Weekend Ramblings

I don't want to get caught up in the ST market action too much  but I can't resist making some comments about what transpired this past week. Given the run we've had in the market since November, the bears had every reason to really hammer the market on this  very weak jobs number and all they did was land a jab. There's a pretty good chance Friday marked a ST bottom if you look  at not only how the market clawed back more than half the losses but also if you look at the big spike in bond prices. Pull up a chart of TLT and you will see that ST stock market tops and bottoms (especially the latter) are marked by steep ST drops and spikes in TLT respectively. Friday's spike in TLT was huge and so that suggests either a ST bottom in the market was made Friday or we're very close to one.

Bigger picture wise, making a judgement about the state of the economy based upon a few data points that came in "weaker than expected" is not smart. There are however some things that support the bear case.  There will be a fiscal drag in the coming months as government spending is set to reign in due to "sequestration" which began in March. Perhaps this uncertainty is largely responsible for the weak jobs number in March...could be a just a coincidence though. $85 Billion in government spending will be cut this year alone. That represents about .5% of GDP....not huge but it's notable.  Then there are the tax hikes that took into effect early in the year which I've read could knock off another 1% this year. That's a 1.5% fiscal drag this year which in this slow growth economy is quite large. Bernanke expressed his concerns about the state of fiscal policy in US. Offsetting this fiscal drag is the tail wind of the housing sector in the US whereas unlike in previous years, housing looks poised to contribute to economic growth rather than subtract from it. I've read it could boost GDP 2% and so that makes it a wash when combined with the fiscal drag. There's always the possibility that some sort of deal takes place which improves the fiscal situation in the US but on the flip side, there's also the possibility that the US housing recovery stalls...lot's of unknowns but I don't see the threats as significant longer term at this point.

On the monetary policy side of this things, there is massive accommodation across the globe. Japan has  taken a page out of Bernanke's playbook and announced a very aggressive $1.5 Trillion  monetary stimulus measure by vowing to double its monetary base in 2 years i.e. a major QE operation. Like what Dragghi said last year, Kudora vows to do whatever it takes, and in this case, it's to break the back of deflation which has plagued Japan since the early 90s.  I'm sure this is going to bring about moans and groans from the permabear "intellectuals" who will claim you can't print your way to prosperity, it's a moral hazzard, blah, blah, blah but the fact of the matter is you now have the heads of the 3 major central banks of the world with the petal to the metal with most other central banks also in accommodative mode (but not as extreme). Bear markets simply don't begin with such conditions....they always began when monetary conditions were restrictive.

I've also been pointing out for sometime now that despite the markets having rallied strongly for 4 years, there's still plenty of skeptics without any of giddyness/greed you typically see at a bull market peak. Mind you, I could have (and did) say the same thing in 2011 before the market had a 20% correction...but I'm talking about long term here. John Templeton once said bull markets are born in pessimism, rise on skepticism, mature on optimism and die on euphoria. I think we're late in the skepticism stage with "green shoots" of  optimism. I came across this great chart which actually illustrates the validity of Templeton's market cycle and where we stand now. It uses over 40 inputs to derive a measure of investor "risk appetite".  There's 5 levels of risk appetite in this chart which fit well with Templeton's cycle . 1) Averse (pessimism). 2) Reluctant (skepticism) 3) Neutral (late skepticism/early optimism). 4) Seeking (optimism). 5) Loving (euphoria).

Right now risk appetite is only at neutral unlike the last 2 times the SPX hit 1550 at the bull market peaks of 2000 and 2007 when investors were risk loving. Another major difference between the market now vs 2000 and 2007 is that monetary policy is extremely accommodative whereas it was restrictive in the other 2 periods (rising interest rate environment leading to an inverted yield curve). I've said it before a few times, bull markets die when there is the lethal combination of greed and tight money. We are nowhere close to that right now. Does that mean we can't get nasty corrections some of which can be prolonged and last several months? No! What it does mean is that the correct posture is to be a LT optimist on the markets and position yourself accordingly i.e. looking for long side opportunities and avoiding the short side (aside for hedging).

Riding this bull market has NOT been easy. We've seen some crazy volatility at times including a nasty 15% and 20% correction in 2010 and 2011 respectively and I have had my doubts a few times but in the back of mind no matter how bleak things looked I always knew that prior to these corrections we did not see the classic conditions for a new bear market and so I never gave up on the bull thesis. We could very well see a situation this year again where serious doubts about the bull market come into question due a nasty correction. I personally however, am not going to hedge for a correction unless I'm quite certain one is imminent  Given my LT bullish outlook, I'd prefer to error on the side of being too bullish than too bearish.  Right now I don't see enough evidence  that a big correction is immanent especially since bonds have spiked so much. I have about 20% in cash and so for now that's my defensive position.

