TLT – Have We Finally Topped?

After rising for 24 of the past 33 weeks, and 12 of the past 16 weeks, the iShares 20+Year Treasury Bond ETF (TLT) made a new all-time, intraday high, before closing lower on Friday during the past week (and actually closing lower by a fraction for the week).

Bigger picture, TLT has been on a remarkable run, rising concurrently with the broader U.S. stock market (SPY), as inflation expectations have been in free fall.

Is this rise in the bond market overdone?

Yes, is the unequivocal answer, as there has been an amazing deterioration in both business confidence, and investor confidence.

Closing Thoughts – What Happens If Economic Data Turns Up

With four interest rates cuts priced into the fed fund futures market, including the growing probability of a 50 basis point cut at the July FOMC meeting, what happens if economic data strengthens, and both business confidence and investor confidence improve?

In this scenario, the bond market may have already priced in a future that is different from what actually happens, and this could be the trigger for a capital rotation bigger than the one that occurred from 2000-2002.

For a look at a different research approach, I am offering a 20% discount to membership to “The Contrarian“, the lowest price point since the founding members price, where we have a live documented history dating back to late 2015, including an updated valuation and price target list for over 103 targeted companies, including several companies that offer upside appreciation potential that rivals the best opportunities of late 2008/early 2009, in my opinion.

Additionally, I am offering a limited time 50% discount to a host of research options through this site, including a lower price point option.   To get this offer, go here, and enter coupon code “june 22”.

Reach out with any questions via direct message (for members here, I have a couple articles that I will post later this weekend).

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point,

WTK

P.S. Heading out to Costco (COST) with family/kids, and then some errands, so if you sign up or message, I will get back to you later this afternoon/evening.

The Opportunity Keeps Getting Better

Summary

  • Investors are crowded into the same investment strategies, sectors, and individual equities, prodded & encouraged by central banks since the GFC.
  • Almost all investors are positioned for the same outcome, which is either an eventual recession, or the lower for longer narrative prevailing.
  • These anticipated certainties are why there are so many historic price dislocations today.

At the height of the prevailing bearishness in December of 2018, I was very bullish, writing privately for members of my research services, and publicly with articles such as, “Is Everyone Bearish“, and “2019 Is Going To Be A Banner Year For Value Equities“, which were both published on December 21st, 2018.

Looking back, this bullish stance was partially correct thus far, with the S&P 500 Index, as measured by the SPDR S&P 500 ETF (SPY), up 17.8% year-to-date in 2019 through April 29th, 2019, and targeted undervalued equities, like Chesapeake Energy (CHK), up 40% YTD in 2019, even after its recent pullback.

However, my bigger picture investment thesis, which has focused on the equities that are unloved, under-owned, and out-of-favor, articulated in articles like this one, “Everyone Owns The Same Stocks“, and with “Economic Growth Has Already Bottomed“, has only partially been embraced, as almost all investors expect either a recession over the next 2 years, or a continuation of the “lower for longer” narrative that currently has a python grip around the financial markets.

The surprise first quarter 2019 U.S. GDP reading of 3.2%, which came in far above consensus expectations, and the recent stronger economic data out of China, have done little to change the prevailing sentiment.

Put simply, almost everyone remains skeptical that any cyclical upturn in global growth expectations will have any staying power.

This sentiment, and the tendency of market participants to embrace what is working, has caused some historic price dislocations, such as the relative performance of commodities versus the S&P 500 Index.

Look at that chart above!

If you thought commodities were undervalued in the late 1990’s, the dislocation since 2011 has resulted in 100-year relative valuation levels being tested.

In summary, if you, like me, wish you could go back a decade ago in time(members of The Contrarian can read this last link), similar to Disneys’ (DIS) new Avenger’s movie, and buy the disruptive growth businesses like Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Netflix (NFLX), even Microsoft (MSFT), and reap compounding returns that turned out to be hard to believe, I think a similar sized opportunity exists today. 

This time, from my perspective, the opportunity is in economically sensitive equities, some of which own tier 1, irreplaceable assets.

Sign Up For A Limited Opportunity

I am very excited about the year ahead, and I want to recruit as many members to my investment research services as possible.

To provide incentive, I have enabled a 20% price discount on memberships to The Contrarian, (founding members still have a lower price, but this is the lowest price offered in a long time) where we have a live history that actually captured the past significant inflection point in 2016.

I am also offering a very well received more traditional research newslettera stepping stone to The Contrarian, featuring direct email reports, with an introductory price of $250 for the first 10 subscribers that use the coupon code “half off”, which is 50% off the current annual rate, which will rise at the end of 2019. For access to that, sign up here.

Wrapping up, looking forward, instead of looking in the rear view mirror, is very important in life, and in the investment markets.

Disclosure: I am/we are long CHK, positions in the contrarian portfolios, 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.

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.

An Ode To Indiana & An Introduction To The Forgotten Equities Series

  • Passive index investing has dominated fund flows for a long time, accelerating over the past decade.
  • Once vaunted value investors have been left behind, as have a whole group of out-of-favor, forgotten equities.
  • The pendulum has swung too far to one extreme, and appears to be starting its move in the other direction, offering historic opportunity for forgotten equities.

