claimed to bet his entire HELOC on Sept 72 QQQ puts at around $5. Those puts are now worth $3. If he wasn't bullshitting and actually did this trade, he is screwed big time unless the markets tank huge next week. I talked about how I've been seeing too much top picking lately despite some warnings signs of a ST top. Seems like too many people were still trying to game the top and the "September is the weakest month of the year" trade and now they are wiped out. Once September options expire next week, we may have seen the last of the top pickers cleaned out for good as they have been blown to bits these past few weeks while late to the party fund mangers chase stocks before the quarter is over. That would make the market ripe for a shakeout in early October but you can never underestimate the stubbornness of these top picking losers...I'll be watching for evidence of such.
So, sooner or later there will be pause and perhaps even a big shakeout but if you look at this from a longer term perspective, there's still plenty of room for the market to go a lot higher. I've been saying the following ad nauseum for a while now....Bull market tops in the past have been marked by high confidence and tight monetary conditions. We have the complete opposite of that right now. Everything from consumer confidence levels, equity fund flows, what your neighbors think about the economy, the books you see in the business section at Chapters and anecdotes from the media all indicate without a shred of doubt that there's pessimism not confidence out there. Next you have monetary conditions which are the most accommodating in history. This suggests conditions for an ongoing bull market are still quite strong. The thing that would potentially sabotage this bullish cocktail would be if there is some major disaster in fiscal policy. I suppose the "fiscal cliff" could be such a thing but from my experience, any major concern as telegraphed as this fiscal cliff ends up turning out to be a non event. Y2K fears is a perfect example. The reason why such fears never come to fruition is because of the fear itself....it motives a swift response by authorities to defuse it before it becomes a reality.
So the big question is what do you do now? At this point any buys you make need to be LT ones such that you could be a strong holder if right after you buy you get caught in a market shakeout. Know yourself. Keeping some powder dry or hedging will help you be strong holder. I made a bigger commitment to hwo.to on Thursday which is the only position I hold right now. I still have a sizable cash position to offset it though. I have a couple names on my radar but for the sake of prudence I won't be in hurry to add to them unless I see the market settle down and I get the price I want. I may also put on an index hedge soon.
Thursday, September 13, 2012
Bears lose....again
Markets hit a fresh 4 year high today on the initiation of QE3. So how important was this announcement? It could perhaps be the most important fed move in years as per the article I will post below. I'm sure though that the permabears are going to find reasons to dismiss this action as "pushing on a string" or that it will only create inflation via higher food and energy prices. Well, you go ahead and keep listening to the same losers who have been on the wrong side of a 115% bull market. Is there ever a point where anyone of these clowns will capitulate and show some humility? I mean Jesus Christ do these idiots realize how fucking foolish they are for being so wrong and yet continually run their mouth? Just shut the fuck up and be humble. These guys are so sickening with their dogma and self righteousness and I'll say it again...it doesn't matter now if the market peaks shortly and goes into a bear market - the damage that the Prechters and the Hussmans out there have done to their followers is far too severe to make up for being "early".
Here's an article by Roger Arnold from Realmoney.com about today's fed move. I'm by no means an expert in this kind of stuff but it's an interesting take as opposed to the consensus fed bashing that I see out there
"The Federal Reserve's announcement Thursday that it will purchase $40 billion of mortgage-backed securities on a monthly basis was a brilliant move. This is not just QE3; it's the beginning of QEX.
Here's an article by Roger Arnold from Realmoney.com about today's fed move. I'm by no means an expert in this kind of stuff but it's an interesting take as opposed to the consensus fed bashing that I see out there
"The Federal Reserve's announcement Thursday that it will purchase $40 billion of mortgage-backed securities on a monthly basis was a brilliant move. This is not just QE3; it's the beginning of QEX.