There's a few major opportunities I see out there and I'll about them next post.

First quarter wrap up

Cyprus turned out to be a non-event, more so than even I expected. The market ends the 1st quarter closing at an all time high! At the end of March 2009, if there was a poll which asked where you thought the market would be in 4 years time, how many people do you think would have responded 1550+? A big goose egg that's how many. What's the motto of this blog again? Nobody and I mean nobody, even those who were the most bullish, would have predicted we would erase the damage of the worst financial collapse in 80 years in just over 4 years. It's an incredible, amazing feat, yet so many people out there seem to despise this and despise Bernanke who made the bold moves which helped allow this to happen. That tells you something....you don't whine and complain like this if you made money. You only do so if you missed out or lost money.

Unfortunately for the general public, they did not participate much in this epic bull market. Most sold into it, especially during the major corrections. Now that we are at an all time high, I still don't get the sense that optimism has returned in any meaningful way. There has been a notable increase in inflows since the start of the year but it's a drop in the bucket compared to the outflows that took place for years prior. I think what we're seeing is a decrease is pessimism rather than a rise in optimism.  I hear some bears say things are euphoric now like how it was in 1999. Give me a fucking break. Fist of all, most bears out there have zero credibility and some of them are quite frankly, delusional. I have yet to have seen any bear admit how horribly wrong they have been during the bull run and issue a mea culpa. The "I'm not wrong just early just you wait and see" excuse is total fucking bullishit for if you listened to these stubborn, miserable bastards you either went broke shorting or you stood there like a chooch (Italian slang) on the sidelines failing to capitalize on a massive multi-year bull market. Now, on an intermediate term basis, the market is probably due for a consolidation, but go talk to your neighbors about the economy or the stock market and see if there's any "euphoria". The fact of the matter is, there's still plenty of skepticism/negativity out there and this bull market has been hated and discredited every single step of the way by a lot of people. Bizzaro World is still in tact.

Here's one example of how stubborn and delusional bears can be. ECRI issued a recession call in October of 2011. That call was clearly WRONG and as to my knowledge, they not have admitted to it nor have they changed their negative commentary even though their own leading indicators turned up in the months that followed. Instead, they cling to any little negative they can find in the data. So pathetic. Good thing these guys don't actually put money on the line with their calls...but I'm sure their clients aren't too happy. For some reason, pundits feel that it's better to deny/dig your heels in when you make a wrong call rather than come clean and admit it. When I see people like this I lose all respect for them. In 2001 I was quite bearish on the market and I would read the commentary from noted bears at the time such as Bill Fleckenstein. When the market turned bull in the spring of 2003 these guys remained bearishly entrenched. By the time summer arrived, the market had clearly changed character and I since I was not a miserable SOB who actually wished for doom and gloom upon the masses, I was able to turn my back to these gurus and change my LT posture from bear to bull. It was then that I realized that pundits who gain fame for making a good call or two are not as good as they appear to be. A lot of them are just broken clocks who happened to finally get it right or have such big egos that they refuse to change their view when they get it wrong. This is why I never worshiped Roubini and Whitney like everyone else during the collapse in 2008. As I predicted in April 2009 they would eventually go from guru to goat.

With the SPX already up10% YTD, it's on pace for a 40% annual return which ain't gonna happen and so you know sooner or later there's going to be a consolidation/correction. In the last 3 years "Sell in May and go away" was the correct strategy and it seems to be shaping up like this will be the case again this year.
Depending on how things go, I'm looking to buy index hedges as opposed to raising cash when I feel the time is right because I believe my holdings are still quite undervalued with lots of upside and so I don't wish to risk "loosing my position" as per the wisdom of Partridge. Plus my stocks each pay a healthy dividend which will help offset the summer doldrums.

I've gotten off to a very strong start in 2013 mainly because of the performance of Greenstar. High Arctic started the year off strong but has given back most of the gains. There's a few reasons why. The first is that there was a sector wide slowdown in CDN oil & gas drilling which resulted in most service companies delivering terrible Q4 results. Even though High Arctic only has 30% exposure to Canada, it got dragged down with the sector. Their results turned out be pretty solid, far better than their peers. Their CDN operations did show a significant decline vs last year's Q4 but their international operations showed solid growth offsetting it. I'm seeing signs that the slowdown in general CDN oil & gas activity may have troughed in Q4, namely the significant narrowing of the discount between the CDN oil price and WTI (which was main culprit of the slowdown) and nat gas hitting a 12 month high which bodes well specifically for High Arctic.

