The research report titled, “Making The Case For Regional Banks: Starring SBCF and HMPR” will be posted to the site Monday morning.

SBCF position was taken in the 2.10 range. HMPR position was taken in the 1.30 range.

As of the close Friday, the portfolios are 85% long, with a 15% cash position.

Current portfolio positions include: WMIH, IWSY, MITL, CIDM, HMPR, SBCF and JMBA

Don’t forget…all research reports since I began publishing them in January of 2012 can be found here. The “research” link provides a concise view of where I have been and where I am currently invested, along with detailed reports on all past and current holdings.

The current market is a bandit. Better yet, a pirate. It isn’t giving itself away too easily so that riches are bestowed upon every participant who dares to open the coveted treasure chest of the market. It isn’t making the voyage too difficult so as to dismay or dissuade investors from making the trip. It is giving away gifts. It is taking away treasures. It is chuckling, spirited pirate who seems to have a lot more behind the curtain than people care to believe.

Here are some observations I am making regarding this piratical market:

- If you look at the major averages on a long-term basis, using weekly or monthly charts, the scope of the breakouts that is taking place in 2013 begins to smack you in the face. If you can’t see it, then you don’t know price. As difficult as this is to believe, we are closer to a beginning here than we are any conceivable end. I’m talking long-term here, not whether or not a correction will take place over the next few weeks or months.

- Bringing me to my next point: Yes, the market is overdue for a correction. What do you have to gain by insisting on and planning for that correction right here? Nothing. I have had one firm signal this year to hedge exposure via TZA in February. It didn’t work out and I quickly moved on. Since then, I haven’t had anything close to any signals to get short or hedge long exposure. There is a rather surprising contingent of market participants who remain (it has been months now) insistent that a significant correction is around the corner. These are the clueless and inexperienced among us. Pay them no mind.

- The easy money on the long side of AAPL expires on Friday. After Friday, I have AAPL becoming a choppy, irreverent drunk. A short opportunity will come down the line. It is not here yet, however.

- Portfolio exposure remains significantly under where it should be at this point. In fact, it has been this way a majority of 2013. 60% long and 40% in cash is the current allocation. I’m in the process of putting more to work in a new name. Opportunities that offer the proper risk/reward simply don’t exist here. I’ll have details on the new name later this week.

- If you did not check out the interview with David Tepper on CNBC today, please do so http://www.cnbc.com/id/100734343

- Anybody thinking about what US oil supplanting OPEC does for the US economy long-term? If not, get to thinking. Here is the story http://www.bloomberg.com/news/2013-05-14/opec-spare-capacity-to-surge-amid-u-s-shale-boost-iea-says.html

- TSLA is an enigma in its price movement. Enigmatic price movement often opens up dangerous doors to volatility that end up hurting those who are overexposed. There is no way to gauge when the TSLA train stops moving temporarily. However, the end of the momentum will bring a vortex of downside that will be difficult for most to handle. Long-term, I think the stock is closer to the beginning of its ascent than any conceivable end. As with any of these popularized investment names, with larger than life characters involved, the volatility along with the noise that accompanies it will be nauseating.

- Don’t forget: Risk shows up quickly, whereas profits are a grind. Always keep that in mind  as you watch this market scale the walls of infinity.

What is it about the current market that has left so many otherwise intellectually esteemed individuals dumbfounded when it comes to proper allocation of assets? Admittedly, this has been a difficult market to keep up with if the quality of your work is predicated by your ability to keep up with a benchmark. Without passing judgment or exercising bias of any sort let’s look at exactly what is going on in the market as of the close Friday. Again, no passing judgment or exercising bias. Simply a look at what is occurring in 2013:

– Dow is at an all-time high

- S&P 500 is at an all-time high

- Russell 2000 is at an all-time high

- Nasdaq Composite is at a 10+ year high

- Dow Transports are at an all-time high

- NYSE Healthcare Index is at an all-time high

- XLP – Consumer Staples ETF is blazing a new all-time high each week

It is not just market strength we are talking about so far in 2013, it is strength in key sectors that typically attract a large international, institutional presence. Joe Smith from Wichita, Kansas doesn’t wake up one day to turn on CNBC seeing that the markets are hitting new highs and put in a buy order for Kellogg or Colgate Palmolive. It is the institutional money that is seeing increased demand for a properly performing asset class that doesn’t have an increasing potential for debt orchestrated periods of shock and awe to the downside that is buying up these names.