I grew up, and have spent almost all my life in the great state of Indiana, though I have traveled across the United States, and a little bit of the world (I want to travel more) in my career, and for pleasure.

Growing up in Northwest Indiana, which was really an extended connection to Chicago, referred affectionately to those from this area as “The Region” (I actually used to tell people that it was really like growing up on the South Side of Chicago, but true South Siders take offense to that), I went to college for undergrad studies at Ball State, in Muncie, Indiana, then moved to various suburbs around Indianapolis, working first in a suburb, then in downtown Indianapolis, then in a suburb again, before starting my own boutique investment research firm.

More recently, my life, which is a story on its own accord, for a book that would make interesting, perhaps even good reading, even for those not financially inclined, and my career to an extent, has taken me to various small towns across Indiana (and some of the bigger cities too…which outside of Indianapolis are really pretty small on a national scale, with the possible exception of Ft. Wayne), and even though I love geography, and enjoy driving, it is amazing to me the number of different small towns that I was unaware of, and stories behind them, which I am sure is true in a number of states, however, I have not traveled them nearly as much.

Many of these small towns, dotted in-between the never ending corn and soybean fields, which can be a beautiful backdrop driving, especially in the changing seasons, are forgotten by those in the bigger cities in Indiana, which really, again, there are not many of, let alone on a national scale.  Summarizing, I have spent virtually my whole life in Indiana, and I come across new towns and places on a regular occasion, with their own interesting backstory and history.

Building on the narrative, even though Indiana is home to a number of Fortune 500 companies, including Eli Lilly (LLY), Cummins (CMI), Steel Dynamics (STLD), Zimmer Biomet Holdings (ZBH), Berry Global Group (BERY), which honestly I had not heard of before today and I have spent my past 25 years actively research and investing, and Simon Property Group (SPG), and a number of S&P 500 Index (SPY) companies have significant operations located in Indiana, which is a list too big to show in its entirety, including somewhat surprisingly Salesforce.com (CRM), on this note Indianapolis is also a finalist for Amazon’s (AMZN) second headquarters search, and a number of global industry leading companies have significant operations in Indiana including ArcelorMittal (MT), and Roche Holding Ltd (OTCQX:RHHBY), (OTCQX:RHHBF), Indiana is an overlooked state, in my opinion, on a national profile.

Sure, we in Indiana have globally recognized institutions with significant fan followings, including Notre Dame football in South Bend, Indiana basketball in Bloomington (though they have been in a down cycle, they are still a sleeping giant with a level of national success that only a few other programs can match), heck even the much maligned NCAA headquarters is located in Indianapolis.

The college programs and towns in Indiana are terrific from Purdue in West Lafayette, to Indiana University in Bloomington, to Notre Dame in South Bend, to Butler and IUPUI, both in Indianapolis, to Indiana State in Terre Haute, and Rose-Hulman Institute of Technology in Terre Haute (Rose-Hulman, which I go to on a regular basis, and Purdue are two of the finest engineering schools in the country), and right on down through the smaller colleges such as the University of Indianapolis, DePauw University in Greencastle, Indiana, (the only time I ever ran of gas driving, which occurred recently, was near Greencastle, where a nice man, resembling a younger version of my deceased for seven year father, and having his same first name, picked me up and helped me on my way), and Wabash College in Crawfordsville, Indiana.

Speaking of my deceased father, who I wrote about more here, we used to travel the state together for a couple reasons.  First, he was an athletic director, and coached a bunch of sports, so by default their was regional and statewide traveling.  Second, we both loved Indiana high school basketball, particularly before the winner-take-all tournament was changed, and third, my dad had a love for track-and-field, which he coached at the high school level too, and followed with interest around the state.

Interestingly, the professional sports teams in Indiana, including the Indiana Pacers, which I had tickets too for some time, including when they collided with the Miami Heat team four consecutive finals team, led by LeBron James and Dwyane Wade, and the Indianapolis Colts, probably have less state and national followings that Notre Dame football or Indiana basketball.

In summary, Indiana offers a rich fabric of nationally recognized colleges, and internationally recognized companies, yet while parts of Indiana thrive, there has certainly been a number of small towns, companies, and industries that have been left behind.

On this note, both of my parents were raised in Gary, Indiana, which was once, long ago, one of the most thriving cities in America, yet today, the southern Lake Michigan industrial coast line, from East Chicago to Hammond to Gary, is a shell of its former glory.

Companies, like U.S. Steel (X), who has significant operations in Northwest Indiana, and which I feel is one of the more undervalued equities in the market today, and Cleveland-Cliffs (CLF), another Great Lakes dominant business, which I believe is materially undervalued, went through a long dry spell, as the industrialized heartland of the United States saw production outsourced to cheaper locales, led by China and Mexico.

Jobs were cut, and industrial production centers centered in the Midwestern United States lost their place in the global supply chains.

Even though the fortunes of many of these companies have been revitalized since commodity prices bottomed early in 2016 (alongside a bottom in global growth), followed by a bottom in sovereign bond yields (with a corresponding  top in bond prices), the broader U.S. equity market, which has been dominated by a handful of winning companies, and winning sectors since the current bull market began in March of 2009, has overlooked a small, but significant group of companies, overrun by the passive flow driven rally.