The Fed has essentially stepped into the breach in the banking and mortgage markets and promised to become the dominant buyer of mortgages. This move is not about mortgage rates; it's about liquidity for the banks. This has had immediate impact on Wells Fargo (WFC) and Bank of America (BAC) because they are the dominant mortgage originators.
Since the subprime crisis of 2008, the mortgage market has been in disarray. No matter how low mortgage rates have been pushed to stimulate bank lending, the effort has been thwarted by concerns about the potential liabilities of making and holding mortgages. The mortgage market is essentially a game of hot potato where banks originate loans and then repackage them into bonds to sell to investors. The key is not holding the loans and not having the loans put back after the sale for some underwriting mistake.
Since 2008, though, banks have been reticent to move back into the mortgage origination market for fear of opaque Dodd-Frank rules, Fannie and Freddie putbacks of previously originated mortgages, potential actions by the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, as well as more legislation from Congress. These issues have spooked everyone involved down the chain of mortgage origination, including buyers of the bonds.
For the mortgage market to be healthy there has to be liquidity, and that is predicated by two primary events on either end of the mortgage market: demand for mortgages by homebuyers and investor demand for bonds backed by those mortgages. Everything else involves the mechanics of meeting those two demands at either end of the mortgage-industry spectrum. The relationship between these two kinds of demand and liquidity in the market is synergistic and symbiotic. Both are necessary for the mortgage market to function.
Up until today, the Fed's actions have been focused on the cost of capital and getting mortgage rates down to stimulate homebuyer activity. But these buyers have then run into obstacles in loan underwriting. Lenders have made qualifying for a mortgage difficult because of fear of regulators and because demand for mortgage-backed securities was low. The lenders did not want to originate loans they couldn't sell, and bond buyers didn't want to buy bonds in an illiquid market.
Today, the Fed has single-handedly alleviated both fears by stepping up to be the dominant buyer of mortgages. This is going to allow the banks to start becoming less restrictive with loan-underwriting criteria because they know they have a buyer for the mortgages. It will also pull the sidelined bond buyers in because they know they have the Fed to provide the liquidity. The increase in demand and liquidity of mortgage-backed securities will drive down mortgage spreads to treasuries, which will drag mortgage rates down by 0.25% to 0.50% from current levels, and maybe more.
A working mortgage market sets the stage for the beginning of a recovery in housing and the economy. Once under way, that will allow the banks to address residual issues with nonperforming loans and real estate owned (REO)."
Wow, this sounds like serious shit. We all know that housing in the US has been a drag on the economy and given the recent signs of life in housing, this plan by Bernanke to jump start the mortgage market is perfectly timed. Now, I'm by no means an expert in the housing or mortgage situation and like I said I'm sure you can find plenty of pundits who will dismiss this recent move by Bernanke. I'm not going to hang my hat on the potential benefits of QE3 like Arnold claims in the above article...I just thought it was an interesting and refreshing for once to see a bullish perspective on Bernanke's action.
Have you noticed how so many stock market "traders" hate Bernanke? I saw a post today on the message boards that said "I hope Ben get's hanged". Wow. One thing I commonly see are criticisms of Bernake for punishing savers and causing commodities inflation. All of this hate is not due to "moral hazzard" concerns it's due to one thing: sour grapes for losing money shorting the market or being on the sidelines missing out. Anyone who traders/invests in the market does so for one reason: making money and so why are so many traders on message boards griping about what interest rate savers are getting? It's just pathetic sour grapes for getting their asses handed to them. And far as commodity inflation goes, if you're so damn critical about Bernanke's policies why don't you load up on commodity stocks and make money instead of whining? STFU already. The bottom line is this...if most people were making money with this rising market (as what's normally supposed to happen but not anymore because we're in bizzaro world) you would not see such complaining and hatred towards the fed. The truth is, so many people, the majority it seems, have bought into the zerohedge doomsday propaganda both financially and intellectually and their wallets and egos have been wounded big time for this sheep-like behavior much like they were in the late 90's when they bought into the "new era" hype.
