Review of 2015 and Considerations for 2016

The below shows self-evaluation of my 2015 “considerations”…but none of the below matters, because I was not up 10x-100x for 2015. Being “right” absent application (i.e. putting $ where mouth is) is little more than mental masturbation. Fortunately, the below roadmap helped me preserve/enhance wealth… a reason to be thankful. 2011 and 2015 were both (rare) years where I could relate both to the “winners” and “losers”.

Considerations for 2015

  • Volatility – YES
  • Us equities market: chop-fest / consolidation – YES
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome – YES
  • EURUSD parity is in sight within 24 month – CLOSE ENOUGH
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay – YES
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China – RIGHT IDEA
  • Gold:2013, Oil:2014, ???:2015

MY BIGGEST MISTAKE FOR 2015 = NOT (FULLY) CAPITALIZING ON THE ABOVE.

Considerations for 2016 (for my own self assessment. may share publicly… tbd)

Having been quite “right” for 2015… I have to assume I may be the perfect contrary signal for 2016. In order to protect myself, therefore, from hostile/nefarious parties who may want to take advantage of me at my own expense, I will keep most of my considerations private. The goal is to be right AND capitalize on being right…ego vindication should be the least of considerations.

  • Key Question for 2016 (across various assets) = Bifurcation

bifurcation

  • Continued cross-asset volatility (I am not implying a specific directional bias)
  • Short Theme X =
  • Short Theme Y =
  • Short Theme Z =
  • Long Theme A =
  • Long Theme B =
  • Long Theme C =
  • Pair Trade A =
  • Pair Trade B =
  • Pair Trade C =
  • Pair Trade D =
  • Special Situation A =

Food For Thought re: 2016

  • Think for yourself
  • Druckenmiller’s comment in that NYTIMES dealbook interview, regarding what will be necessary for survival/excellence in coming years.
  • Why did the SAC/Millennium, and those type of funds/strategies fare well in 2015, both in (debatably) absolute and (unambiguously) relative terms? What does this portend for 2016 (if anything)? Or am I looking for “Moses in the clouds” when there is no such thing?
  • Other than the obvious sector-specific “hedge funds”, why were some US “hedge funds” down 15-30%, in an otherwise flattish (in the indices) year? e.g. Buffett/BRK down -11%? What do these losses portend, if anything?
  • What happened to Passport Capital’s returns in 2015? up 18% through September, and now up 8%?
  • How do momentum and reversion factors play out in 2016 (e.g. oil and gas, gold, etc etc)? Applicable to many disparate situations. Where will momentum persist, versus where will reversion take place?
  • What do the popularity of Bernie Sanders and Donald Trump (and formerly Ben Carson) suggest? Similar question applicable in many other countries.
  • If you’re an active manager, question: in your heart of hearts can you justify your compensation to yourself? Is it possible that as an analyst/portfolio manager/etc… you might actually be pretty useless as an investor/analyst? Worse than useless as an investor/analyst? Why should you get paid 6 figure or more compensation for losing money? Why should you be structured to get paid 2/20 or more for being little more than a closet index guy, or beta monkey?
  • If you’re a passive manager / etf creating machine, question: If your products/services were to disappear tomorrow, would the markets be any worse off?
  • I don’t know what the words inflation/deflation mean anymore. The only phrase that makes sense to me: purchasing power

 

Achieving (or surpassing) the below-like returns, as an investor, matters more than ego vindication:

Michael-Burry-Scion-Capital-Returns

Remember: the above investor is a “one hit wonder”, as believed/preached by the Central Banking apologists.

There’s also the following return profile of a macro investor:

2005: +46.8%

2006: +25.7%

2007: +25.6%

2008: -33% ?

2009: +63%

2010: +22% ?

2011: -31.9%

2012:+0.4%

2013:?

2014:?

2015: +120%

Preliminary Thoughts on Yandex (as a Long)

Yandex NV is Russia’s largest search engine company. Given recent market share losses to Google, as well as it being a Russian stock, it is down -54% in the last 12 months. My preliminary take: the stock’s current price/valuation does not offer sufficient compensation for the risks I see. Specifically:

What I don’t like:

  • The stock is down -55%, yet doesn’t look all that cheap (e.g. compare against Google – YNDX trades at 5.5x revenue versus Google’s 6.2x revenue) given the various risk factors.
  • High risk of being a ‘dead money’ stock, or worse, on its way to becoming a value trap
  • Russia risk – The known unknowns and unknown unknowns – from currency, to confiscation, to who knows what risk?
  • Market share has declined in recent years, even as Google market share has risen.

