EQT Corp Up 49.1% Last Week; Inflection Point Is Here

EQT Corp Up 49.1% Last Week; Inflection Point Is Here

Mar. 17, 2020 8:54 AM ET|About: Antero Resources Corporation (AR)EQTSPYUNGXOMSummary

EQT Corp, the largest dry natural gas producer in the U.S., gained 49.1% last week.

Many natural gas equities had stellar performance weeks, while SPY dropped 9.5%, and historic volatility engulfed the markets.

Looking through the volatility, the inflection point is clearly at hand.

Introduction

There has been historic volatility in the financial markets.  That is not hyperbole, as the chart of the $VIX shows below.

In fact, even though the SPDR S&P 500 ETF (SPY) declined 9.5% last week, we have seen daily price moves, on a regular basis, that exceed that move.

In this swirling sea of turmoil, one sector that I have extremely bullish on stands out.

Specifically natural gas, and more specifically, the historically downtrodden natural gas equities, which have both been contrarian trades and investments even for contrarians.

Dry natural gas prices rose 9.4% last week, the United States Natural Gas Fund (UNG) rose 10.7% last week, and the largest dry natural gas producer in the United States, EQT Corp (EQT), rose 49.1% last week.

Macro Is Turning Sharply To Favor Natural Gas

Anybody that has been reading my work knows that I have been extremely bullish on natural gas prices and natural gas equities.

Why?

In a nutshell, both lower 48 dry natural gas production and liquids production are rolling over, as the charts of my colleague Lothar Grall illustrate.

(Source: Lothar Grall, The Contrarian)

Keep in mind, this data is from the EIA’s Drilling Productivity Report, and production was already in decline for dry natural gas and rolling over for liquids before COVID-19 became a full blown pandemic, and Russia and Saudi Arabia got into a full scale oil war.

The latter has cratered crude oil prices, and effectively rendered obsolete the primary bearish natural gas thesis, which was that unending associated dry gas production growth would forever impair dry natural gas prices.

Natural Gas Equities Have A Contrarian Surge

Again, last week, with the SPDR S&P 500 Index down 9.5%, the largest natural gas producer in the United States, EQT Corp (EQT), surged higher by 49.1%.

That is a monumental move, in a week of historical market volatility, and adding to the narrative, many of the leading dry natural gas producers had a strong week of relative, and absolute, price performance.

As this narrative begins to flow through to market participants, there is potential for extraordinary gains, perhaps even a generational wealth opportunity, as I wrote about in an article highlighting Antero Resources (AR) recently, in some of the largest dry natural gas producers in the table above.

On this note, much beleaguered Exxon Mobil (XOM), which is widely ridiculed for their XTO energy purchase in 2009, which gave them greater natural gas exposure, could get a material, unexpected (by many market participants) boost from higher dry natural gas prices.

Closing Thoughts – Take Advantage Of What I Think Is A Historic Opportunity

Many always ask me how I had a year like I did from November of 2008 to November of 2009.

The answer was really simple.

1. Have an accurate bigger picture macroeconomic view.

2.  Identify opportunities that are mispriced by the markets.

3.  Take advantage of the panic selling.

Fortunately, for market participants today, we have all the ingredients necessary for one of the great contrarian inflection points of all-time.

For members of my research services, I have published several recent pieces quantifying the historical volatility and the opportunity as follows:

Chronicling Another Historic Day In The Market & Putting Together A Buy List

Another Historic Market Day This Week – Chronicling Black Thursday & Looking Forward

Chronicling A Historic Day In The Stock Market & A More Historic Day In The Energy Market

(Note: Members can click on these articles to access.  Also, the first article is still being distributed).

Somewhat unbelievably, we have had three historic days in the stock markets in the past six trading sessions, really four historic days counting Friday’s big gains, so the volatility is incredible.

Seeing through all of this volatility, there are clear inflection points at hand, and the relative and absolute opportunity right now is as big as I have seen in my 25 year plus personal and professional investment career.

In summary, buy what is cheap, and buy into the panic, as the cheapest valuation equities with the best future return prospects will often rebound ahead of a bottom in the broader equity market.

Specific to my research services, I am offering a 20% discount to membership (I am extending this through March) to “The Contrarian” (past members can also direct message me for a special rate), the lowest price point since the founding members price, where we have a live documented history dating back to late 2015.