I'll be the first to admit that I haven't correctly called every up and down in this market but I have played the long side exclusively since the summer of 2009 because I refuse to be on the same side as these pathetic whiners who wake up everyday hoping for the end of the world just so they don't feel so bad about their miserable existence. I know that these losers can't be right and so that means doing the opposite of them is the correct play and it has been. But having said this, I'm still willing to play the short side now instead of just going to cash as a defensive measure. I will only do so however if conditions are ideal...when in doubt I will simply raise cash if I have concerns. I am also very aware that my great hostility toward these loser bears tonight could be a ST contrarian indicator! lol! Well, I have no problem fading myself....I've done so before!
As far as the market goes, when it makes a surge to a fresh multi-year high like this, you tend to see further ST upside even when it gets ST overbought. I will never short a market that makes a fresh 52 week high yet a multi-year one no matter how tempting. One of the things I wrote in my "trading bible" is this "a market that makes a fresh 52 week high/low is a powerful signal and will likely keep making new highs/lows." I realize that chasing the market after a move like this is difficult to do and if you refuse to that's fair enough, but don't short it either.
I found it interesting how coming into today's session sentiment showed NAAIM reducing their long exposure a bit while AAII still remained neutral. That to me indicated that there was still room for more upside and boy did we get it! As far as my decision towards hwo.to goes, I decided to pull the trigger and buy more and did so in the morning at 1.75. I'm confident enough in the company to be very overweight the stock and I figured given today's sentiment readings the market was at least another week or 2 away from making any kind of ST/IT peak. I may very well end up hedging my longs in the in the next 1-2 weeks though.
Wednesday, September 12, 2012
What to do with hwo.to
I've been wrestling with myself about hwo.to. I mentioned how this is my largest holding which comprises about 1/3 of my account now. Keep in mind, I did not initially bet 1/3 of my capital on this stock (which I think crosses the line as being reckless) ...I bet about 20% and it has now grown to 1/3. I am contemplating adding more to the stock. Here's the issue...I have been looking at a lot companies recently and although there's a couple interesting ones, I can't find any that can match hwo's fundamentals both with respect to defensive features (price to book value, quality of the balance sheet) and growth prospects.
This stock reminds me a lot of bev.to (a big winner I had in early 2010) in that despite the upward progress in the stock it's still fundamentally cheap on a book value and p/e basis with what appears to be very good earnings viability. With bev.to they had a government contract in place which guaranteed a fairly certain range in EPS in the subsequent quarters and based upon those numbers, the stock price was quite undervalued. It was almost too good to be true and I kept wondering if I was missing something...shouldn't the market "know this" I said? Well, it turns out I was dead right and the market isn't as efficient as they claim in the finance textbooks after all (thank God for that). The stock went from .50 where I bought it to 3.45 in only 7 months and I top ticked that SOB. My only regret is...you guessed it...I should have bought more. I made out pretty good of course, but I didn't take full advantage of the opportunity.
Now here we have hwo.to. It's somewhat of a similar situation to bev.to prior to it's meteoric rise. It's trading a bit above book value despite having contracts in place that makes it reasonably certain their book value will grow substantially in the coming quarters. The company has contracts in place until the end of 2013 that are applicable to 2/3 of their exiting revenue stream. Given this, I conservatively estimate that by the end of 2013 the book value per share will rise from current the current $1.60 to $2.60. A reasonable multiple to book value of 1.5 gives you a price target of $3.90.
What are the risks? Unlike with bev.to where their contract was with the Canadian government which meant zero chance of customer default risk and zero political risk, hwo does have these risks. They derive 2/3 of their revenue stream (which I mentioned is contracted until the end of 2013) from one single customer which operates in PNG. So if anything should bad happen to this customer, hwo would be seriously harmed. Next you have the third world country of PNG which presents a significant political risk. Right now though, their main customer is in great shape financially and their stock price just hit an all time high. The political environment in PNG is stable at the moment although that could easily change.