Additionally, many stock markets outside the United States, and associated targeted companies have been left behind too, as global capital fund flows have been recycled to the United States this past decade, driving up the U.S. Dollar Index, and combining with domestic fund flows to passive and ETF passive strategies, to narrow the global equity bull market, led by U.S. equities, to a significantly smaller group of winning companies that one would expect, given the magnitude of the equity rally.

Collectively, the left behind companies and their associated equities, both domestically, and internationally, where there is a greater number of these mis-priced companies, in my opinion, are the forgotten companies.

This is a term, the forgotten companies, that I am going to use over-and-over in the next several weeks and months, to describe the group of undervalued companies that offer rare opportunity, in their equity prices.

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 week, it would be worth taking a look, simply to view the Live Chat dialogue.

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.

Ultimately, I think we are now at a major inflection point in the financial markets, 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.

Disclosure: I am/we are long CLF, MT, X, 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.

Dollar Divergence

  • The U.S. Dollar Index has rallied this year.
  • However, the Dollar Index has not made new highs on its recent rally.
  • Additionally, the Dollar Index remains materially below its 2015-2017 highs.  What does this mean?

The U.S. Dollar (UUP) has rallied in 2018.

However, if you look at the chart above, it is interesting that the U.S. Dollar Index has not made a new high this year, even with all of the recent tailwinds, including a sharp downturn in U.S. equities, shown by the SPDR S&P 500 ETF (SPY) below.

Additionally, looking at the bigger picture, the U.S. Dollar Index, even with its recent rally, remains substantially below its 2015-2017 highs, as the longer-term chart shows in the following frame.

Interesting, to say the least.

If the Dollar cannot make new 2018 highs with all the recent tailwinds, and remains materially below its 2015-2017 highs, what does that mean?

Is this a positive leading indicator for equities that would rally on Dollar weakness, including emerging market equities (EEM), developed international equities (EFA), international financials (EUFN), commodities, and commodity equities? 

Buy & Hold

(Travis’s Note: This post was originally written on March 8th, 2018, and I encourage readers to go to the original post to view the comments. The central theme of this article, which essentially boils down to buying-and-holding compounding equities, is a central theme of mine, from an investment philosophy standpoint.  Additionally, as part of the discussion, I talk about the “Punch Card Portfolio” in this post, and you will see multiple references to that in reading my research.  One last thing, the ground floor of the future sector that I think will thrive is commodity equities, specifically natural gas equities, and more specifically Appalachia natural gas producers, which members of WTKTheContrarian have already received one-deep dive report on Southwestern Energy (SWN), which I believe is the best-buy-and-hold stock in the U.S. market today, with more reports on these companies, and this sector, to be delivered in the future.)

  • Buying and holding quality stocks is a surefire path to investment success.
  • This is harder to do in practice than in theory.
  • Ground floor of a future sector that I believe will thrive.

Wednesday night, and Thursday morning, I worked on, and published, an article for members of The Contrarian that highlighted, what I believe, is one of the brightest future long-term growth opportunities in the United States.

As I was wrapping up this article, and the revisions to the article, it occurred to me, that the best way to participate in this sector is just to buy and hold a select group of companies for the foreseeable future.

Building on this narrative, we all look at the Dividend Champions or Dividend Aristocrats of today, and wish that we could have gone back in time and “bought in” on the ground floor of these company’s eventual successes, like eponymous Seeking Alpha author Buyandhold 2012, who is one of my favorite investors & commentators in SA’s community, and who many investors, including myself, at the tender age of 40, could learn from.

Aside from both being paper boys in our youth (do they even have paper routes for kids today?), our investment paths been very different, and I have learned (often the hard way) that buying and holding quality companies is the best way to get the most out of your investments.

In fact, the more I think about it, there is a compelling case that can be made for buying, and never selling, as this would make investors think about their investments in a different light, and ease the burden of what to do, and when to do it.

Buffett commented about this investment approach, and had a name for it, which he called the “Punch Card” Portfolio, meaning that if you had a punch card, and could only make 20 investments in your life, and that was it, it would make most investors better investors.

Think about that for a minute, as I am sure almost all of us as investors would have run through our 20 “Punches”, as the electronic world of investing is conducive to over trading, and over analysis.

I wrote about the “Punch Card” Portfolio, and John Hempton’s take on this type of Portfolio in an October 20th, 2016 article for members.  If you are a member of The Contrarian, click on the above link, and it will take you to this article.

Looking back, most of my biggest investment mistakes in life have involved selling companies too early, as there is no limit to how much a quality company can compound wealth, given time.

The problem today, is that almost everything is overpriced, including many of the stalwart companies in the in S&P 500 Index (SPY), and many of the Dow Jones Industrial (DIA) components, so it is hard to find a quality company that is attractively priced.

This leaves an investor with two primary choices, including building cash to wait for future opportunities, and spending time looking for undervalued companies in out-of-favor sectors.

Instead of purchasing the broader stock market at all-time valuation highs, would it not be much better to buy a sector, or a group of companies, that was selling at multi-decade lows in terms of valuations?

Do these type of companies even exist in today’s hyper valued stock market?

Said another way, are there any “Punch Card” investment opportunities today?

