Farwell 2013

I've never been so sick during the holidays as I have been. It's been 3 weeks of off and on colds including what I think was the flu last week and I still have this annoying cough that won't go away. I ended the year with a 32% gain and just like I said last year at this time, I'm not satisfied with this gain.  I don't say this out of arrogance or greed but because like last year, I don't believe my holdings; in this case Greenstar, is anywhere close to being properly valued despite making gains on the year. If the stock just traded at 3 times 2013 earnings at year end,  it would be at $1.30 which would have resulted in a 58% gain instead.

I've been trading/investing full time since the start of 2009 which makes this 5 years. I've averaged an annual rate of return of 25% during this time. My goal was to achieve an average return of 30%+  and so I fell short of my goal. I think I know why. The main reason was lack of conviction early on. For most of 2009 I was sitting primarily in cash as I didn't have much conviction on either side of the market but around summer time I became LT bullish and felt more comfortable doing the buy and hold thing. I ended that year up only 14% and I really missed out on some of the low hanging fruit. There was some staggering gains in some metals and materials small cap stocks I had on my watchlist but I failed to pull the trigger. I did really well with bev.to which I purchased in Sept 2009 and sold in March 2010 but I should have bought a lot more shares that I did. 2010 was my best year as I had a 50% gain largely due to bev.to but as I said, if I had more conviction that could have easily been a 75%+ year. 

Despite the healthy gains I've made, it hasn't always been a bed roses. Throughout these 5 years there's been ups, downs, boredom, excitement, frustration, despair and even tears. Due to my concentrated style, especially the past 2 years, I've been on several roller coaster rides and let me tell you, I fucking hate roller coasters. I haven't been on a real one for over 20 years. The swings I went through however, where not going from -10% to +15% type swings, it more like +40% to +15% type. 

I usually review the good the bad and the ugly for the year that has passed but I'm going to do so this time in regards to the past 5 years.

The good

Over the past 5 years I have achieved strong annual returns every year without any down years blowing away the performance of the TSX and probably over 90% of the hedge fund universe.  Although account volatility was high (which was to be expected given my approach), I didn't have downside volatility i.e. I was never in the red during the year aside from minor losses early in a couple of years (< 5%) .  I was able to have success all on my own. I followed nobody else's trades. I'm proud that in 2011 I returned  24% while most world indices had negative returns.  I did very well in avoiding losses. The biggest loss on any one position that I took was about 4% of my account value which is pretty low considering that I take concentrated positions. I have learned and developed over these years and found my niche which is micro cap value investing.

The bad 

As good as my numbers are they could have been better....a lot better have I had more conviction at times especially in the earlier years. My cash position was probably too high during these past 5 years. On average I would say that my cash position was 40%. When you have a concentrated portfolio I think it's wise to have significant cash on hand as a  reserve in case one of your positions get's  blown up but I definitely think I held too much cash. I think I also got too comfortable and lazy at times with holding only a few positions as I felt there was no need to look for other opportunities.

The ugly 

I missed out on some really big winners because I either hesitated too much or was too picky with my conditions for entry. I made some undisciplined moves, namely overtrading when I should have been patiently holding. I have put myself under unnecessary emotional stress and wasted lots of time by watching my positions intraday several times a day like a day trader would. I didn't do this every day but often enough for it be a significant problem. This is something that must stop.

Going forward my goal is to once again get above the 30% return mark. I want to do better, but I know after a 5 year bull run, it's going to be harder to find the type of long side opportunities that I uncovered which made me a lot of money. I use a value approach but I'm in no way locked into any one style of investing/trading. The whole point of being in the market is to make money and I will do so in a way I believe gives me the bets odds given the conditions that are present. When conditions change I need to adjust accordingly.

I'll talk about the 2014 outlook next post.

Santa says hwo! hwo! hwo! Merry Christmas!

hwo.to  has been on a tear because of a series of promotional mentions. First it was Jason Donville which sent the stock over $3 for a while before it later pulled back but then it got coverage by a couple of CDN firms a few weeks later with price targets of $4+ and another mention on BNN by some other guy. Is this additional attention a co-incidence or are people riding the coat tails of  Donville, who right now is one of the gurus du jour here in Canada? You know what? I don't care. This is a gift and I will gladly receive it.  I've been selling into this strength and I really stepped up the selling Friday as the stock had a big surge. I'm only left with a residual position at this point which I will unload if the stock opens higher Monday. Here's the thing about hwo. The stock is by no means overvalued but unless they win new business, the next few quarters will be flat at best...they will probably show a bit of softness. Long term though, the company should do very well given their presence in PNG. So while it's nice that hwo is finally getting some well deserved recognition, these kind of promotional surges run a high risk of being short lived if there's nothing exciting in the way of news/fundamental developments. The stock is now overbought on a daily and weekly basis which in the past led to IT tops. Given all the above, I just had to ring the register here with this spike.

At one point hwo represented 55% of my portfolio. I bought my first shares 2 years ago at $1.20. My average cost was $1.45 and I received lots of dividends along the way. Although I got partially shaken out at $2, the stock has been very good to me and the bulk of my position was sold above $3. For a company that has been producing solid, consistent results, it was often unbearably volatile. Last year at this time the stock was tanking hard for no apparent reason giving me great grief. This time around the stock has surged giving me a euphoric feeling and I so I think I'm doing the right thing fading myself here. If the stock keeps surging without me, it's obviously going to suck but as I've been saying for some time, my conviction level with hwo has declined this year and I can't be a strong holder anymore at these prices. It's important to be disciplined and not let greed (and fear) get the better of you.

I will definitely continue to keep close tabs on hwo because I still believe the company and the stock has a great LT future...I just think the risk/reward equation for the next 6-12 months makes it worth selling. I will look to redeploy the proceeds of this sale elsewhere.

Thank you Donville and others for the early Christmas gift!

Sour grapes and Sentiment

I've noticed a lot of articles lately warning about how the market is showing bubble characteristics and may be near its end. A common observation to support this view is the large inflows into equities this year and since retail is always late to the party, it signals a bull market peak is immanent. Trimtabs reported that this year has shown the largest inflows into equities since 2000 and so this must have ominous implications. I will argue that these worries are premature and it seems so many of the top callers out there have sour grapes for missing the bull market.

I clearly remember the bearishly inclined pointing out a couple years back how the market was rising without the participation of retail investors which meant that the bull market was "phony"and not sustainable. I argued just the opposite - that this was very bullish for the market given that bull markets don't end until retail has fully embraced it. Now that we are seeing retail get back into the market the doomers  argue that retail are sheep.  So, according to them it was bearish when retail wasn't participating and it's now bearish that they are! Lol! So pathetic. You know what doomers? Just shut the fuck up already and be humble for once.

Anyhow, back to the strong inflow situation. The inflows we have seen this year large as it may be,  is following 4-5 years of heavy OUTFLOWS and so this by no means suggests retail has fully embraced the bull market. It shows instead budding optimism after several years of deep pessimism. It is perfectly normal to see a bull market accompanied by optimism and hence strong inflows for years prior to its peak. That's what happened all throughout the 1990's bull market and the 2003-2007 bull market. But this has been no normal bull market.  I have often referred to the situation as bizzaro world because the wounds from 2008 cut so deep. This is why it took so long for retail to get back into the market. Are they late to the party? We will see. I suspect there are some Johnny come latelys and a shakeout is forthcoming but history shows that 1 year's worth of inflows does not suggest an immanent bull market peak, especially when there was 5 years of outflows prior to it.

Assessing sentiment is more of art than a science. You have what I like to call "ST sentiment" which is relevant to the outlook for the next 1-4 months  and "LT sentiment" which is relevant to the LT trend of the market i.e. whether it's in bull or bear mode.  A good way to think about it is like this: ST sentiment is the equivalent to the position of the earth's daily rotation and LT sentiment is like the position of the earth's orbit around the sun. Indicators I often mention such as AAII sentiment and weekly fund flows are ST sentiment indicators. Often times I see people incorrectly using these type of ST sentiment indicators to gauge the LT condition of the market. Currently the ST sentiment indicators which includes the recent surge in inflow the doomers are griping about is signaling there is over-exuberance that makes the market vulnerable in the ST but not the LT. And like I said last post, it's possible for a market in bull mode to still make significant headway when ST sentiment is redlining like this (but when the correction does come it wipes out all those gains made) which is why timing ST tops in bull markets is often very difficult.

The following chart is what I believe, an accurate picture of what LT sentiment looks like right now. It shows investor's  "risk appetite". I love this indicator not only because of its great track record and that it's under the radar, but also because it takes into account 46 economic inputs.