The other risk is in regards to the remaining 1/3 of their revenues which is primarily tied to the Canadian natural gas market. Despite low gas prices, the company has been able to thrive because of the producer focus on natural as liquids (NGL). However, this summer NGL prices have come down substantially. This poses a threat to hwo but based upon a discussion I had with an industry expert, despite the drop in NGL prices, Canada's premier NGL play in Montney is still economical. In addition, pretty much every service company is Canada has been focusing on oil plays which has allowed hwo to increase it's market share in gas. Even if there is no growth in Canadian operations for the next year, the booming business in PNG will more than make up for the slack.
There are also significant upside opportunities in both in PNG and Canada. Their main customer in PNG is a part owner of a LNG terminal which is set to start making deliveries in 2014. Based upon recent discoveries, they are now considering expanding the project and that means more growth potential for hwo. The company also hinted that in 2013 there may be opportunities for new customers in PNG as well. In Kitimat BC, we are awaiting a decision before year end as to whether the proposed LNG terminal is go. If it is, and I think it will be, that would result in a significant benefit to nat gas producers although the impact would not be felt immediately.
So, WTF am I do here with hwo? Do I press my position by adding more and put myself at risk having too much exposure to one stock? It's starting to break out now and so now I will have to chase the stock a bit if I want to add. I hesitated when the stock was a 1.65 a month ago. This morning it's at 1.91 although only a measly 1200 shares caused that print....it should come back to 1.80 unless we see bigger buying at 1.91. By the end of the day I'm going to make a decision as to what to do.
This stock reminds me a lot of bev.to (a big winner I had in early 2010) in that despite the upward progress in the stock it's still fundamentally cheap on a book value and p/e basis with what appears to be very good earnings viability. With bev.to they had a government contract in place which guaranteed a fairly certain range in EPS in the subsequent quarters and based upon those numbers, the stock price was quite undervalued. It was almost too good to be true and I kept wondering if I was missing something...shouldn't the market "know this" I said? Well, it turns out I was dead right and the market isn't as efficient as they claim in the finance textbooks after all (thank God for that). The stock went from .50 where I bought it to 3.45 in only 7 months and I top ticked that SOB. My only regret is...you guessed it...I should have bought more. I made out pretty good of course, but I didn't take full advantage of the opportunity.
Now here we have hwo.to. It's somewhat of a similar situation to bev.to prior to it's meteoric rise. It's trading a bit above book value despite having contracts in place that makes it reasonably certain their book value will grow substantially in the coming quarters. The company has contracts in place until the end of 2013 that are applicable to 2/3 of their exiting revenue stream. Given this, I conservatively estimate that by the end of 2013 the book value per share will rise from current the current $1.60 to $2.60. A reasonable multiple to book value of 1.5 gives you a price target of $3.90.
What are the risks? Unlike with bev.to where their contract was with the Canadian government which meant zero chance of customer default risk and zero political risk, hwo does have these risks. They derive 2/3 of their revenue stream (which I mentioned is contracted until the end of 2013) from one single customer which operates in PNG. So if anything should bad happen to this customer, hwo would be seriously harmed. Next you have the third world country of PNG which presents a significant political risk. Right now though, their main customer is in great shape financially and their stock price just hit an all time high. The political environment in PNG is stable at the moment although that could easily change.
The other risk is in regards to the remaining 1/3 of their revenues which is primarily tied to the Canadian natural gas market. Despite low gas prices, the company has been able to thrive because of the producer focus on natural as liquids (NGL). However, this summer NGL prices have come down substantially. This poses a threat to hwo but based upon a discussion I had with an industry expert, despite the drop in NGL prices, Canada's premier NGL play in Montney is still economical. In addition, pretty much every service company is Canada has been focusing on oil plays which has allowed hwo to increase it's market share in gas. Even if there is no growth in Canadian operations for the next year, the booming business in PNG will more than make up for the slack.