It is not just any institutional investor either. It is Asian, European and Latin American institutions, alongside US firms that are piling into these names. The prototypical image of a rally of this nature being led by a bunch of dummies simply doesn’t apply here. Those of you who are constantly drawn to this image need to rewire your synapses to correspond to the present day. This isn’t the 90s or the 2000s. It is an entirely different market ecosystem that instilled enough fear and hate for equities into the masses that they are perfectly fine with allowing all-time highs to become nothing more than a news event, as opposed to anything having to do with enhancement of their overall net worth.

When the general public does return to the market their footprints will be clear. Speculative stocks will rise in a manner that is disproportionate with any positive fundamental developments. Buying becomes sloppy. Pullbacks become more difficult to gauge accurately. The entire infrastructure of the market becomes increasingly unstable as a result of the erratic participation this class of investor brings with it.

We are nowhere close to this stage of the rally. The psychological scars run too deep as a result of a perception of Wall Street as a deceptive, untrustworthy and even fraudulent segment of finance that is best left to testosterone driven men who enjoy hair gel, scotch and the olive bar at Whole Foods.

We all know that markets don’t go up forever. Furthermore, we all know markets that tend to portray an overwhelming sense of safety and stability tend to have the most violent pullbacks over the short-term. Now that every major index has blown through its long-term resistance levels, we are left to look at a combination of price action and the resulting sentiment to come to any educated conclusion as to when a pullback may strike.

There is one indicator in particular that I have been pointing to as a means of gauging when sentiment is becoming overly-optimistic and careless. This indicator has a superb track record for gauging corrections within the bull market that started in 2009. Let’s have another look at the put/call ratio using the 20 day and 100 day moving average only. One glaring point that continues to be a poke in the eye of the bears is that the 20 day moving average has crossed back over and above the 100 day moving average, meaning that sentiment can still be classified as bearish technically speaking. I’ll be updating this chart frequently over the next few months:

click chart to enlarge

Put/Call Ratio

To take profits on SPNS was a difficult decision for me since I believe the company is in an early growth stage here, with upside possibility far in excess of where it is currently trading. I did want to free up capital, however, to take advantage of newer opportunities that present a more balance risk/reward trade off going forward. I am looking forward to buying it back at more advantageous prices in the months ahead.

I have been adding to a couple of existing positions over the past couple of weeks, with an eye on those positions within the portfolio that offer a substantial cushion against risk in the event of a market pullback. Those additions will be detailed in the May monthly summary.

What can easily be gleaned by the performance of the portfolios YTD is that they function completely independent of the market averages. There is little correlation to any specific benchmark, which has its advantages and its drawbacks. The drawbacks come when you have a runaway train for a bull market that is focused on mid to large cap names that have some measure of name investment recognition involved. The small-cap names that I follow have been reluctant to move unless fundamental developments that warrants an adjustment in valuation take place. This again firms my view that we are in an institutionally driven market advance that hasn’t even come close to reaching the speculative proportions that signal a market top of any significance.

With that said, I expect there to be a substantial “catch up” in the portfolio names as the second half of the year brings about positive fundamental developments as well as a more speculatively inclined investor.

There continues to be an excess of cash in the portfolios relative to the 100% allocation towards equities my model says I should have here. Again, this excess of cash is a risk management decision as opposed to any bearish short, intermediate or long-term bearish opinion on the markets.

As of the close today, the portfolios are 60% invested in WMIH, CIDM, JMBA, IWSY and MITL. The remaining 40% sits in cash for the time being. This 60/40 allocation has been in place for over a month now with some slight tweaking taking place to add or subtract exposure along the way.

On another note, I am going to further tighten the parameters I use to determine whether a name should be included in the portfolios. In looking over my results over the past 18 months, I have noticed that my focus has been spread thin among 12-14 names per year instead of the target of 6-8 ideas per year. Ideally, I would like to thoroughly understand each company I am invested as much as possible. When I am looking over 12-14 names per year, this becomes an increasingly difficult task.

In the financial markets, there seems to be only two types of institutional investors nowadays: Indexers and closet indexers. There is an enormous discount being placed on the ability of managers to understand the companies they are invested in, with an emphasis placed on understanding the risk involved with each investment with great detail. Instead, an attempt is made to vaguely understand each situation, with risk management instead being placed in the incapable hands of diversification.

My approach to the markets is completely opposite, in that I take concentrated positions with a very detailed understanding of the risks involved in each position. I believe in my best ideas and my ability to research these ideas thoroughly enough to take positions that can make a difference. Furthermore, I know that if I have made an error in my research, I have enough portfolio backstops in place that the position will eventually be decreased and even eliminated entirely.

Diversification is a tool for the uninitiated, reluctant and indecisive. Buy an ETF.

March monthly report can be found here.