As you can see, we are just edging into the risk seeking  phase i.e. optimism phase of the bull market. As you can also see, in prior bull markets, risk appetite was well in the risk seeking part of the chart for years until the bull market peaked which at that point investors became risk loving (greedy) along with a tight money (inverted yield curve) situation -  the lethal combination that kills bull markets.

There are some pockets of froth out there such as some of the internet and social media stocks but overall, the above chart shows we are still comfortably far from the point where investors are greedy on a  LT basis. This is also confirmed by the anecdotes I always mention. What's also notable about this chart is how extremely risk adverse investors were at the nadir of the financial crisis. It shows that went through a once in a century type storm and we are simply just starting to normalize.  But I must warn as I always do that these types of indicators are not ST market timing tools. I would have (and did)  made the same LT bullish case in mid 2011 just prior to the 20% drop in the market.

Keep your guard up

So much for the "sell in May and go away" strategy. I've never been a big fan of seasonality. At best, I will consider it a supporting indicator if it's giving the same message as the more important indicators I track. So, according to seasonality studies, the next 6 months are the favorable months to be invested in the market. Again, I will not hang my hat on such a view whatsoever. Right now, the ST sentiment backrop for the market is not good. The Rydex ratio, NAAIM, AAII and fund flows are all suggesting that there's too much ST exuberance in the market.There have been a few times in this bull market and in the bull market of 2003-2007 where ST sentiment gets this frothy but stays frothy for several more weeks with the market chugging higher, but when that did happen the correction that followed wiped out all those gains and then some. Bottom line here is that it's time to ring in the register and lighten up and/or put on some hedges. I've chosen to do the former for now.

I've lightened up significantly on my position with hwo.to for a few reasons aside from ST market concerns. The stock got a nice boost a couple weeks ago when a popular CDN  fund manager named Jason Donville spoke favorably about the company on BNN. This was the first time any so called "guru" mentioned hwo in years. Although the company continues to hum along well with its business making a healthy amount of profit, they are likely not going to show any growth vs last year. Although only 30-35% of  revenues are in Canada, its still gets under the pull of the CDN O&G service sector in general and according to my trusted source (a former CEO of a CDN service company) Q3 earnings for the service sector is poised to once again show a y-o-y decline in Q3. This sector has shown considerable weakness in earnings/cashflows this year which has made hwo's "flat growth" look stellar, but despite weak earnings most of the stocks in the sector have managed to post respectable gains so far YTD because of high hopes of the LNG related drilling that is expected to take place in Q4 and Q1. I'm not willing to take such a leap of faith with the stocks up on the year like this. If we see yet another weak quarter of earnings for the sector and the market in general gets under pressure, I don't see how people will look at the service sector as some sort of safe haven, if anything, it could get hit the hardest and so with hwo getting a well timed pump from Donville, I just had to ring the register given my heavy exposure and all the aforementioned concerns. It's a tough call because the stock is by no means fully valued; it can still very well go significantly higher if they announce some good news like an acquisition or new contract, but the stock is no longer the screaming bargain it was a year ago and it has a history of being very volatile and I doubt most of these "Donville buyers" are true believers of the company and therefore are not strong holders.

Greenstar has been drifting lower for the past month and I'm not surprised given what I believe is a supply overhang as I discussed in a recent post. There is no news or other fundamental issues to account for the weakness. Unlike with hwo, my conviction level for GRE remains very strong even with my ST concern about the market. At this silly valuation and given the outlook for GRE's earnings in the coming quarters, I know that time is on my side. The stock could very well continue to go lower in the ST, but simple mathematics indicate that the current price is unsustainable in the LT. Will I be annoyed, frustrated and start having paranoid concerns in the back of mind if the stock continues to slide? Of course, but that's the price you have to pay when you have a "pot committed" position. In the meantime though, I will collect a generous dividend.

Bank of Canada Statement

The bank of Canada today cut its Economic outlook. Here's the just of it

“Uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment, leaving the level of economic activity lower than the bank had been expecting". 

They downgraded their outlook for Canadian and US growth next year. They  said the threat of deflation is now greater than inflation and Canada would not be operating at full production untill the end of 2015 which is another way of saying they don't seen any inflationary pressures building.  As a result they dropped the "were gonna raise interest rates soon" threat they had been making for over a year, which I and probably a lot of others knew was bogus as they are pretty much handcuffed until the US moves first. 

This BOC statement says a lot. It's LT bullish for the market for it shows that we are nowhere close to seeing the classic signs of peak.  Towards the end of an economic expansion and thus bull market, the outlook from central banks and people in general is rosy, not sour like this.  More importantly, near the peak we start to see signs of "overheating" which results in rising inflation to the point where it becomes a concern for central banks and they respond by tightening interest rates. When they tighten to the point where the yield curve gets inverted it sows the seeds for the next recession. We are nowhere close to overheating as there remains a large output gap as BOC noted and money is far from being tight - it's at the opposite extreme. 

Now, just because monetary and economic conditions are still bull market friendly  does not mean the market can't have serious corrections. We saw such in 2010 and 2011. What it does mean is that you should continue to be a LT optimist and continue to look for long opportunities while ignoring the doom and gloomers. Of course, you should be mindful of corrections and not get greedy after the market has had such a large run. After all, big corrections do hurt and there's no guarantee that the bull market can't end until monetary conditions are tight. Trim into strength, raise cash, hedge if you must but don't put yourself in a position where you are net short. Always remember though that trends will always surprise people in their strength and duration and so very, very few people fully capitalize as they tend to get out too early. Even those broken clock bears who were right in being negative in 2008 did not come close to fully profiting from the collapse as most covered shorts around 1100 (according to my anecdotes).

The main purpose of the stock market is...

Surprise, surprise, the fear mongering over the government shutdown and debt ceiling turned out to be yet another non-event. I'll refrain from saying I told you so....oops I just did. Despite a "crisis" being avoided and the market hitting a fresh all time high, there is no joy out there. The media dismisses this deal as a band-aid solution and is hand wringing about how we will have to face the same political bickering early next year.

I've been involved in the stock market (at various degrees) for about 15 years now and I think I can say I've seen it all. From extreme euphoria in 2000 to extreme pessimism in 2009 and everything in between. I have learned a great deal during these 15 years both from experience and the wisdom of others. One of the most important lessons/truisms I've learned about the market is the motto of this blog. Take for instance this bull market we've been in. Over the past few years how many books, experts, articles in the business section, ect, suggested that you be an optimist about equities and load up? Instead, all the focus was on sovereign debt worries, slow economic growth, high unemployment, fed manipulation, ect, all of which suggested you stay away from equities. How profitable was it to listen to this message? And yet despite the market hitting all time highs, there is still a considerable resistance towards embracing any LT optimistic posture. The doomsdayer herd is still in denial, in fact, I'd say they are outright delusional at this point. How can you not concede defeat when the market has moved against you by such a humiliating amount for years now?

We have once again seen a spike in inflows and bullishness has sharply risen as per AAII and NAAIM, but I wouldn't say the bullishness is off the charts. The current situation in the market is tricky. You always have to respect price action when something makes new all time highs for it tends to signal great strength but the market is ST overbought again and there's been a surge in bullishness as mentioned which suggest the market is vulnerable again for another pullback, but I get the distinct feeling that a lot of "pros" even those who have been generally bullish, have been caught off guard by this market all year and have badly lagged the index. This to me suggests pullbacks will be relatively mild for the remainder of the year unless there's some really big negative surprise. I think the best course of action is maintain core positions and perhaps trim into this strength those positions that have not lived up to expectations. I have done that with CDH last week. I meant to discuss this company but after having a discussion with a former O&G CEO in Western Canada, I decided to sell it and was fortunate to get out at a marginal gain.

Update: I just read an article in the NP and I saw this comment

"The US just nearly averted the catastrophe last week by increasing the level of debt they can accumulate, allowing them to print more paper money which will buy them time (no pun..) before the next major deadline hits.

Everybody knows that its just a matter of time before the US economy, and most likely worldwide again, crashes face-first into the ground. Only THEN will things start to show signs of improvement. We still have to hit rock bottom before that happens though."

This comment shows the type of thinking that a lot of Main St. Joe Schmoes have about the economy. It's not a one off because I've seen many comments that are similar. If there's another major lesson I've learned over the years, and I've said this more than a few times before,  is that you have to fade Main St when they are in opposition of the market's trend (but be aware that this is not a ST market timing indicator).