There are also significant upside opportunities in both in PNG and Canada. Their main customer in PNG is a part owner of a LNG terminal which is set to start making deliveries in 2014. Based upon recent discoveries, they are now considering expanding the project and that means more growth potential for hwo. The company also hinted that in 2013 there may be opportunities for new customers in PNG as well. In Kitimat BC, we are awaiting a decision before year end as to whether the proposed LNG terminal is go. If it is, and I think it will be, that would result in a significant benefit to nat gas producers although the impact would not be felt immediately.
So, WTF am I do here with hwo? Do I press my position by adding more and put myself at risk having too much exposure to one stock? It's starting to break out now and so now I will have to chase the stock a bit if I want to add. I hesitated when the stock was a 1.65 a month ago. This morning it's at 1.91 although only a measly 1200 shares caused that print....it should come back to 1.80 unless we see bigger buying at 1.91. By the end of the day I'm going to make a decision as to what to do.
Friday, September 7, 2012
Delicate Balances
So much for that tight range....and low and behold GOOG has made it's breakout....I was 1 week too early! Timing is indeed everything especially with options and there's no difference between being wrong and being too early when it comes to options.
I was going to talk a bit about what Draghi said yesterday but I'm getting sick of fixating on the day to day central bank drama. It's causing me to lose focus. I've touched upon some important sentiment indicators that have been "holdouts" with respect to the market making a ST/IT peak. One of them has been money flows. Last night I was surprised to read that there was a $6 Billion outflow reported. Since the June lows, fund investors have not even remotely embraced the market and now we have a market that has made a new 4 yr high and yet they still shun it. That's a LT bullish sign. Next we have AAII sentiment which showed a neutral reading of 1:1 bulls vs bears - nowhere near what you see at ST/IT tops. These guys have been fighting the rally as well. I realize other indicators like Rydex, NAAIM and insider activity do suggest the market is toppy but I have a hard time betting on the short side for a swing trade when I see those important holdouts that I just discussed. I might take a stab at a quick downside play if the market gets ST overbought though.
This is around the time of the year when stocks exit from their summer doldrums and as a result I started scanning the TSX stock list and I have already uncovered a few potential candidates. I look for small cap stocks that are trading a great values (p/bv <1.5), low debt and positive business momentum (ideally, an early turnaround story). If I see any good candidates I'm going to pull the trigger with a starter position with upto 60% total longs exposure. I have plenty of cash on hand and I can always hedge away market risk.
Switching gears now, I want to share a story. A couple of years ago a good friend of mine confessed to me how he lost over $100,000. He committed pretty much every cardinal sin you could make in this game. He put all his capital in Fannie Mae stock (greed). He bought it solely on the notion that nothing could go wrong given that the US government was backstopping it (ignorance). The stock dropped over 50% from where he bought it a couple months later. It gets worse. The money he was playing with was borrowed money. It gets even worse. The borrowed money was from a credit card that had a 6 month teaser rate. When my friend told me about this my jaw hit the floor. Not only was I shocked about his losses and the stupidity of the trade, I was was equally taken with how he never consulted me about it. He has little knowledge about the markets and although I'm no Warren Buffet, he knew very well about my experience and expertise and knows I do this for a living. When I asked him why he didn't consult with me first he said he wanted to be responsible for his own decision. I know he's a proud guy but I think the real reason was that he was so blinded by greed that he didn't want anyone to try and persuade him out of the trade which he knew I would.