The answer is a resounding yes.

To find them, though, as an investor, you have to look forward, not backward, and this is hard to do too, as almost all of us want to extrapolate the past into the future.

This is human nature, and it causes us to miss opportunities as the investment markets are non-linear in structure.

What if I said that there is a group of companies as undervalued as the best opportunities at 2009’s market bottom hiding in plain sight, with the wind at their back for the foreseeable future?

Clearly this does not describe the broader stock market today, but there are a group of company’s, much like REITs, or small-cap equities in 2000, that are extremely out-of-favor, while the market is extremely in-favor.

Would it help to know that these companies are profitable today, even at the bottom of a nearly decade long bear market in their industry, and just beginning to pay dividends and return cash flow to shareholders?

Would it help to know that these companies own emerging Tier 1 assets in a world that has largely already been discovered and owned?

Over the next several months, I am going to write several public articles on these companies to get commentary and feedback from fellow investors.

For now though, particularly over the next several weeks, I am going to double my efforts for members of The Contrarian, as after a lot of blood, sweat, and tears, I am increasingly coming to the realization that a huge opportunity is right in front of us as investors.

To read my recent article and get a preview of what I think could be long-term quality companies early in their life-cycle, in an emerging out-of-favor sector, consider taking a two-week free trial to “The Contrarian“.

If it is not for you, there are no hurt feelings.

I am willing to face rejections, as I try to put together a unique group of investors, traders, and speculators.

In fact, we would welcome a few qualified dissenters to the group to take the other side of the thesis, and to flush out these investment ideas further, so if that could be your role, send me a message and I will respond.

Best of luck to everybody, and have an enjoyable end to the week,

WTK

P.S. If you have a “Punch Card” stock idea today, meaning a stock that you would buy and hold forever, share it in the comments section, and we could probably get a good discussion going.

Disclosure: I am/we are short SPY In A Hedged 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.

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.

Benefits Of Failure

(Travis’s Note: This article was originally published on January 17th, 2018, and I am re-posting today, October 28th, 2018 to add to the archives, and remember the challenges of 2017 as a Learning Lesson).

  • I have learned more in life through my failures than my successes.
  • 2017 was an excruciating, challenging year and I made significant, critical mistakes.
  • Capital was destroyed, which is precursor for what the broader market is going to do to many investors from today’s valuations.

“We all go through trials and tribulations, and when you see how a person handles it, that really says a lot.”

            – Chris Mullin

While most investors and speculators celebrated a fortuitous 2017 in the investment markets, I managed to have one of the worst years relatively, and absolutely, that I have had in my two decade plus career actively investing & speculating.  It was made even more painful, by the fact that this occurred after our terrific 2016, when it appeared that out-of-favor, value-oriented equities turned the corner in significant way.

The non-stop, relentless rise in the broader investment markets, specifically the S&P 500 Index (SPY), which only trades up nowadays, poured salt in the open wound, and all year, it felt like I was fighting uphill, which was the opposite of the remarkable reversal and rebound that we captured in 2016.

Looking back, I made clear, significant mistakes, and I severely, negatively impacted the investment portfolios of people close to me, destroying capital, which has to be one of the worst feelings in the world.

The silver lining to this unexpected turn of events is that I have found in life, that I learn more from my failures than I have from my successes, even the significant ones that I have been fortunate to enjoy (I have had my share of significant challenges too).

Specifically, I have found that, through failure, you learn more about relationships than you do in success, as successes can paper over cracks, fault lines, or real feelings, while failures tend to spur a “circling of the wagons” for those that are truly close to you, which makes eventual victories sweeter when/if they do occur.

On that note, I am very thankful for the members of “The Contrarian“, and everyone I work with directly and indirectly, as we continue to build a special community of members that aims to take advantage of historic price anomalies in the investment markets.

In summary, as a market historian, I have rarely seen price dislocations like we see in today’s markets.

Frankly, the price dislocations today rival the greatest price anomalies in modern market history, including the important calendar dates of 1929, 1973, 1999, and 2007.

Reading that and inferring from the dates mentioned, you may think that I am only focused on the downside, which is significant, but that is only partially true.  There are enormous upside opportunities too, as both long and short trades are enormously crowded right now, in my opinion.

Given today’s valuations, most investors, in traditional stock and bond portfolios, would be better going to cash (where short-term interest rates will rise) and taking a five-year vacation, checking in periodically, perhaps once a quarter, for better buying opportunities.  I will write more about this in the future, as it is the least I can do to preserve capital.

To close, in a picture, this is how I felt about 2017.

Looking forward to 2018, and moving forward from a despondent, depressing year (entirely of my own doing), where almost all common sense with regard to valuations has been thrown out the window.

Thank you for reading, and please be mindful of the rare investment environment that we are in today,

WTK

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.

Long/Short Investing

(Travis’s Note:  This article was originally published on July 16th, 2017, and it is being re-posted today, October 28th, 2018, to organize for the archives.  Long/short has had a very difficult past decade, but I believe it is primed for a very good decade ahead).

 

The past several days, I have been working on an article for members of “The Contrarian”, that reviews a generational hedge fund call from 2013, and why this call remains relevant today.