The company expects to earn about the same or modestly higher this year vs last year and when you're trading at under 4 times earnings with a solid balance sheet flush with cash, that makes the stock still quite attractive; plus mgmt tends to be conservative with guidance. As a reflection of their strong financial position and outlook, the company hiked the dividend by a massive 25%. This caused the stock to pop but it's being repelled by a single large seller out there. I think once he's cleaned out the stock should make it's way higher. There's also another issue that might be holding back the stock. The company's former CEO, Jed Wood, who was booted from his position by the board when the company almost went bankrupt in 2008, wishes to sell his 20% stake in the company and so even though he hasn't sold on the open market (he'd be an idiot to do so), it represents at least a psychological overhang. This "negative" can turn into a big positive once he sells his position to institutional investors who would most likely support the stock on the open market. With the stock yielding over 6% trading at less than 4 times forward earnings, I'm sure there are interested parties in buying Jed's position....it's just a matter of agreeing on the price, but until that happens the stock could be on a leash for while. Given the companies fundamentals, attractive valuation and the big dividend, I can be a strong holder while the dust settles.

Switching gears now. I make my living off my investing/trading and I wouldn't want it any other way. I'm my own boss, the sky is the limit and most importantly, I love what I do but that doesn't mean there aren't drawbacks. Given my aggressive growth approach, my account balance can be quite volatile which is mentally taxing. Although I try to suppress it, I can't help but feel giddy when my account has a strong growth spurt and deflated when I take a significant hit. I think watching my positions on an intraday basis amplifies the mental ups and downs. Given my buy and hold approach for the most part,  I shouldn't be watching my stocks like a day trader... but I can't help it!  It's an addition that I need to kick. Sometimes I wish I could just make my trade, live in a cave for 5 months and then check to see how I'm doing!

Weekend Ramblings

Lot's of buzz over the weekend about the possibility of Cyprus taxing bank accounts to fund a bailout. Look at the all jokers on the yahoo message board go ape shit over this squeeling with delight.What does that tell you? It tells you that the song remains the same....that despite the market being spitting distance from making an all time high, the typical retail schmuck trader is still bearishly inclined. Most of these guys I'm sure are deep in the red over the past 4 years if not entirely broke and so it's beyond pathetic for them to be gizzing on their computer screens like this.

At first blush, this Cyprus situation strikes me as a one off much like the Dubai crisis in 2010. Cyprus is an island with a population of 1 M and apparently is a haven for Russian money laundering. They are beyond insignificant, but the fear is that this is a black swan event and it will lead to a widespread run on  the Euro as people start worrying that bigger European countries could eventually have to resort to the same tax levy on depositors. I have to admit, I'm not fully informed on what's going on with this issue as of yet, but to me such fears smack of paranoia.

With the market having the torrid run that's had, an unexpected negative like this could very well be the trigger for a dip but it seems to me this it the type of catalyst that is short lived in nature like what we saw with Dubai in 2010 and the Japan Tsunami in 2011. If I was short I would be covering into such a dip. I don't mean to sound complacent though. I need to dig into this "crisis" further without the use of permabear sites like zerohedge. Anyone who has made trading decisions based upon the info on that is beyond broke by now.

I meant to talk about other things this weekend but things got derailed by this whole Cyprus thing and I just wanted to document it.

Let off some steam Bennett

The market continues to grind higher. We've seen this "creeper" type action before during the past few years.  These moves tend to last longer than even the bulls think and when a correction does eventually take hold, it usually takes a few weeks of choppy action marked by minor dips before the real correction takes place. So, I don't think the market is in danger of falling apart in one or two days when this rally does eventually run out of steam especially since there's been high put/call ratios on most days which tells me there's plenty of top picking going on, but when the correction does come it will probably be in 7-10% range. We'll see how things unfold.

As expected, I've given back some of the gains I made in January with hwo.to now in full correction mode. For a company that has been producing best in class profitability metrics and EPS (relative to its asset base) it trades so volatile and hasn't gotten the respect it deserves despite being up more than 100% from a year ago...it should be up much more. In a recent news release the company said it expects flat to modest EBITDA growth in 2013 vs 2012 which means at the low end of guidance (which tends to be conservative) the company trades at 4 times forward earnings and 3 times forward EBITDA. This is ridiculous. I've seen so many other companies earn either the same or less and yet they have much higher market caps and not as as good a balance sheet or outlook. This valuation gap has been narrowing but it should be closed and then some. hwo deserves to be trading at a premium not a discount to its peers given that 70% of its business is in PNG which is still thriving while most CDN service companies have operations in North America which for the most part are showing a decline in activity vs last year and a decline in y-o-y  EPS to go along with it. hwo is probably going to experience a drag from its CDN operations this year but it's only 30% of their revenues. Meanwhile thing are still booming in PNG and the company is spending a lot of growth cap ex this year over there which signals they see plenty of room for growth.

