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. 

Biding my time

Markets have been hit primarily because of  Emerging Market jitters as the currencies of some of the smaller countries like Turkey and Argentina have taken a big dive. This is apparently the result of QE tapering fears and China showing a continued slowdown. You can pretty much pick any excuse; when the market is frothy from a sentiment perspective as I described in my previous post, it becomes much more vulnerable to negative news.

If we continue to see negative consequences to the unwinding of QE, whether it's actually responsible for it or not, then it's likely going to be the case that the upside of the market will be capped until QE tappering has ended or is close to ending and the market senses that there is no serious fallout from it. This means that we could see a choppy or down market for the majority of the year much like 1994 and 2004, which were also years where the Fed was taking away monetary stimulus. Mind you, in 1994 and 2004 there was outright tightening via rate hikes whereas this time around it's only unwinding of QE and monetary conditions would still be very accommodating without QE. However, there's this wide held belief that the market is dependent on QE and I'm sure you've see the charts which show the correlation of the market's performance with every round of QE.  This effect could be more psychological than anything much like how a child feels brave if he has his favorite blanky and so if you deprive this child from his blanky he will be afraid and has to go cold turkey for a while before he realizes that there was nothing to be afraid of all along. By no means do I claim to know the actual impact of QE or lack thereof but I suspect that it's not as critical as many are suggesting. One thing I'm quite sure of is that QE is no magic bullet and that any positive economic response it may have achieved was because it was initiated at the right time, i.e. it was initiated at a time where the economy had largely purged itself from the excesses of the prior cycle and pessimism was thick; therefore the economy had a lot of pent up upside potential making it more likely to react effectively to stimulus. If for example QE was initiated in early 2008 when the economy was only just beginning to rollover I doubt very much it would have prevented a major bear market. Anyhow, that's my worthless 2 cents on the subject. Debating these kind of things can be interesting but then you start getting into the realm of dogma and the more dogmatic your beliefs are, the less investable they are. 

The bottom line for me is that I want to see the froth taken out of this market before I get can comfortable committing more to it and when this happens it will show up in the same indicators that warned me about the froth. As I said in a recent post, I got the distinct feeling that there are too many weak longs in the market who are only long because of momentum. Now we are probably starting to see these longs bail. I don't know how long this process will take and I'm sure there's going to be sharp bounces in the interim and perhaps we're gonna get one of those soon,  but I'm just going to bide my time keeping my bat on my shoulder for the most part while waiting for the medium term risk-reward situation to significantly improve. If I see something really, really enticing I should probably go for it - at least partially, and perhaps put on a hedge. I don't want to be a hostage to the broad market but I'm well aware of the rising tide lifting all boats phenomenon and how this applies to the downside as well.

Beware the dreaded P6

I find myself in the bear camp these past couple of months not because of the dogmatic, miserable fuck bullshit from the permabears which helped bankrupt God knows how many traders, but because the evidence just keeps piling up.  There's a market strategist named Don Hays who I have followed off and on since 2000. I think the word "followed" is not the right way to describe it...reading his commentary is more accurate. Anyhow, he's a top down strategist and his "system" consists of 3 pillars which are valuation, monetary conditions and psychology (investor sentiment). I like to keep tabs on the last pillar, psychology because it tends to be pretty good at marking significant medium and LT turning points. This pillar of his system is composed of a variety of sentiment indicators such as investor survey's, insider activity and fund flows. Psychology is ranked in 6 levels ranges from P1 to P6 with P1 being the most bullish condition for the market (bearish sentiment is extreme) and P6 the most bearish for the market (bullish sentiment is extreme). It is rare to see P1 and P6 readings and when they get triggered they almost always happen near significant turning points in the market. The only time a P1 reading was notably early was during the 2008 crash, which is understandable given the once in century type collapse that it was.

The bad news for the bulls is that a P6 reading was just triggered. The last time it happened was in June of 2011 near the peak of the market which led to that 20% correction (A rare P1 reading was then registered near the depths of that nasty correction). The other time prior to 2011 a P6 was registered was in May 2008 which was the selling opportunity of a lifetime.