What I like:

    • Appears to be a dominant search engine, despite recent market share losses
    • The google anti-trust legal situation looks interesting
    • Management appears to be good/excellent
    • The business appears to be good/excellent

Other comments:

Russia is out of favor with investors for a variety of reasons, yet Yandex’s valuation does not reflect that to me… the decline in share price reflects that, but down is not cheap… nor is down equal to a buy. Also, the stock does not seem to be discounting for this google risk (though the legal actions yandex has taken is a bullish upside offset). So you have a company with a very negative macro backdrop and some anti-growth idiosyncratic risk factors… so why pay google-like multiples? Yes, it’s a smaller company, but see google’s recent growth.

The S&P 500 versus China A Shares and the “Mr Pink” of Global Macro

The S&P 500 versus China A Shares

Since 2013 (use ANY POINT within 2013 as your starting point), guess which market has outperformed? The S&P 500, or the Shanghai Composite Index? My guess is that many Americans and Europeans would (incorrectly) guess “S&P 500”:

ycharts sse vs sandp level

ycharts_chart

Questions and Comments:

  • Note how the SSE underperformed the S&P500 for most of the 2013 – Present period… the ‘shift’ / ‘inversion’ from relative underperformance to extreme outperformance occurred fairly recently.
  • There’s only one person I know who was screaming and yelling (and positioning) Long China, Short USA equities since 2013…let’s call him Donald Duck. I think it’s fair to say he’s the “mr pink” of global macro…it may even be appropriate to call Dan Loeb the “Donald Duck” of event-driven investing. Donald Duck has been pounding the table on going short USD over the last 1-2 quarters. That trade has looked ‘stupid’ until recently. Donald Duck has gotten quite a few other major trades / turning points correct (as well as some very wrong). I don’t fully understand the Duck’s “sausage-making” process, but the result seems to be quite tasty.
  • I told Donald Duck back in 2013/2014 that I felt that the better way to express ‘long China” would be to hand-select a basket of US-listed (and potentially other foreign-listed) Chinese stocks, as the A shares, and mainland stocks would be ‘dead money’. That is, to go about “long China” via an Long/Short China approach, or maybe a long-only approach (but with extremely tight due diligence, careful security selection). Donald Duck, however, expressed his preference for the A shares / indices, (I think) given their lack of focus/expertise on individual company analysis/due diligence. Going long select US-listed Chinese stocks looked smarter in 2013 and through most of 2014 (especially if one avoided the NQ Mobile’s of the world, or even went concurrently short them!) versus going long A shares and/or mainland shares…until recently.
  • Why has the SSE outperformed the S&P500 within the last 1-2ish quarters? Why and how long might this trend persist? Why and how might this trade ‘unwind’ ? (I am, as I write this, considering a ‘trade first, analyze later’ approach, i.e. start building a short China, long USA pair trade)
  • What are some fund flow and other considerations between China main-land listed shares, versus China company shares listed elsewhere?
  •  If one doesn’t care about global macro, what might the implications be for single-stock picking, sector investing, etc.?

Longs and Investing from a … Short Seller’s Perspective

I Am a Short Seller

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” – Sun Tzu, Art of War

My name is Daniel, and I am a short seller. I became aware of this truth and came to accept it several years ago. I do not think I ‘chose’ to become one, nor did anyone ‘teach’ me to become one*.  In this regard, I agree with Jim Chanos, Marc Cohodes, and others, who believe short sellers are not ‘made’, but rather ‘born’. You are one, or you’re not. Plain and simple. Since then, I’ve fully accepted and embraced the fact I’m a short seller. I’ve experienced my share of losses and victories, but overall, I’ve enjoyed the ride. I still have plenty more to learn about the art of short selling, and am cautiously optimistic I will get better with time. With that said…

*With that said, I am grateful for the on-going mentor-ship and friend-ship that several have provided me. I believe they have played a critical role in my maturation as an analyst, short seller, and overall investor. I also believe they have helped me grow, personally.

 

I Aim to Become an Excellent, Overall Trader and Investor

“The will to win, the desire to succeed, the urge to reach your full potential… these are the keys that will unlock the door to personal excellence.” – Confucius

There are three short sellers – I will refer to them as A, B, and C – who, in their own unique ways, have been encouraging me to strive to be an overall excellent investor (i.e. to learn to go long). Fortunately, this is a desire that I have finally begun to desire for myself. I do not know if I am meant to become competent/excellent at buying stocks, or if I am fated to be a ‘dedicated specialist’ for the rest of my life.