I read an article in the Post today by some fund manager talking about a company he liked. He said that it was trading at 7 x EBITDA which he says is a decent valuation and how it has more potential for upside. Well, he's right. Generally speaking, 7 x EBITDA is a decent valuation. So if that's the case, wtf does 3 x EBITDA represent for a company that has a clean balance sheet, fantastic margins and excellent earnings visibility with 70% of it's business given that's secured by LT contracts? Ya, I'm venting.

During my studies in obtaining my finance degree and passing all 3 levels of the CFA program, it embraces the notion that markets are efficient because they instantly discount all public information. Well, I can tell you without a shred of a doubt that this theory is one big crock of shit.  It's been my experience that the market can be terribly inefficient especially in the small cap space. But this is actually a good thing...a very good thing....because it allows for the market to be exploited by rational and patient investors. Mispriced assets do eventually get priced correctly but often not in the instantaneous manner that the finance textbooks claim and that can be quite frustrating. Although I've done well with hwo, the stock deserves to be comfortably above $3 at the very least.

Let's not even talk about my other holding Greenstar which is actually more attractive on a valuation basis than hwo, which I already made the case is a fantastic value! Greenstar has about the same profitability metrics as hwo and yet it trades at 60% of book and 2 times (conservative) forward earnings! I have the majority of my capital invested in these 2 stocks. While it's quite a risky thing to only own 2 stocks, I have my money in companies that have strong fundamentals, solid balance sheets and low valuations which provides me with a margin of safety. Both these companies are cash flow generating machines paying healthy dividends with a payout ratio under 20%.  They have top of the line profitability stats on everything from ROE, ROA, gross margins and net profit margins. To me, these stocks are the equivalent of being dealt pockets aces and so when you have such a hand you have to bet big.  I can be a strong holder of such companies during the nasty corrections they go through, even though it has made me sick to my stomach at times. I may have to go through one of those times again with hwo.

Blazing start to the year

What a month! Both hwo and gre have had big moves so far this year putting me up over 20% on the year already. At one point last week, hwo tagged $2.99 and gre tagged an insane $1.20 intraday. Had those levels held  I would be up a ridiculous 50% on the year! With gre, the move to $1.20 was due to one buyer who aggressively bought stock and once he was done the sellers quickly moved in knocking the stock back to $0.75, but even at $0.75, it's still a healthy move up YTD, and it seems the stock is starting to attract attention. With hwo, I took 10% of my position off the table at $2.92 and the stock has been pulling back after briefly tagging $2.99. Anytime in the recent past that hwo got this overbought and turned down, it would lead to a nasty correction of at least 20%. I never took profits when the stock got overbought in the past because I still believed it was cheap and I felt if I traded I would risk being left on the sidelines if the stock kept going higher despite overbought conditions - something I've seen happen with other stocks plenty of times. This time around though,  for the sake of prudence and to keep my sanity  in the event of another nasty correction, I took a little off this time. I really, really, hope my sale turns out to be a bad one and the stock will bounce back shortly to new highs. The company is set to release cap ex plans next week with the potential for a dividend hike. This news release will be critical in the short run and I'm hoping it's a good one. Although hwo got overbought, the move feels a little different this time. Not only did it breakout to a 4 year high, but it seems as if a new batch of investors have discovered it and so the stock may be more resistant to dips this time around. There are certainly a few potential catalysts this year that could move the stock north of $3. Hopefully the news next week will do the trick.

As far the markets go, it's a tough call here in the short run. Earnings season seems to be pretty good with about 2/3 of companies beating expectations so far. We tagged 1500 as I expected and with the market being up 5% YTD, it's on pace for a 60% annual return which tells you it's very ahead of itself. I said the same thing around this time last year and what happened was that the market managed to climb higher still and starting a topping process in mid March. When the correction occurred in May it almost wiped out the entire gain for the year. I expect something similar to happen again this time but I'm not going to take any action (i.e. a hedge) until I get a good vibe that the market has made an IT peak. There are some danger signs but there's also some hold outs as well. IT peaks are usually a multi-week process anyways and so I don't feel the need to jump the gun especially now that I increased my cash position a bit with my sale of hwo. I'm now at 25% cash.

I know for myself that a 20% gain in a month is unsustainable as well and I have to be mentally prepared for lean months ahead. I will do my best to mitigate or even avoid them but I also know it's a mistake to take profits just for the sake of taking profits. Riding the bigger trend is the way to go although at times it can make you really sick to your stomach to have to endure the set backs. I'm still smarting from that nasty November I had.

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.