March 31, 2013

Bulls Bears and Pigs: Q1 Wrapup

 From Bulls Bears and Pigs

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 f@cking 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 f@cking bullish!t 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!