Greenstar: The (almost) perfect investment opportunity

If someone asked me what would be the perfect investment opportunity I would say it would be a company that had a very stable, predictable business, more specifically a  non-cyclical business that would deliver consistent profits in good or bad times and has a product that is not at risk of  being obsolete - the types of companies Warren Buffet likes to own.  I would require that there be significant upside potential for earnings growth and a clean balance sheet with plenty of cash to fund such growth. I would also want the company to be operating in a politically stable and business friendly country like Canada or the US. Finally and most critical, I want to be able to buy at a steep discount to fair value. Such a list is wishful thinking. It's like searching for a girlfriend who looks like Angelina Jolie, has a perfect personality, is single and is willing to go out with you. But I may have just found the perfect investment specimen in  my top holding Greenstar (GRE) for it meets all the aforementioned criteria with the exception on one item.

GRE sells fresh produce, canned fruits and canned tomato paste which are always in demand rain or shine and will never go obsolete and while there may be fluctuations in pricing, their margins are so wide that they have delivered profits every single quarter for at least the past 4 years. The company has shown solid growth during recent years and has positioned itself for further growth going forward. It has an  immaculate balance sheet flush with cash and it trades at only trades at 2.5 times 2013 earnings and 70% of net assets - a ridiculous discount.  The only ""flaw""you can point out is that it's based in China and in addition to political risks, the stock may be trading at such a huge discount because of some frauds in recent years such as Sino Forrest. If GRE operated in Canada or the US then it would indeed be the perfect investment but here's the thing - the company would not be able to get the type of margins and growth they have been getting if they were in North America. Being in China is what allows them to be the cashflow machine that they are and so the operational advantage of being in China should offset a large portion, if not all, of the political risk of being in China. As far as the "fraud discount" goes, it is completely unwarranted for GRE to be painted with this brush and that's where rational investors can take advantage. GRE is legitimate. Their assets have been extensively verified by Canadian auditors who have visited their facilities and their bank branch in China. The business is also very simple and straightforward and therefore easy to verify. The main assets GRE has is leased farmland which has been additionally verified by an independent surveyor.

As a result of their operational success, GRE recently announced a 50% hike in their dividend starting next year (which gives the stock about a 6% yield ) and intends to acquire a tomato pulp producer (tomato pulp is the raw material they use to manufacture tomato paste). The company also rejected the proposed acquisition of another tomato pulp producer in which they signed a letter of intent back in May due to concerns discovered while conducting their DD. This rejected acquisition would have added significantly to GRE's q4 results. With this new acquisition, GRE won't see a significant impact to earnings until late next year which will probably result in about 25% growth. The advantage of this new acquisition over the other one  is that it has 45% more capacity and so GRE will have the potential to double its tomato paste production and do so with better margins. Since tomato paste production accounts for 50% of revenue, GRE therefore has the potential to increase total revenues by 50% from current levels with this acquisition. This probably won't happen until 2015 as GRE's processing facilities are running at full capacity and so they will need to expand them but as mentioned, the acquisition will still result in about 25% growth in 2014 although it will be back end loaded.

Despite all of this good news, the stock has not made any progress. This situation reminds me of hwo back in the summer when they announced a dividend hike and share buy buyback and the stock did nothing and languished near $2 because there was a supply overhang pressuring the stock. There are a couple of large sellers in GRE who are eager to sell large quantities at current prices and this is suppressing the price. I have a hunch as to where this supply is coming from and I think a good portion of the overhang has been gobbled up but these sellers still lurk. Overhangs like this can be frustrating and cause you to second guess yourself but there is no way I will be because the fundamentals are too strong and the valuation too cheap for me to be unhinged by any declines caused by this.

I have never come across a situation like this where the market gives you an opportunity to make what is as close as you can get to a sure profit if you can just have some patience and let time work in your favor. Imagine if this was a private company and you had the opportunity to buy it knowing that in just 2 years time you will have earned in profits an amount that will cover your cost of investment, not to mention you will be entitled to a pile of cash the company already has in the bank which can finance 40% of your investment cost. It would be the no brainier of century and the person who is selling you the business at this price is beyond an idiot. When it comes to making an "investment" you have to look at it this way. You have to be willing to buy shares without the need to sell to some greater fool in order to make money.

The main risk I see with GRE is if China has some sort of collapse which causes the value of the yaun to plummet vs the loonie. I see the odds of that happening quite low in the next few years although I'm sure guys like Jim Chanos feel otherwise. As far at the Sino Forrest effect goes, that will fade if the company continues to produce the types of results it has been producing and keeps increasing the dividend. Given the performance in the stock this year so far, people are indeed starting to slowly warm up to GRE but I think this is only just the beginning.

Red Herrings

We've gone from fixating about Syria and tapering to the government shutdown and debt ceiling. I've been saying here starting with the outbreak of the pig flu, that these types of one offs never end up derailing the market's current LT trend. They may cause ST declines but that's about it. Even the 911 attack which occurred in the midst of a major bear market only had a temporary impact as the market was able to recover those losses and more in 3 months. The reason why these things tend not to be important is because they don't have any significant or lasting impact on the economy and any economic contraction they may cause will quickly be recovered once the issue is resolved.  Also, fear motivates the authorities to take action and diffuse the problem especially in this post 2008 world.  We've had so many of these types of worries in the past few years and all of them turned out to be Red Herrings.

After the no taper rally the market got overbought again and we saw quite a large surge in inflows. That to me is the main reason we have seen the market pull back for when you have such a situation, the market becomes vulnerable no matter what the news flow is like. If history is any guide, pessimism will be quick to build in the coming days/weeks and the market will be in a better condition to make a rally attempt. Let's keep in mind here folks that the market has had one hell of a run this year and so some sort of a correction/consolidation would not be unusual. Of course, we never want to get complacent about such things, but like I've been saying for some time, the classic conditions for a bull market peak have not been seen and until such happens, be skeptical of the bear case but be mindful that scary corrections can indeed still occur.

Warriors

Last night I watched one of the best MMA fights I've ever seen. Light heavyweight champion Jon Jones fought challenger Alex Gustafsson in an epic battle. Jones edged him out in a close decision (which I think was deserved). Both fighters took beatings and both showed such tremendous heart and courage using every last ounce of their will. For Gustafsson, he showed no intimidation toward Jones who is considered by many as the best MMA fighter in the world. Right from the start he attacked Jones without fear but did so intelligently and with confidence. For Jones, he had to find the courage to battle back for a comeback win as he had lost the first 2 rounds and had a bad cut over his eye. There's no doubt he was rattled for nobody had ever gave him a scratch let alone beat him up for 2 rounds, but he kept his composure. He battled back and was able to win the remaining 3 rounds. He showed the heart of a champion. Jones hurt Gustafsson very bad in the later rounds but Gustafsson refused to get knocked out. He scraped and clawed his way to finish the fight on his feet. He lost the fight but in no way did he lose respect. He gained it in a big way. both men did in my view. What a fight!

I admire UFC fighters because these guys are modern day warriors. It's gotta be the most grueling sport, not just because you're getting kicked and punched but also the cardio that's required. I once tried grappling and man I gotta tell you, 5 minutes of grappling is more tiring than an hour of jogging. This is why each match is 3, 5 minute rounds (with championship matches 5, 5 minute rounds). All sports are games and in games there are winners and losers. The same is true with the market and in life as well. If you look at all of those who are successful in the sport or game they play, you will find many similar traits. Aside from being blessed with natural talent and ideal physical traits, those at the very top tend also to be the mentally strongest. They are dedicated to their craft to the point of obsession. They tend to have an unshakable belief  in themselves and their desire to be the best almost to the point of arrogance, in fact, many are even though they appear humble on TV. They play to win, not afraid to lose and when they do lose or are in a losing position, they don't have any self doubt. The true test of your character is when you're in losing position. That's when you see what your're made of.  Losing sucks and it hurts but with the very best, a defeat doesn't weaken them. They see it as a just temporary setback and a learning experience and keep charging forward relentlessly until they become number 1.