There's few avenues like the stock market which allows for unlimited financial potential. I play the market for a living and so I intend to make the most out of it. I'm not interested in making a few percentage points a year....I want to make big money but I'm fully aware of the pitfalls in doing this. Most people get attracted to the market because of the lure of unlimited riches. Unfortunatley, most people fail largely due to greed and ignorance like my friend did. People want to get rich quick and their greed blinds them from rational thinking and it's just a matter of time before such people blow up their account. Having said that though, if you want to make big money you do have to be aggressive at times and have the courage of your convictions. At the same time though, you can't be reckless. Putting all your capital in one stock like my friend did is reckless and borrowing money to do so is reckless squared. At the same time though, if you spot a rare opportunity through sound analysis (not ignorance) you need to be take full advantage of it and be aggressive but how much is too much? There's a delicate balance between conviction and discipline (prudence). This is a balance that I struggle with at times...knowing what exactly is the optimal amount of capital commitment I should have with a position given what I believe are the risk/reward parameters. I suppose you can never know what exactly is optimal because you can't really know for sure what the risks and rewards actually are. But no matter how strongly you feel about something, you can't put yourself in a position where if you get it wrong you get badly crippled or wiped out....this is what I mean by discipline - tactics to ensure you remain in the game when you get it wrong.
Here's my philosophy when it comes to aggression when you have a conviction. Make a larger than normal bet...say 15% of your capital to start off with a position. DO NOT average down if the price drops. Add only if the price moves up. This is valid for 2 reasons. 1) The market is suggesting you are right 2) You are in a position of strength for now you will have a larger amount committed with an avg cost basis below the market price. So, if things go wrong you will probably be able to exit the trade with little or no damage done whereas if you average down and you get it wrong you're fucked.
I was going to talk a bit about what Draghi said yesterday but I'm getting sick of fixating on the day to day central bank drama. It's causing me to lose focus. I've touched upon some important sentiment indicators that have been "holdouts" with respect to the market making a ST/IT peak. One of them has been money flows. Last night I was surprised to read that there was a $6 Billion outflow reported. Since the June lows, fund investors have not even remotely embraced the market and now we have a market that has made a new 4 yr high and yet they still shun it. That's a LT bullish sign. Next we have AAII sentiment which showed a neutral reading of 1:1 bulls vs bears - nowhere near what you see at ST/IT tops. These guys have been fighting the rally as well. I realize other indicators like Rydex, NAAIM and insider activity do suggest the market is toppy but I have a hard time betting on the short side for a swing trade when I see those important holdouts that I just discussed. I might take a stab at a quick downside play if the market gets ST overbought though.
This is around the time of the year when stocks exit from their summer doldrums and as a result I started scanning the TSX stock list and I have already uncovered a few potential candidates. I look for small cap stocks that are trading a great values (p/bv <1.5), low debt and positive business momentum (ideally, an early turnaround story). If I see any good candidates I'm going to pull the trigger with a starter position with upto 60% total longs exposure. I have plenty of cash on hand and I can always hedge away market risk.
Switching gears now, I want to share a story. A couple of years ago a good friend of mine confessed to me how he lost over $100,000. He committed pretty much every cardinal sin you could make in this game. He put all his capital in Fannie Mae stock (greed). He bought it solely on the notion that nothing could go wrong given that the US government was backstopping it (ignorance). The stock dropped over 50% from where he bought it a couple months later. It gets worse. The money he was playing with was borrowed money. It gets even worse. The borrowed money was from a credit card that had a 6 month teaser rate. When my friend told me about this my jaw hit the floor. Not only was I shocked about his losses and the stupidity of the trade, I was was equally taken with how he never consulted me about it. He has little knowledge about the markets and although I'm no Warren Buffet, he knew very well about my experience and expertise and knows I do this for a living. When I asked him why he didn't consult with me first he said he wanted to be responsible for his own decision. I know he's a proud guy but I think the real reason was that he was so blinded by greed that he didn't want anyone to try and persuade him out of the trade which he knew I would.
