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Robert Duval
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Full time Investor / Trader, 17 years. Specialist in risk management, with intermediate trade focus, US stocks, international ETFs and commodities. Believe in correlation of markets, must understand all markets to trade one well. Self taught through continuous study of myself and other... More
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  • Timeless Investment Principles I Follow...just For My Followers.....

    Shhhhh don't tell anyone else -- here are the secrets: (highly technical)

    1. cut losses

    2. cut losses

    3. see 1 and 2.

    4. Divorce ego from investment choices and mistakes. Losses are part of the game. Be wrong, OK, don't stay wrong.

    5. contra the herd, but don't get trampled.

    6. know yourself. Well. Invest with a style that is you.

    7. see #6.

    8. know what's going on worldwide even to invest domestically. It matters.

    9. be a permanent student of all factors. Study your mistakes.

    10. credit leads.

    11. be fearless when others are fearful, and vis versa

    12. buy good management, that means politically too when internationally investing.

    13. stay within your area of competence

    14. defense wins football games and in investing too, long term.

    15. have your own vision, don't be a follower.

    16. don't chase what's most popular. Be uncomfortable.

    17. Be humble; stay humble

    18. See # 1 again. Really.

    19. Buy Business's, assets, Management, not stocks.

    20. Work harder than anyone else. Believe in yourself.

    Jul 25 1:49 PM | Link | 6 Comments
  • Market Update: Watching CPI, The Fed, TLT.

    This week we will look at a few charts and discuss a macro thesis, which is based on key beliefs, which I will discuss below.

    This investment premise today is essentially based off of a set core world views, and placing long term bets on those world views as to CB action and where we are in the business cycle.

    It is less about making grand predictions about the end or continuation of the U.S. bull market or even setting SPX targets, all of which are increasingly meaningless to my methodology.

    My approach is to favour to favour undervalued assets, which today would be selected emerging markets and commodity assets, and escrew overvalued / popular assets, which today could include areas like speculative US biotech stocks.

    This approach will not outperform in the short term, but I'm confident buying assets when nobody wants them and exercising patience, is the path to long term outperformance. I'll discuss a few ideas below.

    Core world views, and related probabilities, with associated trades:

    1. CB's are determined to create inflation, are terrified of repeating mistakes of the 1930's by tightening too soon, and will not be rushed. They continue to talk a responsible game about tightening (aka the Fed) but in the end will not tighten until forced to by increasing inflation expectations, and resultant sell off in long term bonds. This is similiar to many past cycle's. Eventually Bond markets will lose patience with the Fed and other CB's, and move rates for them.

    Btw --- The long term Fed Funds curve is predicting a very, very slow rise in short rates. The risk here is definately that the market has it wrong.

    Related probability: A large chance of sector outperformance in inflation - related stocks, like metals, agriculture, and energy, and a move higher in long term treasury rates.

    Trade: Buy inflation assets, and short long term treasury bonds.

    On a long term chart, TLT has broken down from a spike top at the beginning of 2015. A reasonable target might be the 2014 lows around 105. Time will tell if this move would affect stocks adversely, or a bigger move would be required. I believe the answer would be the markets perception on whether the move is caused more by increasing inflation expectations vs healthy growth rates.

    I will reiterate historically the average real yield, or yield plus core inflation, has been 2% for 10 year bonds. Currently, with core CPI at 1.8%, this would make 10 year yields 3.8%, vs 2.2% currently.

    TLT Chart

    2. Inflation expectations are increasing, and the prerequisites are there for higher levels of increase:

    Wages are increasing at the bottom end -- I think this is key. A slew of fast food outlets, restaurants, and retailers have (been forced to by labour supply) to raise wages. I believe this is the start of a trend, with almost record low jobless claims, and will feed into CPI in time.

    Oil appears to have bottomed.

    Health care costs are up.

    Rental and housing costs are soaring. Their is a huge underlying housing demand because of this and household formation outstripped new home sales for a number of years.

    While much of this -- like wages -- are good for the economy, I think the jury is out on how good these developments will be for financial assets, after so many years of markets thriving on weak wage growth and middling economic data. What do markets want, is the question -- a roaring economy or permanent zero bound rates? We will see in time. For now if these changes develop, asset allocation is key.