In going through my archived writings, I came across an article I wrote on long/short investing in January of 2016, and I wanted to highlight a portion of that article, specifically my comments on long/short investing.

Here is the excerpt from the January 2016 article:

Reflection On My Long/Short Investment Philosophy

Ever since I learned about Alfred Winslow Jones, the pioneer of hedge fund investing, I was fascinated by the long/short investment strategy. Ideally, it performed well in up- and down-market environments, and separated stock picking skill from general market movements.

During my early career as an investment analyst, I focused on value-oriented investment managers and their philosophies. Some of my favorite investment managers were Mason Hawkins, Marty Whitman, Bob Rodriguez, Dan Fuss, and Jean-Marie Eveillard. Reading their analysis and following their investment strategies influenced and shaped my thinking. The 2000-2002 time frame reinforced my value leaning, as value managers, especially the aforementioned ones, strongly outperformed, as the S&P 500 Index declined nearly 40%.

In contrast to 2000-2002, the dramatic downturn of 2008 treated value investors far differently. Many value investors piled into financial stocks as they declined, attracted by the relatively and historically cheap valuations. Trying to buy value investments in 2008 was akin to catching a falling knife, similar to buying commodity stocks over the last three years (Author’s Updated Note: commodity stocks had a historic reversal and rebound in 2016), and many value-oriented investment investors and firms went out of business.

The tremendous volatility of 2008 also negatively impacted long/short equity hedge fund managers. From my perspective covering hedge fund managers at the time, many long/short portfolios experienced historic volatility and drawdowns, especially in the second half of 2008, particularly in the months of October and November. Observing how these managers responded, reducing gross and net exposure, and emphasizing their highest conviction investments, was an invaluable learning experience.

During 2008/2009, I kept my eyes fixated upon the performance of a select few hedge fund managers. One firm that I followed closely for personal and business reasons was Lee Ainslie’s Maverick Capital. Lee Ainslie, one of my favorite investors, is a descendant in the lineage of the legendary Julian Robertson (another one of my favorite investors), and he sparked my curiosity with how his team structured Maverick’s portfolios. Maverick was founded in 1990, and since inception, it has focused on long/short equity investing, eschewing macro, currency, and interest rates bets.

Part of my attraction to Maverick’s investment philosophy was that it was different from my own investment philosophy. Personally, I have always liked macro forecasts and the trading and investing opportunities that they inspire. My strong 2008 and 2009 performance years were largely the result of my macro market views. Because of their love for macro investing, I have been drawn to investors like Stanley Druckenmiller or John Burbank of Passport Capital, and they have heavily influenced my investment philosophy.

To summarize, value investing, long/short investing, macro calls, and a general contrarian stance have all become critical components of my personal investment philosophy. The struggles I have endured trying to buy historically cheap commodity stocks over the last several years has scared me, and caused me to at least consider a worst-case scenario more than I did prior to this experience (Author’s Updated Note: It has also caused me to heavily research the capital cycle, and members of The Contrarian will know what I am referring to specifically).

The resulting compilation of investment philosophies has been mashed together to produce the Contrarian All Weather Portfolio, my version of a long/short portfolio (Author’s Updated Note: This portfolio has has material out-performance since its December 7th, 2015 inception despite the robust performance in the U.S. stock market). At its heart, stock-picking results, netted out by a SPDR S&P 500 ETF (SPY) hedged position, will drive the returns of the portfolio. A majority of the individual stock selections are value oriented in some fashion. Additionally, there will be a macro theme to the portfolio alongside some macro positioning at the margin.

Takeaway: Long/Short Investing Is More Timely Today

Similar to the late 1990’s, which culminated in a period where growth outperformed value for roughly ten years, the past decade has also seen growth outperform value ironically from 2008 through today, in an environment where stock and bond valuations have become historically extended.

The end result is that expected future real returns today, for both stocks and bonds, are some of the lowest projected real returns in history.

Additionally, with bond yields low in nominal terms, the next significant market correction in U.S. equities, will not see investors saved by bond out-performance, in my opinion.

To close, there is a high probability that a traditional “60/40” equity/bond portfolio or “70/30” equity/bond portfolio will have negative real returns over the next decade.  All investors should think about today’s starting valuations when constructing their portfolios.

William “Travis” Koldus

Disclosure: I am/we are short SPY.

Additional disclosure: SPY short is a hedge position to offset long investments in a long/short portfolio. 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.

Author’s Highlighted Posts – A Golden Age For Active Investors

  • Passive investing, and ETF investing, have dominated the last decade.
  • These unsustainable investing trends have created giant price distortions.
  • The next decade will be extremely lucrative for active investors and we are at an inflection point today.

(Travis’s Opening Note: This article was originally authored and published on September 21st, 2017, and it remains a “foundation article”, in my opinion, for my current investment stance, and it one of my favorite articles that I have authored.  It is being republished today, on 10/23/2018, to launch a new series category, which will be titled “Author’s Highlighted Posts”.)

“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years,” …”We are profoundly worried that this could be a risky allocation over the next 10.”

Sanford C. Bernstein & Company Analysts (January 2017)

“Be stubborn on vision and flexible on journey”

Noramay Cadena

Life and investing are long ballgames.”