2012 Return: +58.61%

2013 Return: -7.36%

Portfolio April Performance: -6.86% S&P 500 April Performance: +1.81%

Portfolio YTD Performance: -7.36% S&P 500 YTD Performance: +12.02%

Total Return Since Inception (1/1/12): +47.80% vs. S&P 500 +27.03%

Portfolio Highlights For April

- SPNS ended March as the largest position in the portfolios. Throughout April the stock steadily rose, finishing the month up 6.43%. Given the performance of the portfolios thus far in 2013, the strategy employed is siding towards conservatism taking precedence over aggression. SPNS has gained some 40% since being initiated nearly 12 months ago, fluctuating between a mid to large sized position the entire time. Although I believe the company continues to have upside potential into the second half of the year, better opportunities on a purely risk/reward basis exist. SPNS was reduced throughout the month of April, ending the month as a small position. I will strongly consider adding to the position if prices become more advantageous in the months ahead.

- CIDM is a new position in the portfolios. The research report was published on April 23rd and can be found here. It was made a mid-sized position from the start given the advantageous setup for the company at this junctures of its existence. To highlight a few points from the research report for CIDM:

• A restructured business model focused on two segments: 1) Cinema software, where CIDM enjoys 70% of the market on the distributor side 2) Content distribution, where CIDM is the #1 digital aggregator and distributor of independent film content, with major partnerships that include Netflix, Walmart, Amazon and Hulu.
• Management that includes an experienced former hedge fund manager who specialized in small-cap restructuring situations and a CEO who is a veteran of the movie business including being the COO of MGM before it was sold for $5 billion to a consortium of investors.
• A completely restructured debt picture that essentially absolves the equity investor base of any responsibility with the debt now being collateralized by existing equipment. The debt restructuring also saves the company substantial interest payments and extends maturities of the outstanding debt.
• This is an extremely “buzzworthy” opportunity in a digital content company that is selling at valuations that create as well defined a risk/reward equation as possible. What I mean by “buzzworthy” is that it is in the right industry at the exact right time. Any earnings momentum resulting in price appreciation has the potential to see the company appreciate 3-4 times in a relatively quick manner.

Portfolio Lowlights For April

- WMIH continues to adversely affect performance as it has been trickling down in a relatively steady manner since the the middle of January. WMIH was the largest position in the portfolios coming into 2013. It has been steadily reduced due to the performance, now sitting at a mid-sized position. Overall, WMIH has been a winner since being initiated in late-July. It is up roughly 20% since that time. However, in 2013 it is down 29%, being responsible for the negative performance experienced thus far in 2013.

I have been involved in several restructuring/reemergence opportunities over the past several years. The bankruptcy and subsequent rights offering in GSI Group is one successful example. The saga of telecom company PTGI is another. CPSS was one that initially in the portfolios throughout much of 2011, but liquidated much too early. In the midst all these examples, WMIH is by far the most fascinating, complicated and potentially lucrative opportunity. There are a ton of moving pieces and possible variables involved here that are difficult to value properly. The difficulty in valuation is what creates the opportunity, however. In other words, if the outcome was apparent there would be no opportunity or certainly not an opportunity as great.

What can be ascertained is that the company has in the vicinity of .35 cents per share in net cash, leaving the price of the “assets” at roughly .25 cents per share (or $50 million) for an interested buyer. The assets in this case are: 1) NOLS worth some $6 billion 2) WMMRC a captive (captive is formed to basically isolate risk from a parent company within a defined structure) reinsurance company being operated in runoff (runoff pays existing policies, without writing any new policies until expiration of all liabilities in the form of outstanding policies). There is a substantial question mark regarding the appropriate value for such an entity. In the court hearings the value of WMMRC alone was estimated at a mid-point of $125 million. It should be mentioned that prospects for reinsurance in the current M&A environment are exceedingly opportunistic in nature. Reinsurance as an industry is getting quite a bit of attention due to many high profile hedge funds using offshore tax loopholes created through reinsurance companies being domiciled in tax havens to create lucrative, tax efficient investment vehicles. There is increasing governmental pressure and scrutiny into these offshore tax havens,creating an increased repatriation from offshore structures. Furthermore, captive reinsurance companies that are being operated in runoff certainly have an acquisition value that seems to be enticing for financial firms that know how to utilize the structure properly. There is, in fact, increased competition taking place in the reinsurance market place for captives. This is, perhaps, one of the reasons the process for WMIH is taking as long as it is. A hot M&A environment involving their sole existing business could be creating increased competition for an entity that has so many restrictions involved with a potential acquisition. It is my opinion that WMIH will eventually capitalize on this trend towards reinsurance, merging or capitalizing with an entity that allows the company to become a legitimate revenue producing financial company that can utilize the NOLs involved properly.

