Weekend Ramblings

The SPX hit a fresh 5 year high Friday. Anytime the market makes a new high I like to observe how people are reacting to it. All I see are tumbleweeds and all I hear are crickets. Some intermediate term indicators are redlining here but aside from that, I don't see anything that resembles giddiness which would indicate we've seen the "euphoria" phase of the cycle. It seems to me the market is going to tag at least 1500 before we run into any IT problems. One of the things that's getting a lot of attention these days is the reviving US housing market. US housing now appears to be tailwind as opposed to the headwind it has been for the past few years. Housing has been one of the major missing pieces of the recovery (the other being jobs) and so now we could see the recovery shift into a higher gear this year.

Something that I've noticed for some time now, which is slowly getting some media attention, is the energy renassance in the US. Thanks to new drilling technologies, the US has a new found bounty of oil and natural gas. The following chart is quite stunning.

This boom in oil production is largely the result of oil shale boom in North Dakota. I've read some reports that suggested North America could be a net exporter of energy in 15 years. Imagine that! I always take long term forecasts like this with a grain of salt because so many things can change in  15 years but there's no denying that all this new found oil and gas could be a massive game changer. For starters, this could put a big dent towards trade deficit and peak oil worries. By no means am I an expert on the energy situation in the US and I'm sure you can find boat loads of people who are critical about these shale developments but the above chart speaks for itself and I'm pretty sure that all the worries about "peak oil" didn't take into account all of these new unconventional oil discoveries which are economically recoverable thanks to advancements in technology.

With respect to nat gas, there seems to be major discoveries of shale fields every year not only in North America but around the world. Granted, some of these discoveries may not be economically feasible as they are located in remote areas but a lot of them are indeed viable especially in North America. What this means is that Canada and the US both have the potential to be major energy suppliers to the rest of the world with cleaner burning nat gas being the energy source of choice vs it's direct competitors nuclear and coal. It will also stimulate switching over from oil derived fuels to nat gas. Mind you, it will take years for all the necessary infrastructure such as pipelines and LNG terminals to make this a reality but the potential is there. These are the sort of themes as an investor you need to be looking for. I'm currently playing the LNG theme via hwo.to. Right now they are benefiting from the LNG boom in PNG and given the recent developments in Canada, it seems as if there is going to be at least 3 major LNG projects in the works and that's going to benefit hwo's Canadian operations tremendously. The only issue is about the timing....I'm not sure how long it will be before hwo will see any positive impacts in the way of increased demand for nat gas drilling services from these LNG projects.

So, here's the thing. You can either focus on the negatives or the positives. The media and the herd have been doing the former for years now and they have nothing but misery and losses to show for it. So many people are still scarred by the 2008 collapse and are missing out on all the opportunities to make money being an optimist/opportunist. That's fine by me. By the time the herd embraces the market,  I'll be heading towards the exits.

2013 and beyond

It's been almost 4 years since the bull market began. I heard more than a few times people refer to the bull market as "aging" or "long in the tooth". Well, it's true. Historically speaking, cyclical bull markets last about 4-5 years, but bull markets don't end just because a certain number of years have elapsed. Take a look at the runs the market had in the 1980's and 1990's to see examples.

You can find literally hundreds of detailed, well researched reports and opinions about where the market is headed, many of which are in complete disagreement yet equally convincing.  Institutions pays thousands of dollars for such reports. But here's something I've learned which is so simple, yet so critical and it's something I've been preaching here for years now....History shows that bull markets don't end until there is a general sense of optimism about the economy from the public and the fed is tightening rates to the point where monetary conditions are restrictive (which will be apparent via an inverted yield curve). High optimism and tight money - that's it! That's the recipe for a bull market peak! It's so simple! So, given what I just said, are we at a point where there is high optimism and tight money? Not even close! It's the opposite! Despite all the buzz about there being a very large equity fund flow last week, there's still a long way to before we even reverse all the outflows from the past few years yet alone show net positive inflows. Ask your neighbors what they think about the economy and you tell me if there's any optimism out there, yet alone high optimism. Meanwhile, all the major central banks around the world either have accommodative or extremely accommodative  monetary policies with Japan recently joining the latter. Monetary policy is important. In 2011 central banks in emerging market countries were tightening and it resulted in negative returns for those markets that year....not a bear market per se, but a dawn out,  multi-month correction.