Most hated bull market gets hated even more

I've only been playing this game for 14 years but I'm pretty sure that there's never  been a time like today whereby a powerful bull market is hated by so many. This is so amazing yet bizzare. It seems the (permabear) trading community took it hard up the ass after the surprise no taper news which sent the market to a fresh all time high! I could almost hear the collective groaning through my screen. The reaction was more whining about how the markets aren't free anymore and how Bernanke is a "financial terrorist". Lol! I like this one. Such losers.  Such pathetic, delusional, miserable SOB losers who are still hopelessly brainwashed by doomers like Marc Faber. He's calling for a total collapse but from a "higher diving board".  I only found out about this because a lot of schmucks on the msg boards have mentioned it. These doomers have no shame and it's comical how they still get plenty of air time to talk about their opinions after the market has made them look like complete baffoons over and over and over. Anytime the market makes new highs they wring their hand saying we are just delaying the inevitable crash which is going to be even bigger now. You can use this excuse forever, this way you can never be proven wrong! Well, the cold hard truth is that if you listened to these doomers you're either broke or have been on the sidelines with your dick in your hand for years while watching the market soar without you either of which makes you a loser. I said this before a few times, it doesn't matter now what the market does from here; crash or no crash, the doomers have been proven WRONG and have ZERO credibility. I wonder if there's ever going to be a point when a lot of these doomer minded traders wake up and say "what a fucking fool I am". You gotta be one to have been constantly on the wrong side of a bull market like this for so long. When that happens then we'll be a lot closer to the end of this raging bull. Untill then, expect pullbacks and corrections only.

Weekend Ramblings

I noticed a lot of articles this week discussing the 5 year anniversary of the financial crisis. It's been clear to me that the crisis still hasn't faded from people's memory and I'm sure the flash crash of 2010 and the 20% drop in 2011 helped keep those memories fresh.

I read the latest commentary from newsletter writer Sy Harding who believes there's high risk in the market. A few weeks ago he said that he feels conditions are similar to 1973 which of course preceded a nasty 40% bear market. I disagree with Harding about this. He tries to make the contrarian case that investors are enthusiastic about the market given that they have been "pouring"money back into the market. It's true that this year marks the first since the bull market that investors have been net buyers of equities but it's still a long ways to go before they make up for all the money they've pulled out since 2008 and so it's a big stretch to claim this year's inflows signals investors are once again enthusiastic about the market- some cautious optimism, yes but that's about it. If you ask the average guy on the street what he thinks about the market or the economy I doubt you can say people are enthusiastic about the market. There's still plenty of pessimism/worry out there. I still see people use the term "reccessionary" when describing the current climate - that's not the sort of thing you see near bull market peaks.  Harding also points out how some sentiment indicators are showing a lot of bulls and how this is a contrary indicator. This is a weak argument. I've said this before, in a bull market, it's only normal to see optimism and so it can be "tolerated" for quite some time before a correction takes hold. Second of all, sentiment has been very fickle. It has only taken modest weakness in the market to see sentiment go from showing lots of bulls to lots of bears. Sentiment such as AAII, market vane, ect, should be used to navigate ST/IT moves in the market. It's not effective in making LT calls.  When it comes to the LT, I've said it here before more than once, all bull markets have ended when there was a combination of greed and tight monetary conditions. At the very least, instead of greed, there should be a general sense of optimism/complacency about the economy by the public and there's no way you can make that claim, meanwhile monetary conditions are about as loose as they can be. So, until I see greed and tight money I will give the bull market the benefit of the doubt and treat every downturn as just a correction.

Harding also points out some recent economic data points which have been disappointing. This is weak yet again as he's cherry picking anything that would reinforce his bearish view. For instance,  he made no mention how Europe and China have been showing surprisingly good numbers which is pretty significant for the global economy given that they've been a drag on it for so long. It should be noted that Sy Harding is a big believer in the "Sell in May and go away seasonality" and so he tends to be biasedly bearish from May-November. Given that his seasonality beliefs have been a failure so far this year, he's probably digging in his heels a bit and maybe getting hurt as well since he tends to recommend bear ETFs during this period.

This week everyone is awaiting the taper decision by the fed. The expectation is for a modest taper. If the economy keeps improving, the market is going to have to deal with the prospect of the unwinding of QE and the uncertainty that it brings. In 1994 and in 2004 the fed started taking away the punch bowl and this caused markets to have a moderate correction with months of sideways action until it got the sense that the fed was done tightening without hurting the economy much. I don't think a modest taper would be the equivalent to the start of a tightening campaign compared to 1994 and 2004. In those years the Fed started raising rates which is a much more restrictive action than a modest taper. However, we know the market is anticipatory and so if it gets the sense that tapering is sure to pick up steam then we will probably have another 1994, 2004 type period in the market. That's possibly what could be in store for 2014, which coincidentally ends with the number 4! We'll take it one step at a time.

I haven't mentioned Syria because I felt that yet again it's another one off  (like Cyprus last year) which won't have a LT impact on the market and if futures are an indication of what's in store for Monday, the market won't be far off from making a new bull market high.



I started a position in Corridor Resources last week (CDH.to). I'll talk about it more in the next post.

Perspective

The other day I just barely avoided hitting a kid with my car. I was on my way to my parents house driving uphill on a sidestreet  which winds sharply to the left . Visibility is normally limited as to who's coming around the bend but it was entirely eliminated when I approached it  because at the corner house to my left, a van was at the end of the driveway waiting to back out. As I was about to turn the corner, a kid no older than 10 came flying downhill on his bike from the opposite direction passing right in front of me literally out of nowhere. I slammed the breaks just barely missing him. He wiped out on his bike but aside from a little scrape he was perfectly fine. If I had been driving on that road 1-2 seconds sooner I would have had no chance to avoid hitting this kid and he would have been very seriously hurt and possibly killed. He had no helmet on either.

The things that I have experienced these past couple of years makes me realize just how fragile life can be.We wake up everyday taking for granted that we will go to bed at night and do the same all over for years to come when in an instant, out of nowhere, our life can be taken away. What I've learned from this is that life must be lived with some sort of urgency and there's no time for being a pussy. You have to do what you must to make the  most of this limited life you have and do it starting right NOW for you don't know what lies around the corner much like I didn't know with that kid. Stop being afraid of whatever is holding you back and take the risks you need to take to get where you want to be, but do so smartly not foolishly.

A couple years ago a girl I knew died of cancer. She was 35. When when she got diagnosed she was told she had about a year to live. Imagine how that must feel and then compare that to whatever is worrying or upsetting you right now. Imagine someone in this dire situation who is then later told that her cancer had miraculously disappeared. How do you think they would approach life?  What could possibly make them afraid? Nothing. This is the type of attitude we have to have. Do you remember the scene in fight club where Tyler Durden threatens to kill a convenience store clerk? It's the same idea.

My heavily concentrated positions in the market are a reflection of what I discussed above. I'm trying to maximize my potential but I'm not taking higher risk just for the sake of being bold and getting rich quick. I'm trying to fully take advantage of situations where I believe the risk/reward equation is heavily skewed in my favor. Betting small or even moderate in such situations would be wasting a rare opportunity.  In life situations often times the only risk in an lucrative opportunity is damage to the ego. Asking that girl you've always wanted to ask out for example. These are the situations that you can't let slip because there really is no downside risk when you think about it. Bruised egos heal and depending on your attitude such failures will make you stronger. Then there are those situations where you will be put in harms way if things don't turn out in your favor. You need to be selective in those situations but if you live your life always playing it safe you will not live much of a life.  One of my favorite episodes from Star Trek TNG  is called Tapestry. You don't need to be a Star Trek fan to enjoy it and learn the valuable lesson it teaches.

Thoughts on Canadian housing part 2

About 3.5 years ago I discussed my thoughts about CDN housing. You can read the post here. I basically concluded that house prices should go higher because we were in the early stages of an economic recovery with low mortgage rates and a "bubble burst" has never occurred in such circumstances. It was right and without trying to sound arrogant, it was a relatively easy call. Living in the GTA, I can tell you that the value of my home has increased about 20% in 3 years given recent sales of a couple houses on my street similar to mine.

So, the question is what about now? Well, we are certainly a lot further along in the recovery but mortgage rates remain historically low despite ticking up recently. The government enacted some tightening measures by shortening amortization periods to 25 years last year but that only had a brief cooling effect. Prices are now at new highs. 

Sentiment towards housing is fascinating. Just like 3 years ago, there's no shortage of doomers out there who keep calling for a collapse. If you read the comment section of any article that talks about housing you will see it dominated by doomers. Early this year I remember reading about some economist (from one of the big banks I think) calling for a "lost decade" for housing prices. Just recently The Economist and the OECD have been warning about Canada's frothy housing market. I'm not going to be a smart ass and say that a bubble can't burst until all this pessimism is gone. There's always gonna be doomers no matter what, however, at the top of a "bubble" market, there is at least a major cohort of people who have come to accept that the elevated prices of the asset in question are a thing of permanence. I really don't get a sense of that just yet. There's at least an equal amount of pessimism as there is optimism towards housing in Canada.