In the meantime, there is a $50 million valuation being given to a company (WMMRC) that was given a a $125 million mid-point value by expert witnesses in court. The NOLs here are basically being valued at zero with such a deep discount being given to the reinsurance entity here.

What is the problem then? The problem is the uncertainty of a potentially hostile situation involving hedge funds (David Tepper and co.) and the equity committee that controls the company here. There is a possibility of the current board could be replaced with a board that is more friendly towards the interests of the hedge funds. In that case, there could be an increasing hostile stance taken towards equity investors that are essentially being given a free ride on the back of what will ultimately be the hedge funds capital infusion. What form that hostility will take is difficult to ascertain here and now. My goal is to figure out the potential risks that I may be missing in the overall picture.

I continue to hold a mid-sized position here for the same reasons I initiated the position at .50 cents in July of 2012: The risk is so well-defined in a business model with abundant possibility and limited observable downside.

- IWSYdeclined 12% during the month of April after a post-earnings spike that saw the stock rise above 1.30. IWSY remains a mid-sized position within the portfolios.

- MITL declined 10% during the month of April in what I consider to be an act of passing time until clarity is seen into top and bottom line numbers into the second half of the year. Given the fact that I believe technology will play a much more prominent role in any market rally from August onward, MITL should begin gaining some traction once money that is looking for increased return potential begins making its way into the US markets. For the time being, MITL remains a small position in the portfolios.

- JMBA declined nearly 7% during the month of April. JMBA is one of my favorite opportunities in the portfolios currently. However, I am waiting for the share price to begin showing some signs of life before adding. What I see in JMBA is not just a potential growth story due to an increasingly health conscious consumer. JMBA is not going to be a smashing revenue model that creates monstrous cash flow for the company causing the share price to explode due to undervaluation according to every metric available. JMBA is 100% a branding story.

In JMBA you have the most well known fresh juice company domestically, with a focused effort on creating the same type of brand consciousness overseas. You also have a management that doesn’t seem as concerned with profiting from each individual franchised store as much as they do making JMBA stores as prevalent as Starbucks in neighborhoods across America. Furthermore, there is an effort to install small JMBA kiosks in universities, hospitals, school cafeterias etc. to further expand the brand recognition. Not to mention the effort that is being made to have JMBA products in grocery stores.

You can see the trend here. JMBA is a branding recognition story in an industry that is just beginning to bubble beneath the surface. Everything management seems to be doing is geared towards putting JMBA in front of the eyeballs of the consumer. Revenue growth will follow the eyeballs. Perhaps of even greater potential is the brand recognition that these efforts will create, making JMBA an eventual high value takeover target.

All of these factors together when combined with the successful restructuring efforts, debt reduction and recent return back to profitability make the $220 million market cap being assigned the company an extremely low risk proposition with substantial upside potential.

- The portfolios did end April roughly 60% invested, with a 40% cash position. This level of under-investment has everything to do with the lack of performance among the names in the portfolio causing me to trim exposure. It is not as a result of any bearish overall opinion regarding the future direction of the markets.

Looking Ahead To May

The sheer persistence of this bull market has been the most surprising aspect of market behavior thus far in 2013. There has not been a correction in excess of 4% through April of this year. What is perhaps more surprising is the fact that this rally has been led by sectors that include transportation, consumer discretionary, healthcare and utilities. Conspicuously absent are the sectors we have come to appreciate as market leaders over the past several years. Namely technology and commodities.

The SOX, as an example, has been lagging the Nasdaq greatly. This is not something that has been typical of bull markets over the past 10 years. Commodities, as a bull market leader, have completely disappeared as weakness in Emerging Markets has created defined weakness within the sector that doesn’t seem to be intent on turning around with any ferocity in the near future.

Furthermore, more speculative names in the markets have yet to make their mark among the market leaders. Take for example the highly volatile social media space. There are select names, such as LNKD, that are being driven forward as a result of superior earnings. However, the market still remains selective in what it chooses to reward and what it chooses to punish.

When you take the aforementioned evidence being offered by the markets into consideration, there is only one conclusion to draw: This bull market we are experiencing has yet to see an influx of any speculative money at all. In fact, it seems to be a bull market that is being driven greatly by foreign assets looking for safe haven in well known, trusted U.S. companies that will preserve capital over the long-term.

This is surprising when contrasted against the loud voices that are calling for an end to this bull market because “there are too many bulls.” The study of sentiment in today’s market environment is increasingly built on indicators that have very little substance, being more anecdotal in nature as opposed to concrete evidence weighed against the actual allocation of assets.