There's few avenues like the stock market which allows for unlimited financial potential. I play the market for a living and so I intend to make the most out of it. I'm not interested in making a few percentage points a year....I want to make big money but I'm fully aware of the pitfalls in doing this. Most people get attracted to the market because of the lure of unlimited riches. Unfortunatley, most people fail largely due to greed and ignorance like my friend did. People want to get rich quick and their greed blinds them from rational thinking and it's just a matter of time before such people blow up their account. Having said that though, if you want to make big money you do have to be aggressive at times and have the courage of your convictions. At the same time though, you can't be reckless. Putting all your capital in one stock like my friend did is reckless and borrowing money to do so is reckless squared. At the same time though, if you spot a rare opportunity through sound analysis (not ignorance) you need to be take full advantage of it and be aggressive but how much is too much? There's a delicate balance between conviction and discipline (prudence). This is a balance that I struggle with at times...knowing what exactly is the optimal amount of capital commitment I should have with a position given what I believe are the risk/reward parameters. I suppose you can never know what exactly is optimal because you can't really know for sure what the risks and rewards actually are. But no matter how strongly you feel about something, you can't put yourself in a position where if you get it wrong you get badly crippled or wiped out....this is what I mean by discipline - tactics to ensure you remain in the game when you get it wrong.
Here's my philosophy when it comes to aggression when you have a conviction. Make a larger than normal bet...say 15% of your capital to start off with a position. DO NOT average down if the price drops. Add only if the price moves up. This is valid for 2 reasons. 1) The market is suggesting you are right 2) You are in a position of strength for now you will have a larger amount committed with an avg cost basis below the market price. So, if things go wrong you will probably be able to exit the trade with little or no damage done whereas if you average down and you get it wrong you're fucked.
Wednesday, September 5, 2012
Treading water
Right now is a tricky spot for the market. On one hand I see signs that the market is "tired" and some sort of multi-week shakeout is forthcoming; on the other hand I still see trapped bears and top pickers who keep waiting for that pot to boil, but as they say, a watched pot never boils! I talked about Rydex and NAAIM and how they have been warning about an impending "one last scare" in the market. So far no dice on that but they have become even more bearish for the market as NAAIM now shows 83% net long exposure which is the highest net long exposure year to date. I have found that NAAIM sentiment is better at calling bottoms than tops though. There have been times when high long exposure led to immanent corrections while other times the market remained "sticky" to the upside and grinded higher for several more weeks before a correction finally ensued. But clearly, going long with NAAIM at 83% is not what you call an ideal entry point. Ideal entry points are when it goes sub 30%. One money flow indicator that has been bullish for the market is inflows into mutual funds/ETFs. They have been quite muted during this rally off the June lows.
It seems to me that for the market to get any downside traction we will have to get to the point of maximum frustration for all players whereby trapped bears and top pickers finally throw in the towel in disgust (moronically blaming the fed for "rigging the markets of course), while some sidelined investors itching to get in on a "pullback" lose patience and chase.
On the Macro front, we got the pending ruling in Germany regarding the legality of ECB bailout fund on the 12th and the fed meeting the day after whereby QE3 may be announced. So, it wouldn't be surprising to see the markets continue this tight range for another week torturing traders even more.
As far as my current holding are I only have 1 right now - hwo.to. This has been my largest holding all year and my most successful (it has grown to now compose 30% of my account). I can be a strong holder no matter what the markets do given their company specific fundamentals and rock solid balance sheet. I realize this is a large concentration which goes against my rules but I'm willing to make the exception given my convictions, the safety of the balance sheet and my offsetting cash position.
With 4 months to go before year end I'm up only 7.5% YTD. A lot of people might say that's not too shabby but I'm certainty not satisfied with that. I've had a real stinker in fmc.to which dragged me down about 3.5% but hey, shit like that is gonna happen from time to time. My accumulation rule of only committing 5-10% of capital to start a position and never averaging down mitigated my wrong decision to buy the stock. I realize that with my primary style of "buy and hold" with small illiquid small caps I can see my performance dramatically improve with just a few good days but it can also work in reverse. Right now my fate is solely dependent on hwo.to. Although I'm confident in the company I'm uncomfortable riding on just one horse like this. My YTD gains can be wiped out if there's a big pullback in the stock. I need to find more opportunities. As I've said before, I'm willing to engage in ST trading opportunities but I can't "force it". The moment you try to force the market into giving you money you will quickly find yourself giving your money to it. If there's none for the taking, then so be it. Wait as long as it takes for your pitch. This is the time of year when I start hunting for small cap names in TSX. Hopefully I will uncover some gems.