We know from history and based upon how Bernanke thinks, the fed isn't going to take away the punch bowl until there is undeniable evidence that the US has recovered from the financial collapse of 2008. That evidence will be in the form of strong job growth numbers - I'm talking about 200K+ jobs per month on average for about a year and so on that note, I don't think we need to worry about the threat of the fed tightening this year.

So, to me it looks as if 2013 will be yet another bull market year and there's no big bad bear lurking around the corner. Having said that though, we need to keep our guard up for intermediate term corrections and admittedly, since this bull run began,  IT peaks were not too far off anytime we have seen a spike in inflows like we have been seeing lately. So, at this point, stay selective and hedge if you know you can't handle a 5%+ correction. However, if you look at history there will come a point during a bull market advance where inflows are well tolerated and are not a contrary indicator until they reach a LT extreme. I don't know if that's going to be case at this point, I'm just saying that this spike in inflows is not the death knell of the bull market since from a LT perspective we've got a ways to go before "everyone is in the pool".

The bottom line is that until we actually see a lot more people embrace the stock market while at the same time the fed is taking away the punch bowl, the correct posture is to be a LT optimist looking for LT opportunities on the long side. When you have IT concerns, go ahead and hedge or raise cash but don't overdo it. And no matter how scary things get - and I'll be the first to admit I've been scared at times despite being a LT bull - always keep in mind that we have not seen the classic conditions that marked the end of a bull market (not even close) and so keep a cool head with the expectation that any downside will likely only end up being a correction and not the start of of a new big bad bear market.

2012 review

It's that time of the year again where I look back and review all the hits and misses and talk about my goals for the next year. I ended up with a 25% gain in 2012 but I gotta say, this is the most unsatisfying 25% gain I will ever have.  On the surface a 25% gain is pretty good and it's in line with how I've been preforming every year since I started trading full time 4 years ago; but if you take some sort of risk adjusted measure, I didn't preform as well as I did in prior years. There were way too many ups and downs. In June I was only up about 5%  on the year and I wasn't feeling great about myself. Then, right around the time Gangnam Style caught fire so did my account. By late October I was up 35% on the year feeling pretty good. Then a month later that gain suffered from George Costanza-like shrinkage  to the point where I was  up only 8%. I felt like such a chump. I've said it before that you need to keep yourself grounded by not getting too high  when things go well and not get too low when you're in a slump, but it's easier said than done. Sometimes I  have a problem in dealing with the slumps....I tend to get down on myself too much. Since trading full time, I haven't had to deal with a drawdown of the magnitude that I experienced in November and the fact that it happened so close to the end of year made it hurt especially bad. As per my prior post here, I knew that I had to be prepared to endure such a drawdown and I think that helped me keep my composure during it. Fortunately, hwo.to rebounded in December and I got a little boost from China Greenstar, my new holding.

Let's talk about the good and bad of 2012. First the the bad...

The bad

My biggest loser this year was fmc.to. I ended up selling the stock for a 50% loss but the overall damage to my account was only about 3% because I stuck by my discipline of never adding to a losing position. I made multiple mistakes with this one. My first mistake was that I jumped the gun too early. At the time of purchase it looked as if the stock was showing a bottoming formation.  It was trading near book value showing break even EPS that looked poised to turn positive and there was a purchase of shares by the CEO in Janurary so I figured it was worth making a play but the sector fundamentals were weak in that it was a coal stock and EPS although poised to turn into positive trend, never actually did.  Even though the company was not exposed to the American coal market, which was a disaster, the global coal market wasn't doing so great either. I didn't do enough DD to realize that until after I had bought. The bottom line is that I relied too much on what appeared to be favorable technicals without having enough support from fundamentals and it's the latter that matters most.  The next mistake I made was not pulling the plug earlier. While I tend to give starter positions plenty of wiggle room, a 50% drop is too much. As a result I have modified my rules to allow for only a 35% maximum drawdown on a starter position. I had the opportunity to exit the stock for only a 12% loss in April after it popped due to a buyback announcement  (not a single fucking share was ever purchased) but I never pulled the trigger. Idiot.