If you look at the asset allocation picture of the markets here, it is apparent to anyone who bothers to look closely that there is very little in the way of speculative, greed driven price movement that tends to mark important market tops. There is no runaway bull market in any one sector. There remains a tendency to back and fill. There is a selective attitude towards what deserves to appreciate and what doesn’t. All of these are telling of a responsible investor class that is controlling the current market environment.

You may ask, what is significant about a responsible investor class being at the reins of the market? It comes down to one concrete fact: Bull markets don’t end with responsible investors being at the helm. The Warren Buffet type of investor doesn’t cause blowoff tops in market averages. The Warren Brown type of investor certainly does. Who is Warren Brown? Exactly. He hasn’t achieved any status, except for late payments at the gas and electric company because he is always buying speculative stocks when the market feels cozy, comfortable and he has lots of company to affirm his judgement.

The Warren Brown type of investor doesn’t bid up healthcare and utility names in an orderly manner. It is a more sophisticated investor that is responsible for this type of asset allocation. This type of sophisticated investor is typically early as opposed to late.

From this vantage point, there are no signs whatsoever of speculative funds rushing back into this market. It continues to exhibit all the orderly cues of a bull market that has simply made a new all-time high after years of being stuck in the mud. That doesn’t mean we won’t have a 5% correction until 2016. We may have one over the summer months, in fact. When that correction comes, it will be an opportunity to increase exposure, however.

It will not be the market top that most expect it is based on sentiment indicators that have no place in the analytic arsenal of any investor who has long-term portfolio appreciation as their goal.

Regards,

Ali Meshkati

Given the state of information indigestion that is prevalent in today’s financial world, it is only proper that I begin this with a little bit of history. History in this case is a little over one month ago. It was at that time I posted an article titled, “Using The Put/Call Ratio To Forecast 5% Correction.” The conclusion that was reached as a result of observing the put/call ratio on March 30th was that the stock market was, at a minimum, one month away from a correction of any substance.

Sentiment, however, is but one tool in an investor or trader’s arsenal of weapons. It must be used selectively based on the nature of the market at any given time.  You can always sniff out an inexperienced investor by the level of importance they place on sentiment data alone. Often times an entire investment thesis and resulting portfolio structure will be based on one or a number of sentiment driven indicators without regard for anything else. A boiling pot of impending disappointment that sends the sentiment driven investor back to the drawing board eventually.

Tonight we will look at two sides of the equation. First let’s see what market action is telling us here. I’ll go over these points in living color during this coming weekend’s review:

- The Dow Transports, arguably THE leader of the current rally, are exhibiting increasingly sloppy behavior, threatening to move below a key technical point.

- Dow Industrials today thrust off of the key trajectory for 2013 pictured here. This is an indication that the market is growing uncomfortable with the slope of the current move.

- IWM volume today was the greatest for a down day since September of 2011. It is not just the volume on a down day that is of concern. Perhaps more importantly, it is where that volume surge is occurring. In the case of IWM (Russell 2000) it is occurring right at the key trajectory from the October 2002 lows pictured here. A very significant development indicating that the market is recognizing the importance of a failure at this key trajectory.

- The SOX is threatening to fail right at its key trajectory from the 1998 lows for the index.

Now let’s look at sentiment by looking over the combined put/call ratio using the 20 and 100 day moving averages only:

click chart to enlarge

Put/call ratio

If you are confused, then you are right where you should be. The market will also be confused, most likely resulting in choppy sideways action that leads both bulls and bears nowhere throughout the summer months.

In this case, the preferred position is leaning towards an abundance of cash and tendency towards mobility.

- On January 23rd this chart was posted showing the next logical area for support as being the generational trajectory from the 1987 high for AAPL. The price target this trajectory pointed to was 400-420.

- As AAPL got closer to the trajectory through a routine of steadily dripping lower, on March 4th this chart was posted bringing greater clarity to the ultimate downside target revealing 390 as being the destination for any sustained attempt at a bounce.

The low on April 19th was 385.10.

Last weekend I posted an article titled, “AAPL: Downside Price Target Achieved, Now What?” In the article I discussed one of the expected results of hitting an extremely important level of support is high volume. While we didn’t get that volume surge last week, this week we certainly did. In fact, it was the biggest weekly volume surge in AAPL shares since April of 2012. This is important not simply because volume finally decided to show up in AAPL, but WHERE that volume showed up gives away a ton of information.

Here is a detailed look at AAPL on a weekly basis:

AAPL WEEKLY