Julian Robertson

Opening Note From WTK

When I worked at Oxford Financial Group, Limited, which was, and remains one of the largest RIA’s in the United States, I was hired by the CIO, Howard Harpster, who was the former head of BP Amoco’s (BP) pension plan. Howard was an intelligent, calculated risk-taker who cultivated relationships in the then opaque, and relationship-based, private equity, private real estate, and hedge fund arenas.

Howard eventually returned to his native Texas, which is near and dear to my heart, as I have many close relatives and friends in Texas, to sort through a family estate, and then take the role of CIO at the Texas Children’s Hospital.

Oxford conducted an executive search, on which I served a role, and narrowed the candidates for CIO to two individuals, ultimately hiring their current CIO in roughly late 2006 or early 2007.

The new CIO, who came from a background at Okabena, which was the family office created by the founding family of Target (TGT), embraced passive investing.

This firmly contrasted with my belief that the markets were not efficient, and we had a rousing discussion and debate for several years, both between the CIO and our broader investment strategy group, which was composed of four key decision makers, including myself, before I ultimately resigned, with good relationships in-tact, to start my investment firm in February of 2009.

At the time, I was full of confidence, as I had made money in 2008, when most investors and speculators lost money, and then I procured a small fortune, at least for me, from timely investments made in 2008 & 2009.

In the middle of 2008 and 2009, I thought it was a dream environment for active investors, and I could not see how the passive investment craze, that characterized the market’s rise from 2003-2007 could continue.

I was spectacularly wrong with this prediction.

Passive investing has dominated the past decade, making the shift to passive investments from 2003-2007 look like a blip on a long-term chart.

This has driven many active managers out of the investment industry (Travis’s Updated Note 10/23/2018: This purge has continued into 2018), accelerating the dispersion between passive investors and value investors, which has resulted in hedge fund closures, the decline of once prominent mutual fund families, and the downgrade in reputation to value investing and value investors.

This seemingly never ending, self-reinforcing, investment cycle has resulted in a bi-furcated market, where the favored investments of passive indexes, dividend growth strategies, and popular ETF’s are traded at some of the highest valuations in history, while equities outside these favored strategies trade at some of the lowest valuations in history.

In summary, this has created another dream environment for active investors, which is even better than 2008-2009 time-frame, in my opinion, and a golden age of active investing is right in front of investors and speculators, in my opinion.

We got a taste of this opportunity in 2016, but the market has not made the pendulum shift from passive investing being in-favor to active value investing being in-favor easy.  In fact, 2017 has been one of the most difficult, if not the most difficult years, of my investment career, thus far, but that should not take away from the scope, or magnitude, of the opportunity that is at hand.

Someday in the near-future, it is my prediction that investors will rue the fact that their equities are part of the benchmark indexes, and popular ETF strategies.  Thus, we sit on the cusp of a historic inflection point.  On this note, I came across a past issue of Grant’s Interest Rate Observer, from last October, about a week ago, that reinforced this point, and I wanted to write something about it, so here is that observation as part of my Investment Philosophy series.

Selected Prior Member Articles Of Interest On Investment Philosophy & Related Topics

Selected prior articles of interest for members on investment philosophy, market history, and portfolio strategy include:

Investing Philosophy – Abandoning Ship & Capitulation – 8/3/2017

Investment Philosophy – Identifying A Good Opportunity Is Only Half The Battle – 7/16/2017

Investing Philosophy – Staying Focused Is Hard To Do – 5/27/2017

Market Historian – What Happens When The Fed Raises Rates – 3/16/2017

Investment Philosophy – The Fallacy That You Always Need To Be Fully Invested – 2/2/2017

A Matter Of Perspective – Commodities & Commodity Stocks – 1/6/2017

Interview Series – Part II Of WTK’s Take On Edward Chancellor’s View With A Focus On Precious Metal Equities – 12/15/2016

Interview Series – WTK’s Take On Edward Chancellor’s View On “Intelligent Contrarian Investing” – 11/21/2016

Investment Philosophy For The Contrarian Subscribers – A Take From John Hempton @ Bronte Capital – 10/20/2016

The Contrarian’s Top-Ten Lists & Thoughts On Portfolio Strategy – 9/29/2016

Reviewing Lucas White’s And Jeremey Grantham’s Research On Commodity Stocks & A Market Note From WTK – 9/9/2016

Working Investment Thesis

It is my belief that we are in the final innings of the bull market that began in March of 2009, with bonds topping now, then stocks, and then commodities.

The Inspiration

Last week, I was reading, and researching, and I came across an October 14th, 2016 issue of Grant’s Interest Rate Observer, which was a recap of a presentation that Steven Bregman gave at Grant’s October Investment Conference.

I have been a subscriber to Grant’s Interest Rate Observer, and I am a fan of James Grant, who was born in New York City, but attended undergraduate college at Indiana University.  Mr. Grant has maintained ties to Indiana, including speaking as a guest speaker at the CFA Society of Indianapolis functions, which I have been involved with as a current member and past board member (I have also been a member of the Chicago CFA Society where Grant’s work has been featured).

This particular issue caught my eye, because it delved into the index/ETF bubble, which has been a topic that I have been writing about, and which I have been thinking about a lot lately.