My biggest missed trade was the rebound in the US housing market. I saw it unfolding but for some reason I just didn't take any action. Maybe I wasn't truly convinced because I thought there was risk that the housing recovery could be begin in fits an starts before entering a more consistent phase.  But even with that concern, given the upturn I saw earlier in the year via the NAHB housing index,  it was worth a 5-10% position in XHB calls. I was too cautious and should have made that trade.

Another goof I made was that I didn't have enough patience with prt.to. I bought the stock at $3 and after watching it dip to $2.50 I sold it where it rebounded back to $3. The company ended up being bought out at $4.50/share. Ouch. I only had a starter position in this and I wouldn't have added, so I lost out on making only about a 3% account gain. When I think about it, I really shouldn't have bought in the first place.  As you may know, I like to bottom fish for turnaround situations in small/micro caps showing favorable technicals and fundamentals. The fundamentals hadn't yet turned around; they were just stabilizing after being poor for a number of years. The company was delivering either break-even or marginal EPS for the past 4-5 quarters. I jumped the gun on this one much like I did with fmc.to but I would have won this time I had held. I'm not too bitter about this. 

The good

This one is obvious. My position in hwo.to. I was able to identify the upswing in this company's fortunes early and I had the balls to take on a big position. Having such a large concentration in one stock comes with a price in higher account volatility and man did I ever go through a roller coaster both on the upside and downside and let me tell you, I don't like roller coasters both in real life and especially in the market. I went through hell for 10 days. But I knew full well, something like this could happen.

Hwo.to was the only position I had in size and duration for 2012 and was responsible for 85% of my gain this year. I held other stocks, gdc.to, isc.vn, prt.to and fmc.to but those were starter positions and with the exception of fmc.to, I sold them for about break-even after a few months. I had a hard time buying stocks other than hwo.to  because when I compared them to hwo.to, they couldn't stack up. This was another reason I kept adding to my hwo.to position. However, this changed in October. I have a found a company by the name of China GreenStar Agriculture (GRE.V) which I think is even a bigger bargain than when I first discovered hwo.to at $1.20 a year ago.  On a fully diluted basis, the company trades at less than 50% of book value,  yet they have been making gobs of cash consistently for several quarters. The p/e is 2 and the balance sheet is pristine. Although the company is young, they have showed great growth, making money every quarter for the past few years with a relatively stable and recession resistant revenue stream selling canned fruits/veggies and fresh produce. Given recent land acquisitions, earnings are poised to grow significantly in 2013. The only catch is of course, the company is Chinese and there's the issue of how reliable its financial statements are and so there's the potential to get "Sino Forrested". Given my discussions with an important company director, my examination of the financials and most importantly where the stock price is trading at,  I'm confident enough to make a sizeable bet that the company is in fact legit for I should be very well rewarded if it is. Assuming the company is legit and baring any disastrous luck (such as a severe drought or really bad management decisions), it's virtually assured that in 2 years time the stock will at the absolute least double in price, since in 2 years time,  the company will likely have generated earnings that will be at least 120% of the current market cap. They recently announced a 1 cent/quarter dividend to start in 2013 which to me is something that I wanted to see happen to help prove legitimacy and so I'm quite pleased by that announcement.  That makes the stock yield about 7% at the current price which isn't too shabby. 

So, I'm no longer just riding one horse by the name of hwo.to.  I enter 2013 with sizeable positions in hwo.to and gre.v. Hwo is still the larger position by far but that could change if gre.v makes a big run which I think could very well happen in 2013. With gre.v, I'm pretty much "pot committed". The stock is very illiquid even for a microcap and given the size of my position, I wouldn't be able to find a seller near the current price if I wanted to sell it all over a span of a few days. I'm Ok with that, as I am not in this for a quick flip. I'm somewhat in a similar situation with hwo.to. 

I'll talk about 2013 and the opportunities that are out there in the next post.