Expectations, Methodologies and Cannibalism
Published on January 4, 2010 in Uncategorized. 0 Comments
Ladies and gentlemans, if you have any problem with having a minority opinion about the markets, individual investments or the investment guru of the movement, I would deem it appropriate that you exit from either the front or rear exit. Dr. Kellegro will always be clawing against the grain, as the very center, core, and all powerful invisible hand that commands Dr. Kellegro’s actions is rooted one hundred percent in the concept of the financial markets being in a constant state of deceit.
At any given moment a large group of investors are succumbing to outright lies. The market has built its foundations on fooling the majority of the people all of the time. The Wall Street machine that is at the periphery of the deceptive practices is constantly straddling the line between being observed as an asset to investors and pursuing its own self-interests, which are inherently opposed to that of all but its own. And this is the essence of the Wall Street machine that has existed for many decades now…a consistent conflict of interest between Wall Street firms and those who they purportedly serve.
This conflict of interest only becomes amplified and therefore apparent during intense bouts of dislocation, such as what we experienced in the fall of 2008. But you are wise to assume that these conflicts of interest are always bubbling just below the surface. Wall Street, in its current state, would cease to function without the deception. It has become an essential part of the infrastructure.
It used to be that this infrastructure was geared against the individual investor. However, then came the dark ages for individual investors. After seeing a good percentage of their equity wiped away when the internet bubble collapsed, investors shunned individual equities in favor of real assets, mostly in the form of real estate. This left Wall Street in a cannibalistic mood and it created instruments to augment its appetite. However, the instruments were now geared towards institutions, as there was no more meat left on the bones of the tiny individual investor. When there are no more fish left in the sea where do the sharks turn for food? To each other, of course.
And so we saw the gross, corrupt and scripted demise of such heralded institutions as Lehman Brothers and Bear Stearns. This was made all the more conspicuous by the individual players involved, reaching into the very pinnacle of government. Conflict of interests abounded and due to the magnitude of the conflict, the sheet has been removed and history will be a harsh judge. We haven’t seen even a fraction of the consequences….they will be much more far reaching both in terms of time and severity than what we have observed thus far.
In order to survive in such an environment you have to assume that you are in a constant vortex of lies. The Dow being at 10,600 at this very moment is a lie, just as Dow 12,000 was a lie and Dow 7,000 earlier this year was also a lie. Put another way, disequilibrium is the natural state of the markets. There is never a moment of balance or true value. It simply doesn’t exist. The greater the duration and severity of the price decrease and especially increase, the greater the propensity for a diabolical lie.
This philosophy created through observing numerous trading patterns over the past 15 years has led me to a strategy that focuses on specific long and short opportunities. I take a very stringent approach towards which investments I take on as I want to have the greatest chance of success at any given moment.
On the long side, I have found that special situation investing can be especially attractive and profitable. I like to see a confluence of factors at work before I will take a long position in any equity issue. I have grown especially fond of taking positions in bankrupt companies, mostly trading below $1.00 due to a host of complicating factors. Bankrupt companies make for extremely risky investments as the equity in the company can essentially be cancelled virtually overnight and in most cases, this will be the outcome. The reward, however, lies in this very risk. As such a risk of complete and total loss of investment exists, there will be times when the market ignores an opportunity or delays the factoring in of a more favorable outcome. Bankrupt securities are not widely followed, making for a less efficient method of pricing in favorable fundamental events. The bottom-line, not all corporate bankruptcies end in the cancelling of shareholder equity. There are issues that manage to turnaround and those are the issues I search out. I see them as being mildly risky investments with potentially enormous rewards. These are issues that have very little correlation to the general market and will do well regardless of whether the Dow goes from 10,000 to 11,000 in one day or 10,000 to 9,000 in one day.
The short side of the equity markets is less research intensive, as I don’t search out potential balance sheet bombs or hidden toxic investment vehicles. There are certain sectors and sometimes certain individual stocks that are more prone towards trading within a predetermined cyclical pattern or price range regardless of market conditions. One example of such a sector is retail. Nine times out of ten retail names that are the “it” stock of the moment or must have momentum name of the day, week or month will succumb to the simple fact that human beings are fickle creatures. Tastes change and as such stock prices will change, as well. Management teams are never able to stay ahead of the human propensity for change. A retail name will only be the must have brand or store for months or possibly a couple of years before tastes begin to change. All the while the market, being the market, will get ahead of anything that management will be able to produce to justify such a price and the price will inevitably shift lower.
As times change, the appetite for sectors to sell short should change, as well. Consumer credit, for example, is in the process of a long-term contraction. All macro signs I have seen are pointing to that fateful period of time when consumer credit experiences its own reversion to the mean. As such, the process is in its infant stages. Therefore, opportunities are freely available in rallies such as the massive rally we have experienced since March of 2009 to get short names that will be affected by such a contraction in credit.
All who read this should take home the following point: you, me and all who care about the markets were deceived by the markets today. All of the prices you saw scrolling across the screen are completely incorrect and subject to enormous shifts over the months ahead. I have taken aim at those which I believe will shift the greatest in that time frame. I only need to be right on a few of these names a year and it will be a good year. If I am right more than a few times, it will be a fabulous year. It really is as simple as that.