Additionally, I am offering a limited time 50% discount for the first 10 new members (I expect these slots, some of which I view as a stepping stone to “The Contrarian”, to fill up fast as they have done previously) to a host of research options, including a lower price point. If you subscribe to a premium option (I have had one concierge slot open up), I will set-aside time for a personal phone call to get up to speed. To get these offers, go here, and enter coupon code “opportunity” without the quotes.  Either way, once you sign up, I will follow-up with a welcome email within a day.

Reach out with any questions via direct message (I enjoy the dialogue at market inflection points).

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point, which I believe will supersede 2000-2002 in the growth-to-value rotation.

WTK

P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.

Disclosure: I am/we are long AR, EQT, UNG, XOM, and short SPY in a long/short portfolio.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Use Panic Selling To Your Advantage

Use Panic Selling To Your Advantage – Highlighting A 14% Yielding Model Portfolio

This article was originally written on February 27th, however, I am posting here for the archives.

Feb. 27, 2020 1:42 PM ET|11 comments |About: Brookfield Property Partners L.P. (BPY)MICSPYXOMXOP, Includes: BPYPPGNWOXYSLBSPGSPG.PJSummary

Panic selling in the broader stock market may have just begun.

Under the surface, panic selling has been ongoing in selected sectors and stocks for an extended period of time.

This presents the historic opportunity.

Introduction

Often, I get the question of how I have achieved out-sized returns (and losses) in the past, particularly with an emphasis on what I have been able to do in my very good years, including 2016, 2003, 1999, 2000, 2008, 2010, and most notably 2009, as illustrated by the snapshot of an aggressive Portfolio that I managed personally for myself below, where I took roughly $60,000 in November of 2008 to over $3 million by November of 2009.

How did I achieve the above returns, over 5000% in a years time (which BTW I may never top, however, knowing this reality, does not stop the pursuit of good years, particularly at inflection points)?

There is a lot of complexity in the answer, including having a variant view, specifically on the broader market as measured by the S&P 500 Index (SPY), using some leverage to express this view, primarily via options, which can be very dangerous tools in inexperienced hands, and the willingness/ability to go against the grain. 

Having said this, there is also a lot of simplicity in the answer, specifically in the main underlying driver of the returns, which was buying significantly out-of-favor equities, with one example being my March 2009 and April 2009 purchases of Macquarie Infrastructure (MIC) for roughly $2 a share.  Famously, MIC got down to $0.79 (before dividend adjustments…so I was down roughly 60% on even what I thought were bottom ticking purchases…think about that for a minute) and topped $80 per share, again before dividend adjustments, while also reinstating a substantial dividend, that has been roughly $1 per quarter for some time now (this dividend had been suspended in 2009 before being reinstated).

Clearly, with the benefit of hindsight, purchasing MIC at the lows was a generational investment opportunity, however, it was not easy at the time, even though I had done thousands of hours of due diligence on the company,  similar to the focused due diligence effort I have done today, on out-of-favor, undervalued securities.  

The key was buying into the panic selling, taking advantage of the panic, and I think we are seeing similar levels of opportunity today, just not in the places that most investors want to look.

Buying Into The Panic

In my November 2008 to November 2009 example above, I actually started buying what I felt were the most distressed, highest return potential candidate equities in 2008, in the heart of the panic.  Remember, the broader equity market did not bottom until March of 2009, which is a whole other story, however, the important point is that some of the most downtrodden equities made their lows prior to the broader market making its lows.

One specific example, is General Growth Properties, the former second-largest mall REIT in the U.S. behind Simon Property Group (SPG), that was eventually acquired by Brookfield Property Partners (BPY) in 2018.

In November of 2008, I was on a due diligence trip through South Florida, meeting with hedge fund managers, and asset managers, and after a legendary night out for this generally non-party owl author (ask me for details if you want), I awoke in my Miami Beach hotel room, looking out at the ocean, and taking in the panic, eventually buying 120,000 shares of GGP on November 14th, 2018 for this specific account, as my brokerage account statement shows (if you want additional details send me a direct message).

These purchases, in aggregate, totaled $53,593.71, which was not a big dollar total in aggregate, however, the 120,000 shares were a nice stake in what would become the best performing S&P 500 equity in the bull market, at least through March 10th, 2017, as this CBS MarketWatch article on the bull market turning 8 years old chronicled.

In March of 2018, in the Brookfield Property Partners deal, these shares could be exchanged for $23.50 in cash.

Not a bad return at all, however, the key was to buy into the panic.

Where Is The Panic Today

Even though the S&P 500 Index is on track to be down 7% or more this week, as I write this post, the real panic is not in the broader stock market, at least not yet.