A – I thank A (over a series of conversations) for helping me develop a firm intellectual grasp of the risk/reward characteristics of going long vs. short. For example, the mechanics of a short or long position going against you, risk management, position sizing, scale-ability, the pressures of managing OPM, etc. The reasoning and philosophy underlying selecting longs, shorts, and building portfolios consisting of both. I also thank A for helping me see the need to learn how to buy/long things. A made it clear and convinced me that this is a MUST.

Finally, A made it clear to me that great long-term investing is about finding great businesses (preferably with great management), whereas short selling is about finding terrible people (preferably running terrible businesses).

B – Whereas A really helped me build a solid intellectual foundation , B has helped me primarily “learn by doing”. B has periodically mentioned long ideas that get him really excited (they are not common), and articulated long theses in ways that I can understand and get comfortable. I would say that B is exceptionally good at buying event-driven / special situation longs that have high chance of winning regardless of the overall market environment. I think every single long idea he has mentioned has led to positive P&L (he rarely talks longs). I can’t think of a long idea he has mentioned that has lost money (at least up to the point of the ‘events’ and/or ‘triggers’ he has identified).

I don’t know if B realizes, but in an indirect way, I’ve also learned a lot about longs/investing by B’s comments on short selling. For example, B has often told me “that is not the kind of company you short”, “short sellers do not short ___” (I remember him saying this about Apple, Microsoft, and Tesla) … after observing the times he has said that, I’ve come to realize that these types of names that may seem like good shorts superficially, tend to actually be excellent longs in pullbacks. I don’t think B is saying they can’t work as shorts (from a trading perspective), but at best, they’re singles… not home-runs. So why waste time on them?

C – Like B, C has told me that I must learn to go long. He has warned that otherwise, there’s always the risk of going insane, or encountering financial hardship. Whereas A and B have fully engaged my head (when it comes to buying stocks), C has engaged my heart. I feel inspired to become excellent at picking longs, and therefore, become an excellent overall investor. C started out dedicated to short-selling. Over the course of time, he has proven to be an excellent investor. He is living proof that it can be done, and that inspires me. It can be done! C also told me something I suspected: I must find niches on the long side that I can put my heart into. Like shorts, I need to develop a personal passion for certain kinds of longs, and no one can teach me that. As a matter of practicality, C told me that it is far more desirable to focus on finding great businesses rather than statistically cheap(looking) ones.

Investing Lessons I’ve Learned the HARD WAY

“Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein

Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.” – George Soros

When it comes to researching longs, I’m probably a C- analyst (currently, speaking). When it comes to trading longs, B- (when it comes to researching and trading shorts, I’ll let others opine). Bear in mind, I was once an F- analyst and F- trader/investor in longs. In fact, most my longs between 2005-2008 were TERRIBLE. If you were short all my longs in that period, you would’ve made 80+% over that period. It took me a long time to realize, accept, and forgive myself of the mistakes I made. In fact, this process of introspection led me to realize I was a short seller.

Here are some of the (painful) lessons I’ve learned, on the long side:

  1. Just because a security/stock is down (significantly), does not mean it is cheap nor even likely to go up.
  2. Cheap doesn’t mean can’t get cheaper.
  3. If a business is experiencing problems (e.g., accounting, ethics, missing earns) you should assume it is worse than it looks.
  4. CEOs lie/cheat/steal. You should not make investment decisions purely because you ‘trust’ management. A lying CEO will say “trust me” without flinching.
  5. Stock fraud, and material misrepresentations, are real.
  6. Don’t create a concentrated or levered portfolio without knowing who the idiot in the room is (and even this is insufficient). Otherwise, it is YOU.
  7. Book value and earnings can go negative… therefore, statistically cheap (looking) may quickly become statistically expensive.
  8. Bad businesses rarely become mediocre ones. They are more likely to go bust or require a ‘restructuring’ (euphemism for, your equity stake getting wiped out).
  9. In market corrections, nearly everything goes down.
  10. “Be greedy when others are fearful” doesn’t guarantee you will make money.
  11. Being contrarian / counter cyclical / against the trend is not insufficient: you must be right.
  12. You should assume that the markets (which is the collection of all interested human beings) know more about a security than you.
  13. High dividend yields are often predictive of a dividend cut
  14. Textbooks, investor quotes, other investors’ opinions, certificates, etc. are no substitutes for direct experience.
  15. Plenty more stocks go to zero than to infinity.

The Present, The Future, and Prospective (Current) Long Opportunities

“The journey of a 1,000 miles begins with a single step.”