    The Trade: Short companies affected by higher wage growth, and potentially, higher food costs. (I'm short 2 of these) So far, my bets on agriculture (corn and soybeans) have not worked out, in spite of a firmer oil price, and the most lopsided bearish sentiment on these commodities since at least 1991.

    However, 2 related Ag companies are breaking out here from long term bases, and I am long both, (NYSE:CF) and (NYSE:DE) Stocks often lead commodity movements. I firmly believe, these commodities may move higher soon, and I am waiting on a trend reversal to re-enter these trades.

    DE Chart

    DE data by YCharts

    CF Chart

    CF data by YCharts

    USO data by YCharts

    US Core Consumer Price Index Chart

    3. U.S. markets are overowned, popular, and pricey, while emerging markets (except China) are ignored, much cheaper, with both higher growth rates and greater margins of safety.

    Probability: EEM emerging markets will outperform SPX over the next major bull cycle.

    The trade: Allocate to EEM broadly long term capital, or to selected regional or country ETF's. Let's conclude by looking at one distressed country that at one time was one of the worlds brightest stars, Brazil. (NYSEARCA:EWZ).

    There is no doubt Brazil is a huge mess today, but one must look ahead. What if the present government is impeached (a fairly good possibility according to reports) and a new, pro capitalism government takes power, that regains the trust of investors and the public, at the same time a higher inflation period takes hold, favouring commodity assets so important to Brazil?

    A subset of this would be instead of buying US Shale oil producers with high debt loads and (according to some) questionable reserves, allocate to international, cheap conventional names. Everyone is chasing yield today, but with my view on higher rates, that's exactly the wrong thing to do.

    2 suggested names would be Seadrill (NYSE:SDRL) and Petrobas (NYSE:PBR) PBR is affected by confidence in Brazil -- but what is overlooked is their absolutely massive, proved reserves. Now the risk that has been priced into the stock is nationalization and to do with the recent scandals -- but that's when one should take a look, as China has, extending a massive credit facility.

    SDRL blew up over their Russia connections and low oil prices --- lets remember they have the best, youngest offshore drilling fleet in the world.

    To close, From my chair of 16 years as a floor trader turned investor, there are few industries more ethically questionable than the vast majority of mutual funds, hunting down Mom and Pop through their "licensed and certified" , your Financial Adviser or Certified Financial Planner.

    These folks are so often nothing but salesmen for the mutual fund industry, and it's all about AUM -- assets under management -- and driving those fees. Switching fees, front end fees, back end, trailer, the list is endless. Churning accounts, special leveraged loan products, nothing is too much in the search for fees.

    There are few industries I have greater disdain for. Be careful who you listen to. There are some good advisors out there, but rare. The conflicts of interest are great.

    PBR Chart

    PBR data by YCharts

    SDRL Chart

    SDRL data by YCharts

    Buy assets when no one wants them. Best wishes to all investors.

    EWZ Chart

    EWZ data by YCharts

    EEM Chart

    EEM data by YCharts

    Tags: TLT
    May 24 12:08 PM | Link | 9 Comments
  • Mid - May Market Update, And The Uselessness Of Grand Predictions

    I'll start with a bit of humor on the fallacy of Grand Predictions by the newsletter - Pundit crowd, and we all know who they are.

    This Group comes in many flavors, like Freezer - Burned Ice - Cream, and is consistent in the uselessness of their commentary.

    The common theme in all of these are, They are never wrong; either they are "early" or the market is irrational, (not them)

    Lets look at the flavors:

    1. The "secular Bull Market" callers: This wise group expects readers to fall at their feet as they repeatedly chant "secular bull", distracting us from their brutal sector and individual stock picks, and the fact they haven't beaten the S&P 500 since, Oh 1970 or so.

    So; I timidly raise my hand to the great and powerful OZ.....please define a secular bull market?? YOU NAYSAYER -- BEGONE! -- I hear. (The real answer is the secular market quoted depends on whether OZ is long or short of that asset, and little else)

    2. They switch between technical and fundamental arguments, depending on whether their asset of choice is (NYSE:A) making new highs (technical) B) Consolidating, flat to lower (combination of Technical mumbo - jumbo and fundamentals -- you start to hear "long term story" once the asset falls over 20%; and C) getting crushed (pure fundamental arguments along with vitriol about "naysayers" and "short sellers" and their foolishness.