In fact, on a long-term chart, the recent decline is just a blip.

Now, we could be on our way to a broader stock market sell-off, as GMO has previously outlined earlier in 2018.

Regarding the path of the broader markets, that is yet to be determined, as we grapple with historically extended valuations, and historical monetary policy accommodation levels. 

The real panic right now is in the underbelly of global economic activity, specifically in economically sensitive cyclical stocks, and more specifically, in the most loathed of all stock market sectors today, which is of course, the energy sector.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) offers a glimpse of this panic, with XOP down 79.8% from its 2014 high, and down 63.8% from its 2018 high.

Thus, with the broader U.S. stock market, as measured by SPY, only down roughly 8% from its recent highs, the compare & contrast should be eye opening for most investors.

Building on the narrative, with our deep research dives, we feel there are a number of out-of-favor equities that are down even greater in percentage terms, which offer even greater relative and absolute opportunity.

Importantly, similar to several of the downtrodden equities I purchased in late 2008, and early 2009, including General Growth Properties, and Genworth Financial (GNW), which was also bought well below $1 in November of 2008 before shares rebounded above $18 by early 2010, the most out-of-favor, undervalued equities right now, will probably bottom ahead of the bottom in the broader equity market.

Panic Selling Is Yielding Opportunity

It is no secret that I am targeting what I believe are the most undervalued securities, with the goal of creating a generational wealth opportunity.  These securities are generally loathed, unloved, and scorned right now, and many of these equities would make your stomach turn looking at long-term charts, part of the reason there is so much opportunity.

While the best opportunities are generally in smaller capitalization names, there is opportunity in large-caps, including in energy stalwarts like Exxon Mobil (XOM), Occidental Petroleum (OXY), and Schlumberger (SLB), all of which offer attractive yield-oriented income opportunity.

These three securities are part of a “Stuck On Yield” Model Portfolio, which is a $100,000 portfolio, that I created on Friday, February 21st, for a family member.

This Portfolio is yielding over 14% right now, and I have done deep-dive due diligence on all its member components, a majority of which are from the target rich energy sector.

Members of The Contrarian can see this Model Portfolio here, and I have sent out emails of this Portfolio to members of my research services, and I will be making it available this week for all my research members.

Closing Thoughts – Be Ready To Buy Now

Nobody, including me, really knows where the stock, bond, and commodity markets are headed right now with certainty.  All we have is probabilities, and ultimately, our valuation analysis.  The latter is crucially important, as buying the most undervalued assets, ultimately leads to the strongest returns, so long as you can ascertain the underlying asset quality, and survivability of the corporate entity.

On this note, I am going to make mistakes, so the key is getting a handful of these right, as the gains from the survivors will more than make up for any losses, at least that is my past experience at previous inflection points.  Ultimately, valuation matters, and starting valuations levels matter too.  Adding to the narrative, with everyone wanting to own quality today, there are many “Have Not” securities that are historically undervalued.

Conversely, a high valuation is a bad starting point, and buying overvalued assets, which certainly describes the S&P 500 Index, which trades at greater EV/EBITDA, Price/Book, and Price/Sales multiples that it did at its peak valuation levels in late 1999/early 2000, is a recipe to achieve poor returns going forward.  Adding salt to the wound, the bond market, which offers meager sovereign yields, is also set-up for poor future returns over the longer-term, as historically over 90% of bond returns are correlated with starting yields.

In summary, buy what is cheap, and buy into the panicas the cheapest valuation equities with the best future return prospects will often rebound ahead of a bottom in the broader equity market.

Specific to my research services, I am offering a 20% discount to membership (I am extending this through March) to “The Contrarian” (past members can also direct message me for a special rate), the lowest price point since the founding members price, where we have a live documented history dating back to late 2015..

Additionally, I am offering a limited time 50% discount for the first 5 new members (I expect these slots, some of which I view as a stepping stone to “The Contrarian”, to fill up fast as they have done previously) to a host of research options, including a lower price point.  If you subscribe to a premium option (I have had one concierge slot open up after a gentleman I was speaking to last evening held off on taking this slot), I will set-aside time for a personal phone call to get up to speed.  To get these offers, go here, and enter coupon code “opportunity” without the quotes.

Reach out with any questions via direct message (I enjoy the dialogue at market inflection points).

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point, which I believe will supersede 2000-2002 in the growth-to-value rotation.

WTK

P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.