If I were to judge/grade my longs between 2010 – Present… NOT BAD. Definitely MUCH BETTER vs. my longs in 2005-2009. My P&L on longs has been positive over that time period. My batting average is way above zero (I think over 50%). My single biggest mistakes I’ve made time and time again on the long side in the last 4 years… not holding positions for sufficient time.

Some areas that interest me on the long side (I may be long or may initiate long positions in the following):

  1. Offshore drilling (e.g. RIG)
  2. Certain UK Grocery retailers
  3. Certain commodities-related businesses
  4. Gold and silver (I think there is a chance of a buying opportunity this quarter… I personally believe odds are better 3-12 months from now).
  5. Special Situation X
  6. Growth Stock Y

I am fully aware that most of the above are down/cheap(looking) for a reason, and face risk of additional impairment (perhaps even permanent impairment). That is why I am cautiously evaluating.

I am also seeking to divert my attention away from statistically depressed/cheap looking stocks, and focus on finding great businesses (and then determining if they are sensibly priced, or wait for opportunities to buy them at sensible prices). Admittedly, I have tended to focus more on whether a security is depressed rather than whether its underlying business is a great one that will remain great or perhaps even become greater, in time.

The impression I get from A, B, and C is that it is a better strategy to find great businesses, and then wait to buy them at sensible prices, vs. any other approach. Practically speaking, I think this will require spending less time observing securities prices, and more time observing the real world, people, and the world of commerce.

Time will tell if I am able to do this, and be able to get passionate about it.

 

In Anticipation of the Next “AOL-Time Warner”

This post was inspired by a @PlanMaestro who wrote: “Prediction: #PullingAnAOL will start trending soon.” I fully agree.

As “everyone” knows:

  • Interest rates remain low (and in many cases, negative)
  • Corporate cash balances remain high (at least in the United States, part of the reason there are inversion/tax related “controversies”)

As some know:

  • Capital/wealth has really nowhere to go other than the private sector, as public sector returns are de minimis. Corporate bonds/equities, hard assets, venture capital and private equity are the only game in town. I believe US is (largely) the only game in town as well.
  • Confidence in the corporate sector (C-level suites) is increasing.
  • Mergers and acquisitions are “back”
  • US Equity valuations are on the higher end historically, but can arguably go much higher given the prevailing low interest rate environment AND due to the pressure capital has to flee public sector and go SOMEWHERE.
  • The relatively high equity valuations have some interesting effects: (1) C-level executives face greater pressure to justify their existence, and so will look for ways to prop/grow EPS. (2) high valuations mean cheap currency, so acquisitions may seem, and may occasionally even be “accretive” (3) High valuations may lead otherwise mediocre/poor managers into thinking they are actually competent, and deserving of their absurdly high compensation packages. This dangerous and misplaced rise in confidence may encourage people to take on risks via M&A they otherwise would not.

All the above conditions lead me to believe we are in ripe territory (said differently, in dangerous territory) for a few eventual AOL-Time Warner debacles… I mean, deals. I’m giving it 5-6 quarters. Personally speaking, I am less interested in identifying potential targets on the long side… I’m not “smart” enough to do that. I’ll leave that to other Long/Short and Event-driven folks (I may change my mind, as I somehow magically transform into a super talented long focused guy with the power to foresee acquisitions). I am much more interested in getting involved ex-post. This leaves me plenty of time to observe the frauds and follies that I believe will come to fruition in the near future. 

 

About AOL-Time Warner

“Every time it [AOL] got to a clean quarter, it would buy something so you never saw internal growth. Total scum.” – Lisa Thompson from http://twitter.com/LTommy256/status/508807681579425792

It is my understanding that the AOL Time Warner deal gloriously harmed quite a few short sellers. Kynikos Associates, Rocker Partners, etc. I believe the list of those who lost money shorting in that situation is a “who’s who” list. I believe losses on shorting AOL were in the order of 10x. Note that time actually vindicated the AOL shorts… but little comfort in being “right” and losing considerable amount of capital.

 

David Rocker, Rocker Partners on AOL:

“Ask what the bull case is, other than bull generally,” demands David Rocker, a New York hedge fund head who says AOL is still one of the market’s most overvalued stocks. 1996

source: http://articles.baltimoresun.com/1996-07-28/business/1996210078_1_aol-america-online-steve-case

In addition, the company used questionable accounting practices for new  subscribers and marketing revenue to improve its short-term financials. These practices  would lead to a $385 million write-off in 1996, and accusations that the company was
“morally bankrupt.” 

Former CEO Kimsey described the accounting issue
as “the big turd” that “sat in the middle of the company and smelled up the place.” Id. at 57. Short-seller Rocker
claimed that for AOL, “every revenue is ordinary, and every expense is extraordinary.