It's important however to keep things into context. In bull market conditions, extreme bullish sentiment  leads only to corrections (which can be scary) while in bear markets they mark the end of a dead cat bounce which then leads to major damage via new lows (as was the case in 2008). So, a P6 doesn't automatically mean the end of the world. In 2004 for example, a P6 reading was registered in March but only led to a 10% correction which took 6 months to play out before the bull market resumed with a vengeance. Having said that though, it's clearly not a good time to be putting money to work during a P6 condition even in a bull market for odds are very high you will be able to get better prices if you wait. It also seems likely the correction will be greater than 10% given the gains we've seen in the recent 2 years and let's face it, after a 165% run in 5 years, we could be in for a major scare much like in 1987 which occurred 5 years after a great 5 year run as well.

So, this also begs the question. Should I consider making a bearish play here? The short answer is yes but because we are not in a bear market and tops can take several weeks to form especially when you have this kind of momentum with the market still very close to the highs, be prepared to be very frustrated if you attempt to do so and so give yourself plenty of staying power. Buying long dated puts would be the best solution. I am strongly considering to do so but since I'm already in 60% cash with my major holding non-correlated to the market I'm already defensively positioned and can patiently wait for the market to show signs of cracking first while keeping my sanity in tact. If history is any guide we will see a couple of small dips followed by sharp rebounds before the "real dip" starts. If I'm wrong and the market simply tanks on a dime then at least I won't be caught with my pants down as I'm already 60% in cash. The bottom line for me is that I can be patient with any attempt to profit on any downside. If I was closer to fully invested then I'd be raising cash in a hurry.

Bottom line here is that it appears the risk/reward for the market in the medium term (6-12 months) is piss poor. We can certainty go higher before we go lower but it would very likely be a running on fumes/blow-off type move in my opinion. The last time I felt this negative about the market's prospects in the medium term was in the early summer of 2011.

Greenstar, my glory or my undoing

Never before have I invested in a company whereby the operating results/fundamentals have been so disconnected from the stock price for such a long period of time and to such a large degree. In the CFA level 3 program there's a section which describes "chronic inefficiencies" of the market whereby there sometimes can exist a mispricing of an asset that can last for a long time due to either structural or behavioral factors. Greenstar is clearly suffering from this and it's making me suffer.

When I first bought the stock just over a year ago at .50 it was trading at 2 times 2012 earnings. A ridiculous discount given how clean the balance sheet was and how constantly profitable the company has been. The knock against the company is that it's a reverse takeover Chinese based company, the same type that Sino Forrest was and so automatically and idiotically, many investors view the company as having high scam risk even though the company has done nothing in any way suggest it is so and they have a pile of cash in the bank. It's no different than labeling me a mafioso just because I have Sicilian blood. In 2013, to combat the skepticism, the company started paying an enticing dividend, added several Canadians to the board. and then hiked the dividend by 50% in the summer. The company also continued to post excellent results with growth in profits likely to be about 35% in 2013 vs 2012. The Canadian dollar has fallen significantly vs the RMB which added further to equity via currency translation gains. I estimate that book value to be about 1.90/dilulted share as of the end of 2013. So, given all of these very positive developments in 2013 you would think that the stock would get a more respectable multiple than a measily 2 times earnings by year end...well, you thought wrong....or at least I did. While the stock price did go up from a year ago, it still trades at 2 times earnings. In the summer it did appear that the stock was finally getting some well deserved respect but that didn't last long and it's been a rather frustrating and agonizing slide since then. I talked about how there is an overhang from what appears to be 3 sellers out there, one in particular that is trading under the annoymous broker. I dealt with a similar situation with hwo.to last year whereby the company has done nothing wrong operationally speaking, yet the stock price drifted lower and lower for months to very undervalued levels primarily because of one asshole who traded out of UBS relentlessly pounding bids. When this happens not only do you get very frustrated but you start to wonder if someone knows something that you don't and your frustration turns to worry and doubt. Eventually, after 5 months of torture, the stock broke out of its funk and eventually soared to significant new highs which means those who were relentlessly selling knew fuck all, but I'm sure there were lot of people who either threw in the towel during those 5 months of hell or sold very early in the recovery thinking the stock would retrace again. 