Disclosure: I am/we are long MIC, OXY, SLB, xom and short spy in a long/short portfolio.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

EQT Corp Finished Up 49.1% Last Week

The largest natural gas producer in the United States had a remarkable week in the middle of market turmoil.

For the week, with the S&P 500 Index (SPY) down 9.5%, EQT Corp (EQT) rose 49.1% for the week.

Natural gas (UNG) prices also rose 9.4% for the week.

Meanwhile, oil prices (USO) declined 23.1% for the week.

Bigger picture, price action is telling us that major inflection points are at hand. Best of luck to all.

Volatility Is Above 2008 High Levels As Dow Jones Industrial Average Has 2nd Worst Percentage Decline

Volatility Index Sets New Highs

This is just a short post to document something remarkable.

Volatility is actually above 2008’s high levels.

With the Dow Jones Industrial Average (DIA) posting is second worst percentage decline ever, and a cluster of recent days on the worst performing days list, perhaps the jump in volatility amid the COVID-19 pandemic should not be a surpise.

Adding to the narrative, the S&P 500 Index (SPY) posted its third worst percentage decline day ever.

Ultimately, volatility is opportunity, and this elevated volatility will not be around forever. Thus, I think market participants should be making their shopping lists for what to own on the long side.

Inflection Point & Opportunity

  • Growth investing has dominated value investing for the past decade.
  • The pendulum has swung to a rarely reached extreme.
  • As it swings back the other way, which I believe it has started to do with the price action in October, there should be significant opportunity.

There is an old saying that a picture says a thousand words, so with that in mind, take a look at these two charts, the first from Ned Davis Research, and the second from Chuck Mikolajczak, by way of  Alastair Williamson.

Looking at the charts, two conclusions should be abundantly clear.

1.  The U.S. equity market has been in a bubble, and this bubble has exceeded the epic 1999/early 2000 peak valuations in certain areas.

2.  Growth companies, led by the infamous quintet of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL), and carried along by many others, including NVIDIA (NVDA), and more recently, before its even more recent decline, Advanced Micro Devices (AMD), have been in-favor to the extreme excesses of the late 1990’s, while value stocks have rarely been this out-of-favor historically, on a relative basis.

The price action in October was a wake-up call, with AMZN, perhaps the leading flag carrier for the markets broader price action the past decade, down -20.2%, and cast aside, forgotten companies like Southwestern Energy (SWN), which is one of my favorite buy-and-hold investments today for the  next decade, up 4.5% for the month, even with the S&P 500 Index (SPY), which is dominated by the large-cap technology growth stocks, down -6.9% for the month.

In an irony of ironies, Southwestern Energy was actually the worst performing S&P 500 Index component from the U.S. equity bull market starting point of March 9th, 2009, through its exclusion from the venerable index in 2017, due to its lower market capitalization, which was caused by its share price decline and severe under-performance.

I would bet almost anything, that Southwestern Energy, which has undergone a very dramatic transformation the past three years that we cover in depth in The Contrarian, outperforms the S&P 500 Index over the next decade.

There are whole studies that cover how unpopular companies outperform, particularly those booted from popular indices like the Dow Jones Industrial Average (DIA), and that is the place to look for opportunity today, in my opinion.

After all, there is a reason that Ibbotson data, now part of Morningstar (MORN), shows small-cap value as the best performing asset class in the market over the long-term.

Sure, this has not been the case for the past decade, but as we showed above, the U.S. equity market has been in a historic bubble, and value equities have been historically out-of-favor.

For a first-look at the forgotten companies that I will be covering in-depth, and have been covering in-depth, please consider joining The Contrarian, which is my premium research service platform on Seeking Alpha.

I am biased, of course, but I think we have the best group of investors and traders anywhere, seasoned by nearly three years of experience together, positive and negative, and commentary for some members, with many members actively contributing their unique perspectives to a robust Live Chat discussion on a daily basis, particularly when volatility surfaces.

Right now, we have an open free trial at The Contrarian, so if you have ever had an interest in test driving our group, now is a good time.

From my perspective, as I said in my blog posts the past two weeks, it would be worth taking a look, simply to view the Live Chat dialogue.

I do recognize that the price point of The Contrarian is a little steep, coming in as one of the more expensive services in SA’s Marketplace.

Over the years, I have had quite a few requests for a lower-priced, more streamlined research product, and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate this official soft launch, which includes a deep-dive research report on what I believe is an extremely timely equity (delivered via email upon membership), I am offering a limited time $299 annual membershipfor the first 100 members. To get this discounted price, simply use the coupon code “first100”.  (WTK’s Note: There are a few slots left remaining at this introductory price).