Click to access 1-Bodie-FINAL.pdf

A well-known short seller of America Online, meaning he has bet that its stock price will decline, Mr. Rocker said that the company inflated its quarterly results by spreading its high marketing costs over two years. At the same time, it was reporting costs to the Government, reporting a loss to receive tax breaks.

”They have been telling the Government the truth, but they tell investors something else,” he said.

source: http://www.nytimes.com/1996/10/30/business/america-online-announces-a-newer-transformation.html

 

Jim Chanos, Kynikos Associates on AOL:

Q: what was your biggest mistake?
A (Jim Chanos): AOL. It was a short due to accounting, we thought they were masking higher churn then they reported. We thought the value of a subscriber would turn out less than they thought. We started shorting at $2-$4, covered as it went up, and covered the last at $80. We kept it to a 1%-1.5% position. We knew we were in the midst of a bubble, so we kept it small, but it still cost us 10% over 2 years.

source: http://myinvestingnotebook.blogspot.com/2010/05/jim-chanos-power-of-negative-thinking.html

 

Idea Generation: Revisiting Broken Investment Theses (In Celebration of 13Fs)

In 2013, long Yahoo! (“YHOO”) was a big winner for some in the activist/event-oriented world (e.g. Third Point). Yet the long Yahoo! thesis had been around … for quite some time (remember Icahn circa 7 or so years ago?). Recall Greenlight articulated largely the same long Yahoo thesis in 2011…and capitulated in 2011. Long Yahoo! was a broken thesis that transformed into a beautiful thesis.

Microsoft was a perma value play, coming up as a popular long idea in value-oriented conferences, and value circles… but it was ValueAct in 2013 that really got it right.

So perhaps the far more elegant way to use 13Fs are not to follow what other investors have done… but to look for ideas that they give up on, and bet the other way (or examine the merits of doing so). 

Remember Meredith Whitney? Remember all the negative sentiment (rightly so or otherwise) towards her in the last few years, specifically with respect to her munifinance/bond prognostications?

For some reason, this recent @MuniLass* kerfuffle got me thinking that perhaps Whitney’s broken thesis is worth re-examining. From a narrative perspective, it just makes sense –  I’m going to give it 24-36 month to come to fruition, in some form.

 

* Blessed are those who protect the anonymous. I find her outing troubling… that being said, I once followed her briefly years ago, but unfollowed her because I found her unnecessarily nasty towards others. The disrespect and vitriol I sensed in her words (towards those who have variant views) were notable. Short seller regularly receive far worse than I ever saw her receive, but nearly all short sellers simply ignore the threats, false accusations, etc.

::UPDATED on May 16, 2014 8:45 AM EST::

Perhaps a 50% haircut on WWE is reason enough to revisit its long thesis…

PLUG Must Be the Envy of All $500-$1,000 million Market Cap Company CEOs

The trading dynamics of PLUG continues to fascinate me (and fortunately, PLUG has been good to me). Let me pose a simple series of questions/thoughts to illustrate why PLUG continues to fascinate and perplex me:

  • Historically significant news is not being released daily, yet PLUG’s shares trade as if this were the case (recently, PLUG has traded 30-100%+ of its market cap… DAILY).
  • I know many $500-1,000 million market cap stocks that might trade 5-15 million $ daily (i.e. trades 1%-3% of market cap daily).
  • It usually is a highly rare event for a company’s stock to trade over 20-30% of its market cap.
  • It is a very, very, very, very, very rare event for a company’s stock to trade 50-100%+ of its market cap.
  • I’ve never seen a legitimate company’s stock (of material size) trade like this before.
  • If I’m a CEO of a $500-$1,000 million market cap company, I would not understand why another company’s shares trades 30-100+% of its market cap 5-15 trading days consecutively, especially absent commensurate news/developments

Here is how PLUG has traded since I first wrote about it (fyi, I’m following PLUG, and writing about it, largely because I’m quite fascinated by what i see as a obviously anomalous activity… the kind of activity that, if I a regulatory body, I would flag immediately and investigate within 48-72 hours):