A Passive Investing ETF Bubble

The opening paragraph describes the topic up for discussion, and the second paragraph spells out the views of Steven Bregman, president and co-founder of Horizon Kinectics, who presented at Grant’s October 4 th, 2016 Investment Conference, and like the famous line from Jerry Maguire, the presentation had me at hello.

Specifically, here is the opening paragraph and then the second paragraph, and then a screen shot that captures the broader discussion.

“A golden age of active investment management awaits only one signal event, Steven Bregman, president and co-founder of Horizon Kinetics, told the Grant’s conference-comers on Oct. 4. A collapse of the index/ETF bubble is that intervening disaster. To hear Bregman tell it, no crash would be so well-deserved

He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

Re-reading this piece, the amazing thing to be is that the passive investing/ETF bubble appeared to peak in 2016, yet roughly a full year later, the excesses have only been amplified.

No Factor For Valuation = No Price Discovery

The crux of Bregman’s case, and my argument too, is illustrated on page 2 of the linked report.  In these paragraphs, he deconstructs the iShares Emerging Market Bonds High Yield ETF (EMHY), and in doing so, he exposed the flaws of indexing, particularly when accomplished through ETF investing.  Here is a highlighted portion that I think makes a convincing point.

“By operation of law,” Bregman went on, “new money in EMHY is allocated based on float. In other words, the more debt a nation issues, the greater the allocation to its bonds because it has a greater capitalization. Petrobras (PBR) issues more bonds: greater index weight. Yes. The allocations must be done promptly and according to their precise index weights.

There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

The emphasis added through formatting was mine, because that is what is going on in the investment management industry.  As the former second CIO I worked under at Oxford aptly discovered, probably from “career threatening” mistakes at his prior CIO position at Okabena, there is no reason to take “career risk” when everybody is embracing the same way of investing, namely passive investing, and investing through ETF’s.

Building on this narrative, active investors, particularly active value investors, who were steamrolled from their purchases of financials and real estate equities in 2008 and 2009, negating their typical out-performance in bear markets, have been unable to serve as a check-and-balance to the “blind” passive money, because they have rapidly gone extinct.

Ultimately, this has harmed price discovery and further distorted valuations.

The ETF Divide

During the conference, Bregman highlighted how ETF’s have influenced stock valuations.  One specific example that stands out, and was illustrated, was the impact of ETF’s on Exxon Mobil (XOM).  Here are the paragraphs discussing its valuation and price performance from 2013-2016.

“Bregman lingered for a while on Exxon, a kind of ETF Swiss Army knife: “Aside from being 25% of the iShares U.S. Energy ETF, 22% of the Vanguard Energy ETF, and so forth, Exxon is simultaneously a Dividend Growth stock and a Deep Value stock. It is in the USA Quality Factor ETF and in the Weak Dollar U.S. Equity ETF. Get this: It’s both a Momentum Tilt stock and a Low Volatility stock. It sounds like a vaudeville act.”

Bregman proposed a mind experiment: “Say in 2013, on a bench in a train station, you came upon a page torn from an ExxonMobil financial statement that a time traveler from 2016 had inadvertently left behind. There it is before you: detailed, factual knowledge of Exxon’s results three years into the future. You’d know everything except, like a morality fable, the stock price: oil prices down 50%, revenue down 46%, earnings down 75%, the dividend-payout ratio almost 3x earnings. If you shorted, you would have lost money”—because the financial statement didn’t mention the coming bifurcation of the stock market that Bregman called the “ETF divide.”

On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Again, the emphasis added was mine, as the impact of ETF investing has been particularly pronounced in the commodities sector, and specifically the energy sector.

The larger market capitalization companies that have dominated the energy ETF’s, notably Exxon and Chevron (CVX), have relatively flourished while most of the mid-capitalization and smaller capitalization equities have been in one of the worst energy equity bear markets in modern market history.

Thus, even relatively large exploration and production companies, like Chesapeake Energy (CHK), and Southwestern Energy (SWN), which are the second and third-largest natural gas producers in the United States, have been cast aside due, in part, to their market capitalization’s, which shrink further as they are not included in the exalted passive indexes and chosen ETFs.

Risk Is Misinterpreted

From my writing, you can already probably tell how much I enjoyed this presentation, and the corresponding write-up.

Here is another nugget, via several paragraphs about risk, specifically related to the REIT sector, think the Vanguard REIT ETF (VNQ), or the iShares U.S. Real Estate ETF (IYR), that I think will hit home for many investors.

“Now came a question: “So how do they—the big ‘they’—address this risk?”

And an answer: “In the financial realm, risk has come to be measured by historical price volatility. Consequently, enormous effort is devoted to finding low-volatility sectors with sufficient liquidity. The most prominent statistic for volatility is beta. Go to Yahoo Finance, type in ‘IBM,’ (IBM) and there, front and center alongside price, market cap and dividend yield, is beta.

“Let’s examine this,” Bregman went on. “The iShares REIT ETF (IYR), with a 2.8% yield—which I personally see as 35x earnings—has a beta of 0.72. That is low-risk by definition. But which beta should be used for that definition? The beta for the three years through August 2016? Why not the beta for the three years to March 2007?