Ultimately, I think we are now at a major inflection point in the financial markets, highlighted by the price action in October of 2018, which has been ongoing in slow motion for three years, but which could suddenly accelerate. Being different, being contrarian, has been extremely painful for a long time now, however, resilience and persistence, two necessary qualities for success in contrarian investing, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

If you have any questions, send me a direct message at any time,

William “Travis” Koldus

Disclosure: I am/we are long SWN and short SPY as a market hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Financial Markets Are At An Inflection Point

(Travis’s Note:  This article was originally published on April 24th, 2018, and it is being republished on October 28th, 2018, to add to the archives.)

  • For over nine years, the current bull marked has surprised investors and speculators, including me, with amazing twists and turns.
  • Personally, I benefited at the previous two major inflection points, (2000  & 2008), including making money in 2008, and making a small fortune in 2009 on the long side.
  • Lessons learned in 2008 & 2009, and during the prior 15 years actually created value biases in my investing style that impaired results tremendously in the current bull market.
  • The pain culminated in a horrific 2017 for me personally, which ironically had followed a historic rebound and reversal in 2016.
  • Almost everybody’s an expert today, with biases in their own successes over the current bull market, or over the past 20 years, but that market environment is rapidly coming to an end.

Few investors and speculators have had the highs, which included making money personally in 2008 followed by huge success on the long side in 2009, or the significant lows, including losing large sums of money personally and for individuals that I was/am very close to (there is nothing more torturous than believing in something through thousands of hours of research, sometimes tens of thousands of hours, and the market proving you wrong, and failing people who are close to you) that I have experienced in the financial markets.

I am over 40 now, and I have been investing for nearly 30 years, starting when I had a paper route at 9.  This has accumulated to a fairly large pool of experience.

However, that only tells half the story.  Financial markets, and market history have been a large part of my life beyond simply the years accumulated, as they have been both a passion and a hobby.

From the age of 12 to 15, I consumed every financial book I could find (really ever since that time frame I have been a voracious reader – this is my favorite financial book), and I began more actively investing and speculating in my early years of high school.

One of my favorite books from this time frame was Martin Zweig’s Winning On Wall Street, which was published in 1986.  During my formative years, I also read the Wall Street Journal, Barron’s, and Investor’s Business Daily, which was founded my William O’Neil in 1984.

During college, I switched from a career in teaching, following in the footsteps of my deceased father, into a career in Finance, after I turned a $3,000 student loan into over $300,000.  I spent every free minute or hour studying the markets, and I figured that I should make a career out of the profession, since it was something I had a unique passion for and where work felt more like a hobby.

Academically, I graduated Summa cum Laude, as the Top Finance student in my class, while working all kinds of jobs from resident assistant, to waiter, to hotel front desk worker, to an internship under a renowned value investor at an insurance company.

From there, I have held many licenses, and accreditation’s, including achieving the CFA Charter in 2006, and the CAIA Charter shortly thereafter.

Additionally, I have spent almost my whole adult professional career in the financial markets, working for Charles Schwab, then performing research as an investment analyst for an RIA, then working for one of the largest RIA’s in the country as a senior investment analyst.

Along this journey, I started a boutique invested firm with my own capital in 2009, I have helped to host investment conferences, and I have consulted for some renowned hedge funds.

Then, late in 2015, I founded “The Contrarian“, because I believed we were near another major inflection point.

In 2016, I was spectacularly right with this forecast.

Then, shortly thereafter, I was spectacularly wrong in 2017, where a huge curve ball was thrown by the markets, which has tested my spirit, persistence, and drive like few challenges in my life.

The financial markets are notoriously humbling, as life is, and 2017 humbled me mercifully, as investors went back into the same trades that excelled from early 2011 to early 2016, even though we had major secular turning points in 2016, including bottoms in commodity prices, including in oil, in interest rates, and a top in the U.S. Dollar.

In summary, the gravitational pull of the bull market was so strong, and so distracting, that it lulled everyone into thinking that nothing had changed in 2016, even though everything had changed.

Even more alarming, the increasingly rare events became prized as commonplace in the financial markets.

Building on this narrative, investors and speculators willingly ignored that valuations were at their most extreme levels in modern market history in the United States, investors and speculators willingly ignored some of the lowest volatility in modern market history, and investors and speculators willingly looked past the changes in market mechanics that were leading to anomalies that should not happen.