PLUG – 30%-100%+ of its Market Cap Traded EVERY DAY recently. Why? NOT due to news.
Date Open High Low Close Volume Adj Close Value Traded
3/28/2014 6.85 7.15 6.68 6.9 26101500 6.9  $        180,100,350
3/27/2014 6.55 7.19 6.21 6.89 45187800 6.89  $        311,343,942
3/26/2014 7.63 7.86 6.26 6.45 1.19E+08 6.45  $        769,179,915
3/25/2014 5.93 8.48 5.8 8.48 1.37E+08 8.48  $    1,161,942,320
3/24/2014 6.1 6.23 5.56 5.69 26559500 5.69  $        151,123,555
3/21/2014 6.09 6.12 5.33 5.94 52721500 5.94  $        313,165,710
3/20/2014 6.1 6.33 5.91 5.97 27852300 5.97  $        166,278,231
3/19/2014 6.19 6.57 5.99 6.21 52422400 6.21  $        325,543,104
3/18/2014 6.49 6.59 5.82 5.96 56945500 5.96  $        339,395,180
3/17/2014 7.18 7.34 6.27 6.51 58073600 6.51  $        378,059,136
3/14/2014 7.48 7.99 6.58 6.71 75379800 6.71  $        505,798,458
3/13/2014 7.58 8.48 6.96 8 1.31E+08 8  $    1,050,784,800
3/12/2014 5.82 7.4 5.32 6.8 1.41E+08 6.8  $        961,299,000
3/11/2014 11.44 11.72 5.95 6.03 2.44E+08 6.03  $    1,473,620,445
3/10/2014 9.23 11.41 8.57 10.31 2.12E+08 10.31  $    2,183,221,887
3/7/2014 6.79 8.35 6.53 8.27 1.26E+08 8.27  $    1,039,927,690
3/6/2014 6.45 6.69 6.02 6.36 47838600 6.36  $        304,253,496
3/5/2014 6.96 7.01 6.45 6.75 56042600 6.75  $        378,287,550
3/4/2014 6.46 7.09 6.24 6.69 1.21E+08 6.69  $        812,396,136
3/3/2014 4.6 5.83 4.5 5.82 84414000 5.82  $        491,289,480
2/28/2014 4.51 4.84 4.45 4.67 37353600 4.67  $        174,441,312
2/27/2014 4.38 4.57 4.25 4.37 21812200 4.37  $          95,319,314
2/26/2014 4.49 4.64 4.25 4.41 52906000 4.41  $        233,315,460

Global Macro: Very Difficult (if not Impossible), Very (Most) Important, and… Critical in Coming Years

Claim: I believe global macro-related considerations are the most important when it comes to the art of investing/speculating. Macro matters, and everything falls short of macro.

I also believe global macro will become more obviously important in coming years. This recent (and relatively mild) Ukraine/Russia situation is an opportunity for everyone to prepare for what is to come.

Rather than rigorously support my belief, I include a series of thoughts that have led me to the above beliefs. I welcome (and invite) variant views:

  • Macro considerations (for example, interest rates, tax policies, currency, cross border capital regulations, financial institution regulations, corporate regulations, war, retirement/savings regulations, demographics, etc) can render company-specific fundamental analysis  irrelevant.
  • No investment/trading strategy is more scale-able than global macro – if you want to build a $1, $10, $100, $1,000, $10,000 million position in a security… which markets might allow you to do so without moving said markets?
  • The rules of investing/trading have, can, do, and will change.
  • Understanding the movement of capital (inter and intra country) is inextricably tied to understanding the market mechanism. The market is always and everywhere a voting machine. Valuations (i.e. opinions) are not realized in a vacuum, but via the weighted average vote of market participants (although in some cases, i.e. acquisitions, a single ‘voter’ can set a valuation. But that still is a vote)

There is a time for peace… there is a time for war. There is a time for plenty. There is a time for famine.  There is a time for calm… and there is a time for turbulence.

I believe that understanding the true causes of the relative strength of US capital markets vs. EM capital markets in recent history is key to understanding what will likely happen in coming years. Be prepared.

Important Consideration for the next 2 years:

2 forces that fuel upside risk in US equities next 1-2 years:

  • Domestically, Capital fleeing Fixed Income (equity deemed more attractive). Both current and marginal capital flows.
  • International Capital fleeing EM to US.

US equity markets have been due for a correction, but nevertheless face upside pressure from those two forces. I believe we see much higher and much lower within the next 2-3 years.

Plug Power: Some Historical Perspective and Recent Anomalous Trading Activity

“Life is beautiful…but luck must be on your side.” – Tivadar Schwartz

I study rare events. Some believe it is my stock in trade. Enter Plug Power (“PLUG”). Someone pitched me PLUG as a short several weeks ago, when it was trading between $3.00-$4.00 per share. For various reasons, I was displeased with the short case and passed on it. I did not transact in PLUG or related securities until the last couple trading days.