I want to talk a little bit about convictions. I believe that in this game if you want to make big money you gotta bet big when you have a strong conviction (but you can't be reckless). A lot of people I'm sure will disagree and say you gotta grind it out but I have realized that fortunes can be made if you are early in identifying some major macro theme or company specific story and bet big. Imagine if you bought in size and held gold stocks in 2001, energy stocks in 2003, Apple in 2009. But alas, very, very few people did this. I'm sure those few who had the courage to bet big, sold far too early while those few who managed to "buy and hold" only did so with a small amount of money. Early in my "career" I was guilty in not only failing to bet big when I had a strong conviction but also failed to sit tight as well. Chalk that up to lack of confidence and emotions. I still have not mastered the "be right and sit tight" mantra eschwed by Livermore but I'm getting better.
It seems to me that for the market to get any downside traction we will have to get to the point of maximum frustration for all players whereby trapped bears and top pickers finally throw in the towel in disgust (moronically blaming the fed for "rigging the markets of course), while some sidelined investors itching to get in on a "pullback" lose patience and chase.
On the Macro front, we got the pending ruling in Germany regarding the legality of ECB bailout fund on the 12th and the fed meeting the day after whereby QE3 may be announced. So, it wouldn't be surprising to see the markets continue this tight range for another week torturing traders even more.
As far as my current holding are I only have 1 right now - hwo.to. This has been my largest holding all year and my most successful (it has grown to now compose 30% of my account). I can be a strong holder no matter what the markets do given their company specific fundamentals and rock solid balance sheet. I realize this is a large concentration which goes against my rules but I'm willing to make the exception given my convictions, the safety of the balance sheet and my offsetting cash position.
With 4 months to go before year end I'm up only 7.5% YTD. A lot of people might say that's not too shabby but I'm certainty not satisfied with that. I've had a real stinker in fmc.to which dragged me down about 3.5% but hey, shit like that is gonna happen from time to time. My accumulation rule of only committing 5-10% of capital to start a position and never averaging down mitigated my wrong decision to buy the stock. I realize that with my primary style of "buy and hold" with small illiquid small caps I can see my performance dramatically improve with just a few good days but it can also work in reverse. Right now my fate is solely dependent on hwo.to. Although I'm confident in the company I'm uncomfortable riding on just one horse like this. My YTD gains can be wiped out if there's a big pullback in the stock. I need to find more opportunities. As I've said before, I'm willing to engage in ST trading opportunities but I can't "force it". The moment you try to force the market into giving you money you will quickly find yourself giving your money to it. If there's none for the taking, then so be it. Wait as long as it takes for your pitch. This is the time of year when I start hunting for small cap names in TSX. Hopefully I will uncover some gems.
I want to talk a little bit about convictions. I believe that in this game if you want to make big money you gotta bet big when you have a strong conviction (but you can't be reckless). A lot of people I'm sure will disagree and say you gotta grind it out but I have realized that fortunes can be made if you are early in identifying some major macro theme or company specific story and bet big. Imagine if you bought in size and held gold stocks in 2001, energy stocks in 2003, Apple in 2009. But alas, very, very few people did this. I'm sure those few who had the courage to bet big, sold far too early while those few who managed to "buy and hold" only did so with a small amount of money. Early in my "career" I was guilty in not only failing to bet big when I had a strong conviction but also failed to sit tight as well. Chalk that up to lack of confidence and emotions. I still have not mastered the "be right and sit tight" mantra eschwed by Livermore but I'm getting better.
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