Ultimately, we have reached a rare point in the financial markets, similar to 1999 and 2000, where an investor can be, “Extraordinarily Bearish & Extraordinarily Bullish“, at the same time.

How does this happen?  The pied piper of the Fed and global central banks have certainly not helped, yet it is just the human condition, where we have all become accustomed to excessive speculation and extraordinary intervention in the financial markets.

Following the most improbable losses of my investing career in 2017, I believe there are extraordinary opportunities in today’s financial markets on both the long and short side.

Thus, while most traditional investors could probably “Take A Ten Year Vacation“, and check in quarterly or annually to see if there are better opportunities, and most likely, come back to better prices a decade from now in the broader U.S. stock and bond markets, the landscape for contrarian value investors is unusually opportunistic, as most trades are extremely one-sided today, and when the pendulum swings the other way, it is going to be something we are writing about like we write about 1999-2002 and 2007-2009.

In closing, I have gone on several tangents, however, the main purpose of this blog entry is to highlight the opportunity, highlight the risks, and just reflect a little bit in a public forum where a dialogue can ensue.

When the extraordinary happens over and over, it becomes routine in a sense.  Thus, for investors who have lived through the late 1990’s and early 2000’s, or those who survived and thrived from 2007-2009, today’s extremes seem commonplace, yet today’s extremes are even more extreme than those historic extremes.

(Source: The ContrarianGMO)

Think about that for a minute.

If you take away anything reading this, be aware of the market extremes, be aware of your own biases, my own have been exposed and beaten down, and be aware of the historic risk, and the historic opportunity.

WTK

Disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Once In A Lifetime Market Price Action

(Travis’s Note: This article was originally published on January 22nd, 2018, which, with the benefit of hindsight, ended up being near the peak in the global equity market.  Much like 2000, though, when the NASDAQ peaked in March, then rolled over, however, the S&P 500 Index attempted to make a new high in the Fall of 2000, this time something similar happened, with global equities peaking in January, and then the U.S. stock market, specifically the S&P 500 Index, making new highs in the Fall of 2018).  

  • There is no parallel for today’s price action.
  • Extremes are beyond extreme.
  • There will be a price to pay when overcrowded trades unwind.

One of my favorite authors is Malcolm Gladwell.

One of my favorite short stories is Gladwell’s 2002 New Yorker article “Blowing Up“, about Nassim Taleb & Victor Niederhoffer.

One of my favorite passages (I have many) from this article is the following:

 Physical events, whether death rates or poker games, are the predictable function of a limited and stable set of factors, and tend to follow what statisticians call a “normal distribution,” a bell curve. But do the ups and downs of the market follow a bell curve? The economist Eugene Fama once studied stock prices and pointed out that if they followed a normal distribution you’d expect a really big jump, what he specified as a movement five standard deviations from the mean, once every seven thousand years. In fact, jumps of that magnitude happen in the stock market every three or four years, because investors don’t behave with any kind of statistical orderliness. They change their mind. They do stupid things. They copy each other. They panic. Fama concluded that if you charted the ups and downs of the stock market the graph would have a “fat tail,”meaning that at the upper and lower ends of the distribution there would be many more outlying events than statisticians used to modelling the physical world would have imagined.

Reflecting on a personal level, I have characteristics of both Taleb and Niederhoffer, and I have endured and caused a lot of pain in 2017, both daily , and on a cumulative basis.

Reflecting on the markets, we remain in an unnatural state, where the S&P 500 (SPY) has risen 15 straight months on a total return basis.

It is a melt-up of epic proportions, which comes after an already epic bull market, and the consistency of the advance for the broader market, and for the “Have” stocks (the “Have Not’s” have been left behind in an equally historic move) has removed any objectivity from analysts, speculators, and investors.

To close, we have to chronicle the magnitude and the extremes of the price action, and realize that when crowded trades unwind, there will be nobody else to take the other side of the trades.

Disclosure: I am/we are short SPY As A MARKET Hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Steepening Of Yield Curve Is Bigger Now (Already) Than In 2016

  • The U.S. Yield Curve has been flattening for a long time, and after a brief rise in 2016, the flattening trend resumed in 2017, and for a majority of 2018.
  • A recent steepening in they yield curve is already bigger than it was in 2016.
  • What does this mean for asset prices?

I have been a longtime bear on U.S. equity prices, and global bond prices, though I am extraordinarily bullish on a subset of equities that I think are historically cheap.