Luck was on my side. The stock went straight up over the last few weeks, hitting a high of $11.72 per share yesterday morning…before crashing down mid-day, and closing at ~$6.00/share. PLUG fell nearly 50% from peak to trough, yesterday.

On Monday, I claimed, “If you look at $PLUG historical daily traded value since 1999, you’ll see why I suspect recent criminal/illegal behavior.” I may be wrong, I may be right. I would like to elaborate on my opinion (which I stand by), and explain the underlying reasoning behind it.

Unusual and Historically Anomalous Volume

Note the following:

  • PLUG’s 3 largest volume days in its HISTORY (since 1999!) occurred in the last 3 trading days;
  • The value traded exceeded its market value in these 3 days.
  • The price of PLUG rose 25%, 30%, and 9% (intra-day yesterday) on these days, even as volume rose to historical levels. The 25 % and 30% rise ranked in the top <1% daily price increases in PLUG’s entire history.
  • Suspiciously, PLUG share price rise these last 3 days occurred without any headlines, developments, etc. Any positive news (e.g. Walmart blah blah blah) occurred many days ago. So no news, yet historical volume, and historical price increases?
  • Nearly half of the largest volume/value traded days of the top 1% largest volume/daily traded occurred in 2014. (that is, if you rank PLUG’s daily trading by largest volume days, 42% of the 1%

PLUG Historical volume

If the above set of facts do not disturb you, consider the following: if you and I were playing poker, and I went all-in (bet my entire stack of chips) 3 consecutive times, and each time I won because my hand was a royal flush… which explanation is more plausible:

(a) The probability of such an event is blah blah blah

or

(b) He is cheating

Note how I never have opined on the company’s business, accounting, etc. I simply am pointing out mathematically questionable volume and trading activity. The above behavior can only be explained by the behavior of stock promoters, unscrupulous shareholders, and maybe unscrupulous quant/high frequency entities.

I may update this post later with more. Note that this post is not opining on the near or long-term trajectory of the shares discussed.

LST Year in Review – and Considerations for 2014

Although Wall Street may be the last place to go, for those seeking introspection, I find year-end to be an excellent time for investors/traders to process and reflect on all the good, bad, and ugly investment/trade decisions that were made in 2013. it’s an excellent time for introspection on Wall Street. Everyone is subject to bad/good luck; happens to the best of us. The real question is: when I fail, can I pick myself up? Can I determine how much was my fault, vs. what was beyond my control? What could I/you have done differently, and what can I/you differently going forward?

Or, if and when I am doing exceedingly well, how much of my success is simply a result of luck? Skill? Future success (independent of bad/good luck) seems somewhat dependent on figuring these things out, as it pertains to applying to future actions/decisions. That is, until one encounters a black swan that renders one a fool of randomness…

I find it time-consuming and painful, but ultimately valuable to examine all investment/trade decisions… it helps me figure out the underlying ’cause and effect’ relationships behind wins/losses (answering the “why” questions). Or not (“I don’t know” is a perfectly acceptable answer/belief, in my view). By the way, luck is fine… self-honesty is what matters, in my opinion. As long as one is aware of return attribution… staying power/replicability may be within reach.

PERFORMANCE ASSESSMENT SUMMARY

  • Public and Private Statements – Mixed bag. Made some very bad public calls, and made some good calls (statements made via verifiable fashion, e.g. tweets, posts, e-mails, in-person statements, etc). See below, “THE UGLY, THE BAD, AND THE GOOD” for more.
  • Actual Returns – Great job, but can do better going forward, especially on the long side. My overall batting average remains poor, but as some guy named Stanley Druckenmiller said: “I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” A friend earlier this year told me, “try harder.” He’s right, need to try harder. Also need to consider scale-ability and replicability. Shorting the Yen is very scaleable. Other, lower hanging fruit? Not so much. I had an interesting discussion with a quant about scale-ability. Despite the fact we do very different things, we understood each other…I gather his fund seriously ‘models’ scale-ability for each implemented as well as prospective strategies.

THE UGLY, THE BAD, AND THE GOOD

THE UGLY

THE BAD

  • Short CAT – This idea generated positive alpha, but in absolute terms, this has been a bad (but not ugly) short.
  • Short OSTK – I tweeted, “$OSTK has this huge “SHORT ME” sign all over it… but I’ve thought so all year, and haven’t pulled trigger yet.” – the stock has been flat/down slightly since. Yes, alpha. But abysmal.
  • Long JCP – I wrote, “If you have some “moolah to torch”, methinks you start building a long $JCP position next hour, if not early next week. No Ch.11 over wknd.” – The stock drifted further, before going slightly positive from the point I stated. T
  • Short China – China definitely underperformed relative to the US, but my timing was perfectly bad, as it was in July.
  • Long $ – I wrote https://thelongshorttrader.com/2013/07/08/make-way-for-the-coming-of-king-dollar/ – Another terrible call (though I stand by it, going forward).