The main argument that housing doomers use is the price to income ratio which they point out is way above the historical norm. This is to me is a flawed measure for it doesn't take into account a very critical factor in determining housing affordability - interest rates. Take for example Joe Blow, who earns $100,000 a year and has a $300,000, 25yr mortgage with an 8% interest rate. The monthly payment for such a mortgage would be  $2290. Now take John Doe who earns $100,000 with a $450,000 mortgage at 3.5%. The monthly pmt is about the same as Joe Shmoe even though he's carrying a mortgage that's 50% larger!

So, despite what the doomers say, interest rates matter and matter big time and to ignore them in any kind of affordability measure is not being realistic. When you take into account the actual burden of carrying a mortgage, housing prices aren't as bubbly as they would appear to be. I wouldn't say they are cheap either though. Now, a doomer who reads this will certainty say it's inevitable that interest rates will rise substantially from these low levels. Well, that will likely turn out to be true...at some point, but you have to keep in mind history has shown that interest rates can be very low for decades! Just look at what interest rates (both short and long term) where from 1930-1960.

Then there's the argument of owning vs renting. There are those who claim that right now it's cheaper to rent vs own when you take into account all variables. I have to admit, I need to examine this claim further but with my personal circumstances, I don't see the appeal of renting. When I compare the cost of carrying my house (which includes property taxes, utilities, ect)  to renting a similar house in my neighborhood, I see no advantage in renting. I realize my situation could be different vs that of others (mortgage size, mortgage type, fixed vs variable, ect). But again, I need to look into the renting vs owning situation in more depth.

3.5 years ago I was comfortable in predicting there was no immanent "bubble bursting" for Canadian housing. With prices now considerably higher and with the economy further into the recovery cycle, it's not nearly as easy to make the same call but if you put a gun to my head I'd say I still believe there's no immanent bubble bursting. Housing is definitely now more vulnerable should there be some sort of shock like an interest rate surge or a recession but neither seem to be in the cards and without such a shock, it's going to be difficult to see housing prices collapse or even have a serious correction. The government might try to tighten conditions again and that could be a trigger, but unless they do something really drastic, I believe it would only cause a temporary dip as what happened last year. I still think  it's going to require a period of sustained rising interest rates to trigger a downturn in housing. Even though interest rates have been rising they are still quite low historically and so I think we'd need to see a much larger rise for it to prick the bubble.

August wrap up

As expected, the market has turned down since my post. Once again, any "excessive bullishness" quickly dissipates and turns to pessimism on just a minor dip.  Last week, NAAIM sentiment, AAII sentiment and mutual fund flow activity all displayed a level of pessimism on par to what was seen at the June low. While that doesn't guarantee we've hit the low, it shows to me that any further downside would be limited.
One important holdout to mark a bottom  is the put/call ratio which hasn't risen nearly as much as it did at the June low.

My 2 holdings reported q2 earnings in August and both were quite good, especially Greenstar. High Arctic reported lower y-o-y earnings, however if you dig into the numbers a bit, you'll see the decline was soley due to a tax asset that wasn't booked this year vs last year. Revenues, operating income and EBITDA all showed significant increase vs last year. Pretty much every CDN service company reported terrible y-o-y results while hwo has once again beaten the shit out of at least 90% of its peers. The stock has been acting well and perhaps maybe the market will finally see what I have been seeing for quite some time now, i.e. that the company doesn't deserve to trade at below average sector valuations when for over 2 years it has delivered far better results than average.  While the company still expects flat EBITDA for the year, with the $30 M in cash they have in the bank, they are in a great position to make an acquisition. They have been wanted to do so for at least a year I reckon. Longer term the company is very well positioned to expand in PNG where its main customer OSL is going to have an explosion in revenues once the PNG LNG plant comes online around mid 2014. PNG has a huge bounty of resources which is still very much untapped and OSL holds most of the exploration licenses there.

Greenstar reported an impeccable quarter. Revenues and Net income were up 25% and 27% respectively vs last year. As I've said some time ago, significant growth in GRE is pretty much baked in the cake for this year and next if the acquisition they have planed closes in September.  At the end of June their cash position is a huge $14M (real time $18M) and so they are in position to make even more acquisitions to expand growth. Strong earnings along with the gain in the RMB vs the loonie has resulted in a surging book value to $1.58/share (diluted). So, here we have a company with fantastic growth, a squeaky clean balance sheet and a mountain of cash to fund organic growth and yet it trades at 3 times earnings and 73% of book value. This is completely asinine and makes a mockery of the theory that markets are efficient in pricing stocks....there is no bigger crock of shit than that theory let me tell you. I for one am very grateful the market can be woefully inefficient in pricing stocks otherwise I couldn't make a living doing this. GRE only trades this cheap because of the "China syndrome"thanks to the likes of Sino Forrest and a few other bad apples. Slowly but surely however, people are realizing that GRE is indeed a legit company and it's just a matter of time before their fundamentals will be given the proper respect.

Playing defense

I was stopped out of 35% of my position in hwo.to at $2 last month and the timing could not have been any worse. Do I regret it? Not really. Here's why. Prior to getting stopped out, hwo.to represented about 40% of my account. That's a very aggressive position to say the least and in order to justify such, everything has to be in a favorable condition, namely, valuation, balance sheet safety, earnings momentum and technicals (price action). Earnings momentum has stalled, and I'm ok with that given it's not in decline but the technicals were not favorable and had not been for several weeks. I already talked about the large seller out there who was bullying the stock. At first this large seller was only capping upside at $2.35 and wasn't hitting any bids. This caused the stock to trade sideways. I had no problem with that kind of action as I got paid to wait via the monthly dividend. But then the seller starting putting pressure on the stock hitting bids and capping the upside at at a lower and lower price and it got to the point where there was a high risk the stock could break the $2 and head to $1.80. With that sort of action, I could no longer justify the type of exposure I had even though I was quite confident that longer term a $1.80 is not sustainable given the fundamentals. I had to draw a line in the sand and that line got crossed. When I got stopped at $2  this large seller also hit the $2 bid quite hard and then a couple hours later the company announced a new contract, the stock reversed to the upside and this large seller was gone. He has been gone since and without him holding back the stock, it has now surged back to $2.72 where I have sold a bit more and plan on selling even more if the stock lifts further (discussion to follow).

I talked about the delicate balance of conviction vs discipline. I've said it before, that in order to make big money, you gotta have conviction - you gotta have the balls to make a big move. At the same time you gotta have discipline. You make the big moves only when the odds/conditions are heavily skewed in your favor which in turn means you need to take defensive action when those conditions that warranted your position are no longer favorable. I was forced to downsize my position in hwo.to because one of the 3 conditions I require to make a big bet were no longer in place. Had I held say only a 10-15% position in the stock I would have been able to be a stronger holder for the entire position.

Getting whipsawed like this is part of the game even though it makes you feel like a chump.That's just your bruised ego talking. I don't regret getting stopped. I still have a significant position and I'm in a better financial position now that the stock has rebounded quite strongly. If the stock tanked to $1.80 as I feared, I may have felt good about myself for selling some at $2 but would seen my account balance drop nonetheless.

Hwo.to is often influenced by the general trend in the CDN energy services sector, even though only 30% of revenues are in Canada. The sector has been on fire as of late probably because the discount between CDN and US oil prices has narrowed significantly since January plus the price of US oil has gone up quite a bit too. There is also hope that Canadian LNG is going to be a growth driver. Both of these developments are no doubt positive for the sector and resulted in upgrades, but it doesn't appear that these developments  will have any material impact until next year and so with earnings for the remained of the year expected to be on par vs last year (which was a lousy)  it doesn't give me much conviction to expect the recent surge in the sector to hold up. Regarding hwo specifically, their upcoming Q2 earnings report will no doubt be better than your average service company given that 70% of the business is in PNG which has held it's own, but these operations too are expected to show flat growth this year. Therefore, as a result of everything discussed above, plus the ST concern I| have about the general market, I no longer have the same level of conviction to hold an oversized position in hwo as I once did at the current price and I'm inclined to lighten up further.

gre.v has had a wild ride, touching 1.70 before crashing back to 0.95. Such a thing in not uncommon with illiquid micro cap stocks and so long as fundamentals haven't changed, one should not be fazed. The selling was largely due to one person similar to what happened with hwo and so once he's done, the stock should see a strong rebound immediately. With the company poised to earn 0.40-0.45/sh this year, it's ridiculously underpriced. I'm maintaining my position and may even add to it.

Regarding the markets, they have had quite a run since my last post far exceeding my expectations (and everyone's I'm sure), but there's warning signs in some of the key indicators I track. I suspect we will see one more downside scare before summer's end. Now's the time to raise defenses by lighting up and/or hedging positions but don't overdue it.

Lose yourself

If you had one opportunity or one shot to seize everything you ever wanted. One moment. Would you capture it or let it slip?

