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

• 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:

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%

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…

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%

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.