As far as I can tell, there is nothing at all that suggests something is wrong with GRE's business. In fact, it's the opposite. The company just announced major expansion plans and I conservatively estimate the company will be making $40M in annual profit in 2015. Put this into perspective with the current $26M market cap of the company.... it's fucking beyond asinine, beyond insane. Now, there is going to be a private placement closing next week which will bring about a dilution to existing shareholders. I'm not thrilled that they are doing it at such a cheap price but they need Canadian funds to do an acquisition and the expansion they have planned will require all of the cash they have in the bank plus an increase in working capital. But even with the increased share count due to the PP, I conservatively estimate that fully diluted EPS in 2015 will be at least $1 which means the stock price is trading at 0.84 times 2015 earnings!  How the fuck can the stock price not soar after this news? Anytime the stock tries to pop on good news, sellers come in aggressively hitting bids knocking it down again and the buyers back off. What are they thinking? They can easily fetch higher prices if they wanted to. They are such fucking idiots. 

At some point, I figure that the market is going to give GRE the respect it deserves. I said this at least a few times during the first year when I bought hwo.to. It took 2 years after I bought for the market to finally come to its senses and so I wonder if it will take the same amount of time with GRE....it may take even longer given that the company is Chinese, but there's only so long the market can penalize a company that keeps producing these kinds of results while consistently raising dividend payments as the company grows, and speaking of which, based upon the growth that's to come in 2015, I think there's a good chance of  another 50% hike in the dividend for 2015 which would be announced this summer if history repeats. 

In the meantime I may very well continue to suffer and be frustrated beyond limits. The only way I can combat this is to simply not look at the stock price day to day and only monitor fundamental developments. I can't second guess myself thinking that maybe someone knows something I don't. I've made my move and I'm sticking with it unless there's clear evidence that something is wrong.  I said this once to someone; as a value investor the best strategy is to buy a cheap stock you've done your homework on and have strong convictions, turn off your computer and go live in a cave for a year before checking the price because it can take a long time for the market to recognize the value that's there.  And yes, these extreme value disconnects CAN and DO happen especially with microcap stocks. The market is often NOT effecient and so it's wrong to assume all cheap stocks are "cheap for good reasons". Case in point is with bev.to. In early 2009 the stock was trading at 0.23 when they announced a major government contract which pretty much guaranteed at least 0.50-0.60/share in earnings. What did the stock do after the announcement? Fuck all and it did fuck all for several weeks later and only really started moving when the money from this contract actually started coming in. The stock price got as high as $3.45 just over a year after the contract announcement. I bought at 0.50 only because I discovered it a little late. Why was the market so slow to react to such good news? Because the company nearly went bankrupt  a couple years prior, plagued by scandal from its former CEO and so nobody trusted the company anymore even though they restructured and got rid of old mgmt. A similar thing happened with hwo.to. The former CEO Jed Wood nearly ran the company into the ground in 2008. They booted him out and restructured but despite producing great results early on, the market did not give the company any benefit of the doubt for years due to its history and its operations in PNG which was deemed risky, but eventually it simply became too hard to ignore the strong balance sheet and great results the company was delivering and the company finally got it's due.  The lesson I learned and profited fro is that in the LT, good financial performance gets recognized by the market one way or another and there's only so long unwarranted negative sentiment can hold a stock back, but I also know the journey a shareholder must take to see this through is filled with frustration and doubts galore. In hindsight the best thing to do is like I said earlier, don't look at the stock price for long periods of time and simply focus on the results that are being delivered and other fundamental factors. 

Now I just need to take my own advice before I lose my nerve. I may not post for a while unless I find some new stocks to buy which I'm currently on the hunt for.