With regard to the broader U.S. equity market, my bearishness has been wrong, thus far (more on this below).

However, specific to the bond market, my public writing has proven fairly accurate, with the iShares 20+Year Treasury ETF (TLT) down -9.1% this year, and down -14.9% since July 1st of 2016 (global sovereign bond yields made their secular lows in the Summer of 2016), as evidenced by the following sampling list of my public SA articles.

Is Everything A Bubble? – Published On June 12th, 2017

A Massive Detour On The Road To Inflation – Published On March 24th, 2017

The Bond Bubble Is Bursting – Published On October 7th, 2016

Are We At The Point Of Maximum Financial Risk For Bonds? – Published On August 26th, 2016 (behind paywall)

The Bond Bubble Is About To Burst – Published On August 9th, 2016

Central Bank Bubble Blowing: The Reflation Trade Is Alive – Published On July 15th, 2016

The Irrational Fear Of Deflation – Published On June 17th, 2016

The Stock Market And Bond Market Are Telling 2 Different Stories – Published On April 8th, 2016

Inflation Is Coming, Are You Prepared? – Published On March 11th, 2016

Looking at the articles above, the last linked article, the Inflation Is Coming, Are You Prepared article,the The Irrational Fear Of Deflation article, and the Central Bank Bubble Blowing: The Reflation Trade Is Alive article, are all not behind SA’s paywall, so this could be a good starting point for reading.

Clearly, I have been bearish on bonds, and U.S. equities too, though so far this has been very wrong with regard to the broader U.S. equity market, though I still think real returns going forward are going to be the worst in modern market history as shown by the table I regularly put together below using data from GMO (first table below), and corroborated by Goldman Sach’s (GS) Bull/Bear Market Indicator (second chart below).

What could cause these poor projected real returns?

One answer is rising interest rates, and ironically higher economic growth, as faster economic growth puts upward pressure on inflation and interest rates, particularly at the longer-end of the yield curve, which has remain stubbornly subdued compared to shorter-term interest rates, as shown by the chart of the spread between the 10-Year U.S. Treasury Yield and the 2-Year U.S. Treasury Yield.

Looking at the chart above, we are clearly early in the steepening of the yield curve. In fact, the upturn only looks like a blip. However, in percentage terms, we have already exceeded the steepening in late 2016, so there may be more to this developing story than meets the eye, especially with the correlated turn higher in longer-term interest rates across the world, including in the United States, Britain, Germany, and Japan.

“Lower for longer” has been a mantra for a long time applied to interest rates, but what if after nearly a decade of a flattening yield curve, longer-term interest rates rise more than almost everyone expects right now?

What would that do to current asset valuations?

Where are the risks in an environment where almost all investors have been chasing yield for over a decade?

Where are the opportunities?

In closing, it is my opinion, that there are many extremely crowded trades, not to dissimilar to past major inflection points in the market that we have collectively witnessed as market participants over the past two decades.

Active investors, particularly value investors, have been punished severely the past decade, however, this pain (and I have endured my fair share or more) is setting up an extraordinary opportunity as price discovery, long cast aside by the indexing/ETF wave, reasserts itself with a vengeance.

Best of luck to everyone,

WTK

 

It Is Not Easy To Be A Contrarian, Especially At Turning Points

  • The most rewarding trading and investment opportunities happen when everyone is crowded on the same side of the boat.
  • Trades appear extremely crowded today, similar to how they were in 2016, though to a bigger degree.
  • Reflecting on past opportunities, and the time, patience, and losses that had to be endured to get to the other side of the opportunity.

Roughly two weeks ago, I had dinner with a friend, somebody I have known for over 35 years, really ever since we were five years old.  After the dinner/meet-up, I started to write this piece, but tabled it until this afternoon/evening.  During the get together, we reflected on the current environment, the challenges of the past two years, and the opportunity today.

Since this gentleman knows me pretty well, I made an effort to be quiet, and listen more than usual, and what came out caught my attention.

His observation is that whenever I have felt the worst (and these past twenty one months have been at the top of my list for difficult stretches in an active 25 plus year investment career), the weight of sub-par returns, the weight of losses, that is when things usually turned.

This gentleman knows very little about the markets (other than our interactions over two plus decades investing, and longer than that as friends), and what he reads on his own accord.  He also knows very little about the investment business, though he is very smart in his own right.  Really, he is just a good lifetime friend of mine, through the ups and downs, and he has trusted me to manage his capital.