THE GOOD

LESSONS LEARNED FROM PAST MISTAKES (a.k.a. “trader’s tuition”):

  • Value Traps (long housing 2005/2006) – In 2005 and 2006, I went long some housing related names because they looked cheap on book value, etc. basis. I was the patsy on the table. I lost nearly 100% of my invested capital in these names. Lessons learned: cheap can get cheaper (and go to zero), book value can erode, earnings can go negative (despite past results), macro matters, true fundamental/securities analysis is NOT merely looking at numbers/ratios. Cyclicality matters, and structural discounts to valuations on cyclical names are often well warranted. Risk management and diversification are NOT a linear function of # of securities one owns.
  • Risk Management and Humility Critical with Short Selling – In 2011, I was overly concentrated in a short that I believed was going to zero. As the stock went lower and lower, I grew my position substantially (“It takes courage to be a pig” so I thought). I initiated the short at 100, added some at 67, added more at 50, and a lot more at 29. I felt like a genius. It went down to 18…and hit a temporary low at 18. I considered taking profits around 20… but did not. As fate would have it,  I was incidentally on a flight most of that day. I had about a 20-30 minute window of time to decide whether to cover or not. Woe be the day I did not cover, because the stock went up 4x-5x before eventually going to zero. I realized a loss on this trade. It almost single-handedly destroyed my 2011 performance. Fortunately, I learned my lesson quickly (after taking my loss), and actually ended up handsomely in 2011. As Kyle Bass said (regarding a similar experience he endured), “and it was the most important lesson in short selling that anyone could ever learn. It taught me the humility and the respect that you must have when you’re on the short side of anything. It wound up being one of the best things that ever happened to me.”

CONSIDERATIONS FOR 2014

  • Consider sectors and strategies that were out of favor in 2013 – When I say consider, I am not advocating that you blindly invest in everything that didn’t work in 2013… but to understand what did not work in 2013, why it did not work… and why it may (or may not) work in 2014. Try to understand causation. There’s one particular strategy that I’m very “bullish” on… and I think I’m “bullish” for all the right reasons. Hint: unreliable, but often cited hedge fund performance survey claims that performance for this strategy was -20-35% in 2013.
  • Gold and Miners – I say we will see gold go lower in 2014. 10+ years of up, up, and up does not correct this easily. Need to see some miners go the way of chapter 11, and/or massive dilutive capital raising. “Gold tumbled 28 percent this year, set for the worst annual plunge since 1981.” Note that gold declined further in 1982.
  • Endogenous vs Exogeneous – So I think it’s fair to say that the 2006-2008 financial crisis was largely an endogeneous one, whereas 2001 was more exogeneous in nature. I wonder if the proximate cause for the next correction will be of the exogeneous variety.
  • Go Long Active (vs. Passive) Management – The popularity and proliferation of passive management (as evidence by ETFs and similar), coupled with the rise in US equity indices in 2013, provide a rare opportunity for active managers to generate significant alpha in  2014 vs. their passive counterparts. 2014 will favor true alpha seekers.
  • Credit/Rates – I say go long Saba Capital, or some of the strategies/concepts they employ that have not fared so well this year.
  • Bitcoin Implications – I took bitcoin very seriously, before many others did (thanks to a geeky friend of mine who is very much a forward-thinking individual).  I’m thinking through the investment implications, i.e. the 2nd/3rd/4th order implications. Suffice it to say: I believe bitcoin and/or related concepts may end up slaying certain rent-collecting goliaths of the real economy… these behemoths, in my view, have de facto monopolistic power within their respective domains. Their demise/contraction are long overdue. For the sake of society (and capitalism), I would love to see innovators slay them within the next 5-10 years. Innovate or perish. Creative destruction, par excellence. It is the American way.
  • Russia? Turkey?
  • War risk creeping – Investment implications unclear (not the US per se), but for example, Japan is getting aggressive. It seems symptomatic of desperate governments. Certainly rhyming with past history. I personally hope all their unnecessary aggression dissipates…but you never know. It is my understanding that  (?) market prices poorly predict war.

“Trading, like poker is a zero sum game. We have 1,500 employees, spent hundreds of millions on research during 37 years. You are going to have to beat me.” – Ray Dalio, Bridgewater Associates.

And David slew Goliath.