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

The problems that we had evaluating risk in 2007 are even worse today, in my opinion, as correlations are higher, and the amount of listed equities in the United States has shrunk by roughly half.

In summary, the accelerated adoption of passive investing and ETF investing has heightened risks, but investors and speculators do not realize this, because volatility in the markets has been so low, and the lack of draw-downs has provided and eerie calm and complacency that supersedes the 2007 investing landscape, in my opinion.

The Opportunity

For someone who has spent the past 25 years actively investing and speculating, but who has gone through a very rough period of performance, I can empathize with the following quote from the write-up of the conference.

“So much for life on the sunlit side of the ETF divide. What about life in the darkness? “In the past two years,” said Bregman (Author’s  Note: Remember this presentation occurred in October of 2016, but the trends have continued through today, nearly a year later), “the most outstanding mutual fund and holding-company managers of the past couple of decades, each with different styles, with limited overlap in their portfolios, collectively and simultaneously under-performed the S&P 500. We’re talking 10 to 20 percentage points in a given year. There is no precedent for this. It’s never happened before.

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for under-performing—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From my perspective, I agree with the bulk of this commentary, with the exception of the comment about the under-performance by the best money managers.  It has happened before, and it happened fairly recently, specifically in 2007 and 2008.

During this time-frame, active managers, particularly value managers, under-performed, as traditional bastions of value, notably financial stocks, suffered the worst declines.

I can remember than time-frame clearly, and what I remember is that very few analysts and investors could value anything, similar to today.  It was confusing, and confounding, but it offered substantial opportunity, as does the investing environment today.

When valuations have no anchor, prices can fluctuate wildly.  For us, as contrarian investors, that means some of our big losers on the year, or since inception, have the potential to rapidly reverse course, but it is hard for us to realize that right now, as we have been battered by the non-stop declines, constant negative news headlines, and price action that is seemingly negative every day and every week.

Conclusion – Embrace Active Investing & Being Different Than The Indexes

Here are some quotes I highlighted in the article, directly from the presentation, which again occurred in October of 2016, but is even more relevant today, in my opinion, and I wanted to list them again, because they provide a conclusion that practically writes itself.

“He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

“There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?”

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

“On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for underperforming—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From the presentation, its documentation, and my chronicling, and commentary, it should be clear that the markets have reached extremes (they had already reached these extremes in 2016 but have extended these extremes further in 2017), perhaps beyond any prior valuation extremes in modern market history.  Absolute valuations certainly rival 1999, but relative valuations between the “have’s” and the “have not’s” is even more pronounced.

The lack of price discovery, and valuation analysis, which is accelerated in a self-reinforcing cycle by the massive fund flows into passive and ETF investing, has created a market that is ripe for price discovery, which should be a dream environment for active investors.

In summary, simply surviving to get to the price discovery phase has been difficult, however the rewards should be similar in magnitude, and perhaps even greater than the 2008/2009 opportunity, which rivals any period of potential returns in modern market history.

To close, the market has a dividing line today, which is even more pronounced than 2016, and the stock market remains extremely bi-furcated.  The opportunity lies on the other side of this dividing line, in sectors, like commodity equities, which have very little weight in indexes.  Drilling down further, commodity stocks that reside outside the “halo” of wide-scale ETF ownership, offer return potential that is every bit as good as the depressed financial and real estate shares in the Spring of 2009.

Two Research Services

To get in on the ground floor of this opportunity (yes it is still a ground floor, maybe even lower after energy prices bottomed nearly three years ago in 2016), please consider one of the two following research services.

First, is The Contrarian, where we have a live history that actually captured the past significant inflection point in 2015 & 2016. Members can read through posts from that time, see how out-sized returns were achieved, look at what is similar today, and try to apply those past learning lessons to today’s market environment.

Put simply, I really appreciate our group at The Contrarian, many members who I have come to respect, and I am optimistic that we are all going to do very well together in the year ahead, similar to 2016.

We are always looking for new members that can add profitable ideas, or challenge existing ones, so if you fit this criteria, consider signing up.  A fair warning, though, our group is like the Marines, only a few, only the strong, can survive.

Second, I have had quite a few requests for a lower-priced, curated research product, a stepping stone to The Contrarian (our goal is that you try our research at a lower price, make money, and then later upgrade to The Contrarian for the more in-depth, interactive experience), and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate the second official month of this research product, where the goal is deliver one deep-dive article a month via a PDF emailed report (and I believe there are a lot of once in a generation opportunities today), I am offering a 21% discount off of a much lower annual price point. To get this limited-time discounted price, simply use the coupon code “december”.

Ultimately, I think we are now at a major inflection point in the financial markets, highlighted by the price action in October of 2018, and November 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 over two years now, however, resilience and persistence, two necessary qualities for success in contrarian investing and in life in general, 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,

Travis

P.S. I have learned over my career that handling disappointment, and taking advantage of the resulting opportunity is a crucial skill for investors and speculators.  I cannot tell you how often I am disappointed in the investment markets with price action, yet stubbornness, persistence, and hard work often, but not always, result in a favorable situation, like most things in life.

P.S. II With everyone looking for a price dislocation similar to 2007-2009, look for something different to happen, including a potential pick up in inflation and interest rates, which very few are even considering.