I can't get this Eminem song out of my head because I've been given a very rare, very lucrative opportunity. I'm given an investment opportunity such that I will be able to buy a shit load of shares of a company that I believe strongly in at a massive discount to the current price which is still undervalued. There's no strings attached either - the shares are free and clear and I can sell anytime although it would not be in good faith to flip it. Right out the gate I would be up an instant 60%. If I take down the full available amount it would put me "all in". It's not a slam dunk though. Liquidity is still fairly low and if things taken a sudden turn for the worse, it would be difficult for me to unload this potentially large position at favorable prices. There is still the chance (albeit small) that I could get badly hurt or even wiped out.

I have vowed never to put myself in an all in situation like this. It's the number one rule I set for myself - but clearly this is a very unique opportunity. The prudent thing to do is to only buy a portion of the amount that is available to me but I feel it would be foolish to not take full advantage of the situation. When will I be able to get such an opportunity again? Probably never. The odds of me losing money on this appears to be slim. It would require some really, really bad luck for that to happen. If things stay status quo I will do well and if they go just moderately positive, I stand to make out extremely well.

The final decision hasn't been made yet but I'm leaning about 90% to go for it. If and when I do, it is no doubt going to be mentally taxing to the max but  I plan to de-risk the trade by selling an amount that will cover my cost of investment once the stock goes up by a certain amount. Then at that point I can ride the remainder of the position on the house with no stress. I don't want to be too hasty in selling as I believe the stock should go a lot higher in the next year or 2 but given the size of my position I can't let it all ride to the point where I believe the stock will be fully valued - that would be too greedy...I will have to sell a portion before that point.

Several months ago I talked about the need to have brass balls in life...taking a sizable risk when the risk is worth taking. This is clearly one of those moments for me.

This blog will go dark for a while.

Half time report

I can't believe half of 2013 is already over! Time sure flies and I've noticed that the older I get the faster it seems to go by. Not good! The market correction that has taken place appears to be just that - a correction.  I think most of the damage has already been done given how rapidly pessimism has swelled in the shorter term trading indicators I track. For instance NAAIM sentiment shows active managers are only 34% long which is in the vicinity of where correction lows have taken place.The concern about "Chibor" which added downside fuel to the fire seems to be alleviated at least for now and I think this is the catalyst that sparked the bounce.  Not sure if this bounce is the beginning of a sustainable upswing though (I have my doubts). My forecast for choppy markets in the months ahead seems to be on track. Meanwhile I noticed all the same losers on the yahoo message boards squeeling with delight while the market was dropping along with some of the usual permabear suspects calling for a big drop in the market. You know what? Do yourself a favor and delete any bookmarks you have for these jokers if you actually invest/trade the market. They have poisoned your mind. This is not to say you should never be bearish again, just find another way - find a method that will turn you bearish when it's actually the correct posture. Most of today's doomsters are simply broken clocks who have been singing the same tune for several years or even decades and so when a crash happens they look like geniuses. The truth is, if you followed their advice over time, you'd be in the red and maybe even broke.  At the end of the day making or losing money is the ONLY thing that matters if you play this game which is why these guys should be totally ignored.

Gold has been getting hammered quite badly this year and I'm a bit surprised it hasn't been able to get a  bounce bigger than the short lived ones it has had so far. Maybe we will finally get a big bounce soon soon but I wouldn't hold my breath. I'd like to know where all those "gold will do well in inflation or deflation" guys are now and I wonder how the doomer gold bugs like Schiff are preforming. They certainly know how to brainwash people into believing the end of world is coming and yet they and their followers must be taking quite a beating. I must say, I have no sympathy for miserable SOBs who lose money.  Gold stocks are now closing in on the 2009 bear market lows and gold companies are scrambling to shut down mines and cut costs. Gold stocks have been hit hard by a perfect storm of cost overuns from the likes of the majors like Kinross and Barrick and now a free falling gold price. In fact, Barrick is now trading at where it was in 2001 when the gold bull market had just started! Wow! I can't tell you how many times I saw Barrick recommended on BNN by the "experts" when it was above $40. So, with gold stocks getting hammered so badly even with gold still comfortably above $1000, does this mean that the sell-off is overdone and maybe even over?When you have these conditions where the gold price still hasn't found a bottom and the companies are hurting, slashing payrolls and shutting down mines it's best to avoid the sector no matter how tempting for it usually takes several months for the dust to settle in such cases...sometimes years. Think housing. There will of course be tradable rebounds but they are often elusive and you know what? I used to be interested in such opportunities but as the years have gone by I have passed on committing my capital on ST speculative endeavors like this. I'd much rather look for situations where I can buy a fundamentally strong company trading on the cheap which therefore gives "substance" to my positions or bet on some LT secular trend that I believe is its early innings. Bigger and easier money is made this way and in such situations I can have the conviction to make large bets whereas I can only bet small when I'm looking to "play a bounce" in some sector.

So far I've had a very good first half of the year but I gotta say, it's a bit unsatisfying because it's all due to my holding of gre.v  while hwo.to  has been stuck in a rut and is flat on the year. The company just announced a 3 year renewal of the big contract it has in place with its customer in PNG. This customer accounts for the bulk of the company's revenues and so it pretty much guarantees significant cash flows for 3 years and when you're trading at sub 4 times earnings, close to book value, no net debt and with a 7% yield, it makes the stock quite a bargain even though the company did say it expects flat EBITDA this year.There is this one huge seller of the stock out of UBS who continues to keep a lid on the stock putting up a brick wall at 2.10. This guy has sold over 1 M shares so far this year which is huge overhang for a microcap. If not for this big seller the stock would be a lot higher because anytime he's not there the stock lifts quite easily. I've been trying to find out who this seller is but I've had no such luck. It's not any insider otherwise it would show up on the insider trading report. Maybe it's a former insider. It's really frustrating to see this action in hwo but in time, the fundamentals always assert themselves and so the stock should work higher but in the meantime its been dead money and I don't like dead money. If I see something else equally enticing out there I might as well just pull the plug and move on.

Greenstar on the other hand has done quite well for me so far this year.  Interest in the company is slowly building. When I was buying shares at .50  I was literally the only one buying. Although the company operates out of China which is struggling right now, most of its business is international and the domestic part of it involves the sale of fresh produce which is always going to have steady demand rain or shine. With significant growth pretty much baked in the cake for the next 2 years and stock still trading very cheap, the upside momentum seems poised to continue. The dividend is likely going to be hiked as well sometime down  the road too given that it's only a tiny slice of cashflows which are growing. So far mgmt has done a good job in trying to separate the company from the bad image Chinese stocks have thanks to Sino Forrest and some others.

Taper your tapering fears

The buzzword of the month seems to be "fed tapering" and it's this worry that is the apparent culprit of the correction. Isn't it funny how when QE was first  introduced it was widely criticized and dismissed? Very few people if any, believed that it would have a lasting impact on the markets. The consensus view was that all it would do is crater the dollar and stoke inflation. Then as the bull market progressed without the dollar disaster that was expected, you heard all this griping about how the bull market is solely due to QE. Wait a minute, wasn't QE supposed to be useless? Where is the mea culpa from all the pessimists? This is why I show so much hostility towards the legions of permabears that are still out there. They have shown ZERO in the way of admitting how hideously wrong they have been about pretty much everything.

As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.

I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.

So, is this it?

Are we getting the long awaited correction? The one that has foiled both bulls and bears alike? If a bull like me was inclined to buy puts just over a month ago and got ran over with them, I can only imagine the destruction that was laid upon the bearishly inclined...which I reckon makes up the 80+% of the trading community. I'll say this again, it doesn't matter how bad the market gets from here because if you've listened to the bears and followed their advice or what they implied you should do, you're broke.

Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.

I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.

Hwo has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time   insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.

My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, i's future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forrest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it.Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything.  I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style. 

This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward,  I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode. 

Fresh all time high and still no respect by the herd

Better than expected payrolls and significantly revised March payrolls caught everyone flat footed Friday morning. Given the trend in the disappointing economic data as of late, nobody expected that 165 K print or last month's upward revision. It looks like my protective put purchases on Thursday are going to indeed turn out to be a sacrifice to the trading gods...and I don't have a problem with that at all! Any of you who have been bullishly positioned should thank me!

