Weekend Ramblings

The market has enjoyed one hell of a rebound to the point where all the losses of the year have been recovered.  In addition to the improvement in sentiment I noted last post, there was also a massive equities outflow of $20B that week as well which was the biggest outflow since the summer of 2011 near the depths of that 20% correction (this week $6B was added back). As a result,  I think there's a pretty good chance the February low will not be violated for a least a couple of months. We'll see how it goes. Sentiment can be fickle and we can just as well see a rush back into the market in the coming weeks which would once again make the market vulnerable. One thing I've continued to notice is how there is still that underlying deep rooted pessimism about the market from retail trader types that's been there since day 1 of this bull market.- Bizzaro World as I've often called it. The majority of the schmucks who post on the yahoo message boards still cheer and squeal with delight during sharp sell offs  and complain when the market rises. This makes me leery of being bearish for a prolonged period of time for I don't want to be on the same side as these losers LT.

GRE has finally shown some life. The move up started with the closing of the PP which was well under-subscribed. The Chinese mgmt may not be too happy about this "testing the waters" financing  but I sure am as it means there is much less dilution than expected and perhaps others felt the same way as per the action the stock post PP.  On Thursday GRE released yr end production numbers which looked pretty good. This added to the upward momentum in the stock price.  These numbers should dispel any kind of concern that the slide in the share price for the better part of the last 6 months was due to some sort of fundamental deterioration as it certainty appears GRE will have a strong Q4.  My theory that it was a supply overhang pressuring the stock these past several months appears to be right and it looks as if that overhang has been cleared although it's too early to know for sure just yet. There is still this trader who uses the anonymous marker that dribbles out board lot orders at the bid price and he's been doing so in a manipulative way because he usually acts when he knows he can down tick  the stock price especially if he can do so at the close. On Friday he sent the stock price from $1.11 to $1.04 with a 100 share sell order with 6 seconds left in the day. That's such bullshit. One can only wonder what this guy's motive is, but I have taken action by reporting him to IIROC and I suggest other GRE shareholders to do the same. GRE mgmt is aware of this clown and are trying to take action against him as well. This manipulative trading shouldn't matter in the LT but that doesn't mean it should be allowed. You can get into big trouble if you try to mark up stock prices at the end of the day using this tactic and so it's only fair that the same rules apply to downside manipulation.

Alright, let's talk fundamentals now. If GRE  can close the CDN distributor deal they will probably require another financing but I'm sure it will be much higher than at 0.85. I think also, that they will be able to find more willing institutional money to come in on such a financing as they will be a lot more comfortable with the idea that they are funding a CDN based acquisition and the company itself will be transformed to being a lot more Canadian as there will then be significant sales generated in CDN dollars whereby the proceeds will remain in Canada. I would not mind at all the dilution that would would result in financing a CDN acquisition at a higher price,  because it would mean that big money will have committed to GRE which would be a big vote of confidence and could also result in other big money players to follow suit. The number one thing holding the stock price has always been confidence. If a couple of big money players take a stake in GRE they will likely provide support on the open market and mop up any weak holders from say some of of the original Chinese investors who have a low cost basis and want to cash out. This is all tactical stuff. In the LT, if the company stays on the current path the strong fundamentals will assert itself in the stock price one way or another but obviously the sooner this happens the better.

Switching gears now; there's been a lot of negative articles about China for the past several months and  "the looming credit crisis in China" as the media likes to call it. There are indeed problem loans in China but all this negativity reminds me of  how the media was calling for the collapse of  Europe via PIIGS. Remember how everyone was saying  PIIGS were the equivalent of subprime mortgages? Well, yes, there were problems in Europe, serious ones, but there was no collapse and things turned out much better than pretty much everyone expected. Here's the thing about dire predictions and why they seldom occur. If everyone is expecting something bad to happen it means the problem/issue is well known and so people will take swift action to ensure they don't get hurt by it, especially the authorities; and as a result the fears either don't come to pass or the damage is much less than expected. I touched upon this phenomenon in the past such as when everyone was fretting over the debt ceiling and I predicted it would be a non-event as  fear will motivate the authorities to take action.