    I've actually read here --- I kid you not -- many times on this site regarding certain stocks, that have fallen 50% -- or much more -- both that they are still in a "secular bull" and the "naysayers" are dead wrong! How's that work, exactly? Makes great comedy!

    3. The "hedge funds" are a contrarian indicator -- if the Hedge funds are short my favorite stock -- and the Hedge Funds are "buying up my stock" -- -- so that s good news! How can the Hedgies both be always wrong, and always right?

    To add to the above: There is a lot of commentary out there on the economy, again from the ivory tower that can't beat the S&P 500. Now that we mention it, I propose a new, self governed rule. For those pundits -- that's most of them -- who cannot even achieve the simple task of beating the S&P 500, I propose you don't opine on markets or the economy until you do. Graduate kindergarten and then you are permitted to speak. Fair?

    Anyway the point is -- for those economic experts -- who cares? I don't trade the economy. I trade the market, and at its core, I trade risk. Grand economic predictions don't make us any money, if one can't choose sectors and individual equities worth a darn.

    Experts, when you even figure out the above phrase, let me know. Maybe then you will be allowed into grade 1.

    Anyway enough humor -- on to the update following my Article, "Its all about the Bonds" --- Boy am I looking like a dope for selling my Jan TLT 2016 puts late last week (at a 50+ % profit ), looking for a bounce in TLT. Yeah we got it -- for one day!!

    Thankfully, (while away yesterday) I hammered the bonds this morning in the futures market on the housing data -- remember how I've been bullish on Housing all this time? -- and I still have a big chunk on Jan 2017 TLT puts that I won't trade.

    In the context of ECB chatter and Euro bonds rallying, the action in US long term bonds is EXTREMELY bearish !

    TLT Chart

    TLT data by YCharts

    I make no grand predictions about secular this or that -- but on long term charts it sure looks like an ATTEMPT at trend change; gleaned through OBSERVATION not Grand Prediction, may be in development - with profound implications for various asset classes.

    As to other positions; I remain short 2 Shale plays, (NYSE:PXD) and (NYSE:CLR) ; and Canadian oil Sands, COS.TO. The first 2 --are not related so much to a "grand" call on Oil itself, but their debt levels -- in a sense its another play on a bond selloff spilling into highly indebted sectors.

    CLR Chart

    CLR data by YCharts

    On (COS.TO), its all about the Alberta election, and higher royalty rates and regulations from the new NDP government.

    Lumber Liquidators (NYSE:LL) is not working out as yet, but I believe they will work through this, and a strong housing market won't hurt. It seems there are not clear regulations that apply to anyone here. I'm giving this more time as a distressed play.

    (NYSE:PBR), (NYSE:FCX) and (NYSE:SDRL); I am happy to see these pull back as long term holds, as I've already completely hedged these stocks with short June calls, which are getting crushed. I hope they expire and I keep the stocks.

    AS a whole, Indian stocks (NYSE:HDB) and (NYSE:TTM) have done nothing, I am flat on the position, but have a big gain on my third Indian holding, Fairfax India Fund (FFXDF or FIH.U.TO) -- depending on your quote service. Standing Pat, will give these lots of time and space.

    HDB Chart

    HDB data by YCharts

    (NYSE:MBT) Russian Telecom, (NYSE:SUNE) Solar co, and (OTCPK:HCMLY) Holcim Aggregates co look solid here. I trimmed MBT for nice gains and sold calls (poorly) against SUNE, thus are the mistakes, selling calls and then seeing stock take off. I like Sune and will add on any notable dip.

    SUNE Chart

    SUNE data by YCharts

    (NYSE:TRQ), Turquoise Hill which I also lightened, is taking off this morning on a new agreement re the underground mine with the Mongolian Government. This stock has huge very long term potential.

    TRQ Chart

    TRQ data by YCharts

    (NYSE:TRN) Trinity short Put position is working as stock is over 30 -- they were expensive puts and I'm happy to see them go to dust. I'm not sure if the stock will make a lot of fwd progress, hence I only shorted puts here.

    Lastly, still waiting on special situation Fannie Mae Preferreds...(FNMAS) stock spiked about 10 days ago, I should have sold some, and missed. I do think a strong housing market helps their ultimate, free market valuation. Patience.......

    That's it for the update. Best wishes to all investors!

    Tags: TLT
    May 19 10:21 AM | Link | 9 Comments
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