With the market at a fresh all time high do you think it's changed the ingrained miserable SOB herd mentality out there that have dismissed this bull market from day one? Not one bit. I still keep seeing the same "blow off top!" "It's rigged by the Fed",  type comments which have been ongoing for over 3 years. So pathetic, so delusional. Keep reading articles from zerohedge doomers...it's done you really good I'm sure. Keep following Roubini, Schiff, Hussman and the rest of the miserable permabear SOBs who have been utterly humiliated by the market for 4 years and yet continue to display arrogance without giving any mea culpa for being as horribly wrong as they have been. Unbelievable these guys are. I for one don't feel sorry for anyone of their devotees. And as I said before, it doesn't matter if the market were to make a bull market peak shortly and descend into a new bear...these jokers have been wrong for far too long and the market has gone up far too high for them to have any credibility as far as I'm concerned.

Tough to say where the market goes in the ST at this point. The rule of thumb is that when a market breaks out to an all time high it's a powerful signal and more ST gains are likely but there obviously has to be a limit to this and given that the market is already overbought, it doesn't seem likely the market will be able to advance a lot further without some sort of consolidation first. I've outlined some factors that support both the bull and bear case in the ST. One thing's for sure though is this...you must respect a market that is making a new high or low and more often then not you get ran over if you try and step in front of it betting the other way. Just look at what happened when I bought those puts last week! 

Two weeks ago I posted that global leading indicator chart which suggests that the data is going to start looking a lot better in the immanent future. Is this why the market has been able to ignore any bad news? We are certainly going to find out! This should be an interesting summer. Given my partially hedged position, I can sit back and watch the show with less anxiety. And have you noticed that sovereign yields in PIGS have collapsed to multi year lows? That's the complete opposite of what happened in the springs of 2010, 2011, 2012 when yields were creeping higher until they blew out to "crisis" levels which helped trigger the major spring/summer corrections. 

I also want to say something about Doug Kass. This guy has gotta be an ego maniac.  He's short Buffett's Berkshire and was invited to Buffet's annual shareholder meeting to challenge Buffet with some bearish questions. Out of all the stocks to short, Kass chooses Berkshire. Jesus. I think he's trying to pick a top on Buffet rather than the stock itself. I remember reading an article by Kass a few years back claiming Buffett has lost his touch. Well Kass, it's YOU who has lost your touch. Buffett proved you wrong then and  (so far) again this year. I'm not sure at what price Kass is short, but whatever it is, he's underwater as the stock made an all time high Friday. From my knowledge, Kass has been mostly short the market since the year began as well and so before being critical of others, especially legends like Buffett he should be more critical of himself.  

Getting it out of my system

Alright I did it. I bought some index puts to hedge my portfolio. There...fuck off now George Costanza. For now it's a rather small hedge making up  2% of my account value. They may very well end up being a sacrifice to the trading gods because I have to admit there's a bit of paranoia in this trade.

I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.

I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part,   been weaker than expected. The market has been able to shrug it off for a month now which could suggest it  believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.

The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I  think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.

I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.

Sell in May or stay?

Two Mondays ago gold took a 10% hit and all because China reported 7.7% GDP instead of the expected 8% the night before. That's not really a big miss and so such a catalyst doesn't seem justify that kind of damage but I guess since this "bad news" came at a time when gold was already trading very weak breaking major support, it doesn't take much to trigger an avalanche of selling with margin calls fueling the fire. I'm not surprised to see the rebound that gold has had and I suspect a full retracement of that panic sell off will take place. I'm kicking myself a bit for not buying calls on GLD a few days ago. My finger was on the trigger but I just couldn't pull it.

Gold the "commodity" is another thing I wanted to talk about in my previous post.. In the 2000's commodities became "financialized" as institutional investors embraced it as a major asset class. As a result we have seen large "investment demand" of commodities via commodity futures and commodity backed ETFs for the past 10 years. There have been debates as to how much impact this had in driving commodity prices. I suspect it had a lot of impact both on the upside and downside. Gold was right in the thick of things went it came to the financialization of commodities. The arrival of GLD in 2004 was the primary conduit for "investment demand" to flow into. GLD has been responsible for massive accumulation of physical gold (since its required to be backed by gold) which no doubt drove the price up. Gold bulls have enjoyed the tailwind of the investment demand for about a decade and make no mistake about it, the investment demand for gold is responsible for the vast majority of the rise in the price of gold - I'd say 80% or more (jewerly demand has been flat and  the drop in the dollar mathematically only justified about a doubling in the gold price from its low at $260 ).  But if you live by the sword you die by the sword. If the investment demand has peaked and is now heading south, then gold bulls are in for a world of hurt longer term.

Gold is such a debated topic. You can find strong arguments pro and con. At first I was going to go through some of the major points of these arguments but I'm going to cut to chase and talk about what counts - where is the price headed.  I think in the short to intermediate term, gold will continue to rebound as it got very ST/IT oversold at its recent low and sentiment as measured by trader type indicators, got extremely negative. Longer term, I believe there's a good chance we have seen the end of the bull run that began in 2001 and here's why...

At the very beginning of a secular bull market for any asset, conditions had been bleak for it for quite some time to the point where nobody wants to own it and the price had been taking a beating to the point where it's significantly undervalued, which of course is the best time to be buying. That's where gold was in 2000. Equities had been in a 10 year bull run, unemployment was at record lows, central banks were selling and the US dollar was king. At a major top/beggining of a bear  it's the opposite. Things look the most promising, the price had been going parabolic and by then everyone who ever wanted to buy has bought, which of course it the best time to sell/short. I believe this situation is where we stand with gold.

Gold had a 10 year run from 2001-2011 without a down year gaining about 550%  from the bottom. Constrast the conditions I mentioned above for gold which prevailed in 2000 just prior to its epic bull run to now. It's the total opposite. During the span of these last 10 years you had a significant decline in the value of the US dollar, 2 huge bear markets in equities, a once in a century meltdown of the global financial system, central banks buying, the most accommodating Fed in history, stubbornly high employment, ongoing concerns of a European collapse and I'm sure I'm missing some other major negatives that support the "gold is a safe haven" notion. Aside from a collapse in the fiat monetary system, things pretty much can't be better for gold and so I think most of the people who ever wanted to own gold owns it by now. So, if we're at that point there's only way for the price to go longer term that that's down....all it takes is the unwinding of one of the major supporting catalysts to trigger the transition.

I've been reading stories about how there have been line ups of people buying physical gold on the dip in Asia. You might think this is a bullish thing but it's not. Shorter term, yes, but not longer term because it shows the type of behavior you see in the first major decline of a bear market - denial. When you see people embrace a big decline like that it's a bad sign longer term. These dip buyers probably represent the last bastion of buyers who have always wanted to buy gold but have been waiting for a "pullback". Once these dip buyers are exhausted the downtrend will resume but in the interim, there could very well be a strong rebound. When the tech bubble burst the initial decline was about 40% but that decline was followed by a 40% rally before the real damage took place!

Switching gears now to the equity markets. We are now approaching the "Sell in May and go away" period. For the past 3 years this strategy worked out pretty well. I've been saying since early this year that we would probably not see a significant correction begin until sometime around May. I gotta tell you though, as of right now, conditions do not support anything more than just a minor dip. AAII has shown 3 consecutive weeks of bears outnumbering bulls by a significant margin, bonds have been very strong for a month and retail inflows into equities has been flat for a month as well. In fact, despite the strong market this week, there was a sizable outflow! I've never seen a major correction begin with such conditions..it instead suggests that the market will go higher still or go sideways with only modest dips.  Perhaps people have been catching on to the "Sell in May and go away" notion and if that's the case, it makes it less likely to work this year!

On the fundamental side of things, everyone's talking about the slowdown in emerging markets and it's no secret that Europe is in recession. Lot's of people are also saying that the weakness in commodities, especially copper, is ominious for the global economy/market. I say that's bullshit. I say the action in commodities is a coincident/lagging indicator.  Look at every significant top in the past few years and you will see "Dr. Copper"  gave no such warnings.  The most flagrant example was how copper and other commodities were making new highs in the first half of 2008 while equity markets were rolling over. What signal did that give? I believe commodity weakness in the face a strong equity market is bullish not bearish for lower prices are economically stimulative. We have seen strong rallies get short circuited anytime commodities run up too much like in the spring of 2010 and 2011 as it provided an economic drag.

The following charts shows the recent state of the global economy.

This doesn't look too great, but the market doesn't care about what just happened, it cares about what's going to happen. This chart shows that the global picture will be a lot brighter in the near future.

Perhaps this brighter outlook as per the leading indicator above, is why the global markets (especially in Europe) have held their own despite the economic data having been piss poor in recent months. The brighter outlook for the global economy also bodes well for commodities in general which would be a tailwind for gold.  I think commodities bottomed this week.

Bottom line: Unlike last the 3 years, conditions are not suggestive at this point that a major correction is going to begin in May. The market seems poised to either go sideways or higher at this point. If conditions change I will change with them.