The damage from 2008 crisis has left scars and is still fresh in everyone's memory. It resulted in central bankers and governments around the world to not be complacent towards budding problems and they are motivated to take decisive actions to diffuse them. This is a strong underpinning for a secular bull market. This fear of a repeat of 2008 whenever there's a problem out there  is a perfect example of the recallability trap fallacy.

Notable improvement in sentiment

AAII sentiment and NAAIM sentiment released today have shown a significant decline in bullishness. AAII is at a ratio of 1.25 bears vs bulls and NAAIM long exposure is down to 51%. Ultimately, I expect bullish sentiment to unwind further as has been case near a major low when you typically see 2:1 ratio of bears vs bulls and < 35% long exposure, but these things often don't occur in a straight line and there's definitely enough unwinding at the moment to warrant a multi-week bounce. Try to play these bounces if you dare....

I'm still having a hard time finding any table pounding long side candidates aside from GRE.

Mandatory reading

Have you ever accidentally smacked your head into a door or a wall?  Your first reaction is to wanna punch that door, as if it's the door's fault! This is obviously a stupid reaction but one nonetheless we tend to have. It's an example of an emotionally driven X-system response which usually dominates the way we initially react in a stressful situation. Emotionally charged responses often drive an investor's decision when they buy and sell. This flawed tendency and other flaws are covered by the studies of behavioral finance. During my CFA studies my favorite topic by far was behavioral finance. Not only was it the most interesting but it's the most effective in terms of helping you actually make money in the market and preventing you from losing it. The biggest enemy you face in this game is yourself.  In addition to emotionally charged decisions; biases, anchoring, herding, overconfidence are some other key pitfalls. Behavioral finance studies the flaws in human thinking and behavior which leads to poor decision making and inefficient markets....and man, there are dozens of flaws  that we have. It's very critical to be aware of these flaws. There's a book you can find online called "The little book of Behavioral Investing".. I strongly recommend it. The stuff you learn in this book is also useful for non-investing life as well.

No Man's Land

That's where I feel the market is right now. There's enough evidence to suggest a ST low is at hand but there's still a ways before the coast is clear on a medium term basis. I have vowed long ago to resist  playing ST wiggles in the market because the shorter the time horizon the more random the market is and the closer you are to pure gambling. However, if this year is going to be a flat or down year as I expect, then I don't want to just sit around every day with my dick in my hands. I want to make money and so that means I may have to take a more active approach in the market and get out of my comfort zone of micro cap investing. However, I know all too well that the moment you start forcing things trying to make something out of nothing,  i.e. making trades without a strong edge, you will lose money. When there's no mouth watering opportunity you just have wait for as long at it takes before one shows itself. It may also mean that you need to start looking elsewhere in different markets/sectors  for opportunities but you gotta make sure you know the territory.

I've said it here before that you only need to make a few moves every year to have big success in the market. It's obviously easier said than done but it's true. It's also true that sometimes the best move could be no move at all and take long breaks away from the market when conditions aren't appealing. Not only is this a disciplined move but it allows you to mentally recharge/reset and come back with a fresh set of eyes. If you are a bottoms up stock picker then you don't care what the market does and so there's no reason for you to take a break. If you take a top down approach then taking a break as per the above is beneficial. I consider myself a bit of both. If I see a really compelling stock I'm going to make a move regardless of where I think the market is going and I will hedge or keep a cash reserve if need be. A lot of value investors don't pay attention to the macro but I do because I know individual stocks don't always exist in a vacuum although they can at times; but as we saw in 2008, 99% of stocks took a beating regardless of their own specific set of fundamentals. In the 2000-2002 bear market there were some stocks/sectors that did well and did not get caught up in the bear market vortex, but the majority of stocks did go down and so having success stock picking is much, much harder to do in bear markets than in bull markets where you have the rising tide lifting all boats effect. Newbies who never experienced a bear market learn this the hard way. 

The bottom line is that you don't have to play every single hand. You can fold and fold and fold again until you are dealt pocket kings or aces. The market is not going away. You can take a sabbatical for a month, 6 months, a year or whatever it takes. 

One trade I'm eyeing is long TLT calls. I'm kicking myself a bit already for missing this move. I won't chase it though and I'll wait for a consolidation if and when it happens.