Previously, I have lost significant amounts of money for him, and I have made him significant amounts of money (overall significantly net positive relatively, and absolutely, but he would be the first to tell you the ride has not always been smooth).  When things go badly, he trusts me, and when things go well, he trusts me too.  We have built up experience together that is invaluable.

Thinking about this dinner today with my friend, and thinking about this past week, and the past several years, starting with the founding of “The Contrarian” in December of 2015, it seems we are on the cusp of a significant inflection point.  Looking back, 2016 was the start, and while I have talked about how that year was not easy, it ultimately turned out to be a very good year for investment returns if you were willing to think different.

Besides being a good investment year for our fledgling group, though very few members were on board from the start (as most left earlier in 2016), 2016 saw a secular bottom in commodities early in the year, and then a secular bottom in the bond market, specifically a longer-term sovereign yields, which occurred in the middle of 2016.

Interestingly, the second half of 2016 looked a lot like today’s investing environment, with longer-term yields rising, U.S. commodity equities outperforming, and ironically the U.S. Dollar rising, though interestingly today, the U.S. Dollar Index is much lower than its previous peak in 2016, or really where it was from 2015-2017.

The inability of the U.S. Dollar Index to make a higher high is a big positive, in my opinion, especially for commodities, commodity equities, and international equities, which have lagged U.S. returns badly over the last decade.

2017, and a majority of 2018 clouded and obscured the picture that was painted so beautifully in 2016, yet after a long detour, we appear to be back on the road.

How will the rest of the inflection point play out?

The specific details, I do not know exactly (though I have my general road-map).  This is similar to past major inflection points.  Looking back, a lot of things that happened in 1996-2002, or in 2006-2010 surprised me, though having the bigger picture road-map/game plan proved invaluable.  Ultimately, if you are right, and able to stick to it, having a bigger thesis can be very rewarding.

Reflecting on the past opportunities, another thing that stands out to be is resilience.  For some of my best years/returns in the market, things did not always work out as planned.  Sometimes I endured significant losses before the turning point, sometimes I had to commit additional capital, and sometimes I just made, and still do make, mistakes.

However, being resilient, and sticking to something with perseverance, when you think you have an edge can payoff with rewards that are hard to imagine, if you are positioned correctly, and aggressively, which of course has risks, and which of course is not easy.

So, what should we stick to today?  What is our primary investment thesis today?  This linked article will summarize it nicely.

A further simplification can be explained in few sentences.  Specifically, bonds topped first (2016, and I believe this is confirmed now with the very recent steepening of the yield curve), stocks will top next (there is a contingent of smart investors that I interact with that believe this has happened already on global basis, though I am not in that camp yet), and then commodities last.

Over the past several weeks, we are seeing this thesis play out in real time, as longer-term sovereign yields are rising, led by U.S. yields, yield curves are steepening, and commodities are outperforming, with oil up four straight weeks to new highs being the most notable example, however, there are many other examples, including natural gas, which might be the most crowded trade in the market I see today (almost every market participant believes U.S. natural gas prices will be lower for longer, ironically while world natural gas prices surge).

In summary, the runway for commodity, and commodity equity out-performance should still be long, as we have not seen a capital rotation yet, though the seeds for this capital rotation have been planted.  Lower for longer is currently being challenged as interest rates normalize across the curve, first in the United States (and first at the short-end of the curve, but now at the longer-end), and soon the rest of the world will follow, as Europe and Japan are already both reducing their quantitative easing.

Keep this thought in mind, and keep repeating it.  Bonds will top first, then stocks, then commodities.

With equity markets in the U.S. poised for some of their worst real returns in modern market history, the relative and absolute opportunities should be every bit as big as they were in 2007-2010 or in 1999-2002.

In closing, stay resilient, keep developing your ability to think about the next opportunity after a success, or more importantly after a mistake, and keep your minds focused on enormous relative and absolute opportunities, which as the chart below shows are in commodities versus the S&P 500 Index (SPY), with commodity equities representing an even better opportunity, in my opinion.

I have a number of things I am working on research wise, including a new Top-Ten List.  After the turning point in April through June, July and August were a cruel return to purgatory, the proverbial “Lucy” taking the ball away from “Charlie Brown” one last time (hopefully one last time) as he prepared to kick it, and frankly, I couldn’t publish a new Top-Ten List, as it was just an open wound.  As painful as it is, there is going to be a time where all the suffering is worth it, and I am increasingly confident that we are closer to that point today,

Travis