Infection points

Quite an eventful week! Lot's to talk about. The SPX powered its way to a fresh all time high and is closing in on 1600 yet all I see is more whining and complaining. The latest complaint is that it's the "defensive" names that are leading the market and so the rally is false. Then of course you have the perennial "the bull market is phony because it's all due to the fed" complaint.  Back in 2009 and 2010 there was a lot of complaining about how the advance was occurring on low volume and yet another complaint was that the rally was occurring at the expense of the US dollar and so the bull market was false. Complaining, whining and staying angry at the Fed -that's all people seem to be able to do. By the way the market is up 140% from the bottom and the dollar is only down about 6% from that point and so the "rally is phony" argument is total bs.

A really bizarre thing happened this week with AAII sentiment. Despite the market making fresh all time highs, the bull/bear ratio plummeted to .35  which is the lowest level since March 2009! When I first saw this number I was shocked and I figured it had to be an error but it's not! Normally you see such extremes in bearish sentiment when the market has been getting hammered. I have never seen such a extreme bearish reading like this when the market has been so strong not to mention making all time highs. On a stand alone basis this has enormous bullish contrarian implications but you should never hang your hat on just one indicator. Other measures of sentiment aren't nearly as bullish, but there are some corroborating indicators which suggest that in the ST the market still has the fuel to power higher still. Bonds once again are indicative of this which are in the same condition as  I pointed out last week which led to a ST bottom as I expected. Fund flows into equities have been quiet the past 3 weeks which again supports the notion that shorter term, the road is cleared for the market to make a further advance. One thing's for sure....there's no way I'm going to play the short side with the above mentioned conditions for it suggests that any downside from here will be limited...for now.

Lots of buzz about gold this week and its 20% slide into "bear market territory" as the media is calling it. Readers of this blog know that I've not been a fan of gold for some time but anytime it had a setback I was quick to admit that it looked like a correction rather than the start of a bear. This time however, we could actually be looking at the start of a bear market and if it is...better hang on your hats! First of all, I don't automatically assume a 20% drop constitutes a bear market. It all depends on how that 20% drop takes place. A sudden decline of 20% of a market that had been climbing relentlessly most likely represents a steep correction in an ongoing bull market rather than the start of a new bear market. Examples of such are the 1987 crash, the 1998 correction and the correction in 2011. The 20% decline in gold did not occur this way. It  dropped to its most recent low in a multi-month downward trending fashion characterized by lower lows and lower highs - that's bear market action. It also registered a 21 month low and that's something you tend to see in the early stages of a bear market - not a bull market correction.

Let's look at the explanations for the drop in the gold price. From what I've gathered the main explanation is that  the drop is due to the restoration of confidence in the US and in the dollar which is the result of the relative strength of the US economy and its equity markets.   Last week's drop in gold was probably exacerbated by Goldman's downgrade of gold and the news that Cyprus might sell reserves, but since gold had been declining prior to this, I don't think these factors are soley responsible - they simply added fuel to the fire that was already burning. Basically, I believe that the decline in gold price could be summed as the unwinding of pessimism towards the US and the dollar.

Now having said all this, there are a number of signs that suggest the negativity towards Gold is at a ST extreme. I turned on BNN Friday and all they talked about was the decline in gold and it's not just them; there's tons of coverage out there in the financial media pointing out how gold has dropped by 20% . I read an article in the Globe and Mail  Friday titled "All shine and no substance: the reality of gold." Talk about kicking someone where they're down.  I also noticed every single "technician" out there is expecting a lot more downside this week now that  gold closed below a key support level. Volume in the GLD etf spiked to an extreme which is often indicative of capitulation. GTU is trading at a 6% discount to NAV. The last time this happened was late April-early May 2011 when gold had a sharp but short lived pullback. So, I think there's a good chance that this breakdown in the gold price last week could end up being a massive bear trap and a vicious snapback to 1550-1600 could take place. I may intend to play this I get the right set up. We could be in a situation with gold similar to that of March 2008 in the equity market when the market dropped 20% before making an IT bottom which lead to a strong rebound for 2 months. It's also possible of course that all we are seeing here with gold is a lengthy consolidation/shakeout phase which began in August 2011.If you pull up a LT chart you could make the case that, with the exception of Friday's close, the gold price has been going sideways for several months.

Gold bulls have their reasons to remain bullish the main one being that there is unprecedented "money printing" going on all over the globe via QE and it's just a matter of time before the inflationary impacts of this gets unleashed. Well, first of all, QE is not money printing per se because it doesn't permanently raise the supply of dollars for the Fed can reverse QE and therefore "destroy" the money they created at will.  Gold bugs have been warning about hyperinflation for over a decade now and it hasn't happened. We never had an inflation problem. If we did, it would be reflected in the bond markets via high interest rates and rates have been historically low even before QE. If you want to see a period of high inflation look to the 70's where interest rates were double digits and there was broad based inflation in all goods and services. Yes, we saw a dramatic rise in energy prices over the past 13 years but that was primarily the result of supply/demand dynamics of commodities namely a surge in emerging market demand - not monetary policy and the commodity price spike didn't spill over much into the general prices of goods and services. I'm sure you can find exceptions but for the most part, you can't honestly say we've had an inflation problem in North America. And if monetary policy was the main driver of commodity prices explain to me how the prices of coffee, natural gas, orange juice, olive oil and other commodities have plummeted in value over the past few years to multi-year lows. Easy money probably has an exacerbating effect on a bullish supply/demand situation for a commodity or any asset class but it's not the primary driver...at least that's my view. Anyhow, I digress

Getting back to gold. When I first turned bullish on gold in late 2000 it was because confidence in the US was just starting to roll over from an all time high and I figured that since I believed a big bear market in stocks was underway, the status of the US being the economic powerhouse of the world would fade considerably along with confidence in the US dollar as a reserve currency. Basically,  I believed that there would be a gold bull market due to a substantial rise in pessimism towards the US in general which would make people flock to gold which at the time was very under owned. Also, the avg cost of producing gold was well above the gold price at the time ($260/oz) which meant that gold strictly as a commodity was undervalued . We all know what happened afterwards (and by the way I got off the gold train waaaaaay to early).

 So, if the gold bull market was to have ended and a new secular bear has begun I ask myself do we have an inverse of the conditions that I noted back in late 2000?  The answer to that is yes!  Let's first look at factors I outlined above

1)confidence in the US/dollar.

There's no doubt in my mind that pessimism towards the US and the dollar hit extremes these past few years. There's is the notion that the US is in a state of decline equivalent to the fall of the Roman Empire. The dollar has been beyond trashed and it's status as the world's reserve currency severely weakened as central banks have looked to diversify out of dollars and into Euros and gold these past few years....the same gold by the way that they were willing to sell en masse in the 1990's for sub $400/oz. Despite all the trashing of the dollar and how the fed has been "debasing" it,  it's about the same level as it was 6 years ago (trade weighted as per ticker $USD) and has been on an uptrend for about 2 years which started right about the same time gold peaked. I doubt this is a coincidence. There have been many reasons cited as to what drives gold but it's  been my opinion that the main factor is the US dollar.  Gold as a "reserve currency" or "safe haven" has only one major competitor and that's the US dollar.

2) ownership level of gold

A secular bull market begins when an asset class is under owned like gold was in 2001. Only the hard core gold bugs held gold and/or gold stocks. I cited here a few times how in 2001 when gold started rising I specifically recalled the "pros" on CNBC dismissing the move saying gold should be traded not invested in.. That notion has been completely reversed. In recent years the pros have stated that gold is in a LT uptrend and should be a component of one's portfolio at all times to protect them from upheaval and central bank "money printing." They also said that gold will do well in inflation or deflation conditions. lol! What a crock of shit that statement is. Investment demand in gold surged over the past 10 years especially since 2008 and so it's definitely not under owned anymore. I don't think it's as over owned like tech stocks were in 2000 but I think there's enough people "in the pool" to fuel a big bear market should they start unloading gold.

3) avg cost of production

This one is a bit tough to ascertain  From what I can gather the avg cash cost of gold production is about $950/oz give or take but the "all in cost" could be average about $1250.  That suggests that the gold price isn't over inflated on a commodity level. This suggests we shouldn't see a complete collapse in the gold price should there be a gold bear market but if things get bad for gold a fall to $800-$1000 is quite doable as bear markets often send a commodity below the cost of production...sometimes well below it. Just look at what happened to nat gas.

WTF? For some reason blogger didn't save what I had written after the above paragraph. Well, it's too late to rewrite it now...I'm off to bed!