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Reggie Middleton's Year End Note to Subscribers and Readers
This is the year end note that I posted on my blog. I noticed that there are those in the Blogosphere that take issue with charging for subscription content or mentioning returns. There are also those who feel they must anonymously troll the blogosphere to attack from behind keyboards. If you belong to any of these camps, this is your opportunity to stop reading RIGHT HERE and move on to another post. This way, we can avoid the senseless vitriol and unproductive noise that will inevitably end up in the comments section. I'll be honest in that it turns me off to participating in the comments when it goes too far. Again, this is a note to my readers taken from my blog, and is aimed at illuminating what my failures and successes have been since this Asset Securitization Crisis has started. If you don't want to read about me, my investment thesis, work philosophy, successes and failures then this is not the article for you. For everybody else who is interested in how I viewed 2009 and what I look forward to in 2010, please join me and read on.
I will be the first to admit that 2009 was a disappointing year for my
investment results. Although the first quarter of the year was the
strongest that I ever had during the Asset Securitization Crisis,
and I clearly saw the trend reversal coming at the end of the quarter
(actually almost to the day since I put a comment out on BoomBustBlog
that I was preparing for a very aggressive bear rally, but that
granularity in timing was more luck than anything else), I
significantly underestimated the length, breadth and depth of the trend
reversal. I want all to be clear that I am not making excuses, but the
probably reason for the lack of clarity was rampant and clandestine
intervention in the equity and debt markets (more on this later). There
has been a lot of chatter in around the web about my performance, and
although I am very disappointed at how the year turned out, I would
like to put this into perspective. I am not a daytrader nor a swing
trader and my research is not aimed in those directions. My stated
investment horizon for the research on the blog is 3 to 18 months with
a likely targeted range of action of 6 to 9 months. Since I rely
primarily on the fundamentals and can't control markets and stock
prices, I need to wait for my thesis to pan out.This entails taking
some volatility at times. Of course I am the first to admit that the
most aggressive rally in 70 years may be a bit much, but one must be
able to ride the ups and downs of irrational market moves until one's
thesis plays and your are proven right or wrong.This recent bear market
rally was probably a once in a lifetime event, and in the case that it
was not, we now have the tools to deal with it on an invested basis -
even as a pure fundamental investor.
Click any graphic to enlarge.
I need to run a delicate balance here, for I definitely don't want to
understate how disappointed I am in 2009's performance, but at the same
time it is pertinent that a realistic view is attained. I don't want to
flagellate myself, yet don't want to be a braggart as well.
It has been 2 to 3 quarters of what I consider under-performance thus
far, and I see the fundamentals coming to the fore in a very big way
for the year 2010. To recap, I started the blog 9/07, and my personal
account return for that quarter was about 14%, roughly annualized at
55%. The following year saw a time weighted return of about 450%, and
the first quarter of 2009 saw a rise of around 50%, but I finished the
year down 39%. Again, the last three quarters have been very
disappointing to me as I can imagine it has been for others who are
bearish, but I do want my subscribers and readers to know that this
blog's (and particularly, my personal) record bests the records of the
vast majority of market participants - and by a very wide margin. We
are talking in the range of about 150% annual blended return for my own
performance. I had 7 winning quarters out of 10, which although pales
to Goldman Sachs' statistically impossible 97% win ratio (again, mine
is unpowered by government hook-ups and multi-billion dollar subsidies,
but I am working on that), should be commendable by most but is still
quite disappointing to me. I need to hold myself to a very high bar.
The significant drawdown from the second and third quarters of this year stemmed from the
fact that I waited too long to adopt a market neutral stance. This
fault has been corrected and we plan to be well protected against
extended movements against the fundamentals in the future through going
long volatility via market neutral strategies, if the events call for
it. The market neutral strategies allowed me to trade the volatility in
lieu of the fundamentals and still benefit from the potential of the fundamental research bearing fruit. See the researched strategy analysis released
for subscribers at the end of this blog post that proved profitable in many
of the preferred cases.
Although one could theorize that I could have knocked it out of the
park this year if I went net long, I would not have done so. I am a
fundamental investor and there were, literally, absolutely no
fundamental nor macro reasons to be long most stocks, and the only
reason to buy stocks was because the price of stocks were going up. -
that in and of itself should give the fundamental investor pause. Now,
this has been a glorious three quarters for the momentum investor and
swing trader, both of whom relish in chasing trends, but the
fundamental investor had to take a back seat as profits and losses,
assets and liabilities, balance sheet strengths and insolvencies became
inverse to share price performance in the investment space. The weakest
companies literally gained the most while the strongest companies stood
relatively motionless. I suspect the shenanigans played by the "powers
that be" will wither in 2010. See the following articles for more on
the possibility of significant manipulation that postponed the
inevitable crash in the markets. Even for the optimistic, this must
spur some thought:
- Is The Government Misrepresenting Unemployment By 32%? [Zerohedge.com]
- On Government DOL Misrepresentations Part 2: Following The Money, Or In This Case The Average Unemployment Paycheck [Zerohedge.com]
- TrimTabs Asks: Who Is Responsible For The Non-Stop Market Rally Since March; Gives Some Suggestions
- Is it all just a Ponzi scheme? [Sprott Asset Management]
- Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?
- You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?.
- Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets
If the pre-ordained crash is not the case, I have polished the
market neutral strategies so as to attempt to prevent myself and my
subscribers from being left out, or even worse, hurt by extreme market
rallies that fly in the face of the fundamentals for an extended period
of time. In essences, no more significant drawdowns unless I am
literally wrong, this time around. Remember, the price of a stock's
movement in the short term does nothing to dictate whether one's thesis
is right or wrong. I, for one, believe that fundamental investors need
to stick to their knitting and not become momentum chasers when the
breeze blows in a different direction. This was painful for three
quarters of this year, for the bulk of the year was a trader's market.
For the record, I would not have taken the risk of forging ahead after the 2nd
quarter if I was managing outside money. The reason? I easily made my
year's compensation, being up about 50% in Q1-09. Why jeopardize the
10% of that gain I would have received on a 2 and 20 basis. If I was
running $100 million dollars, I would have been able to pocket a $10
million incentive fee plus the AUM fee of 2%, which would have doubled.
Better to sit in cash and collect me fees. Now, since I didn't have the
leverage of other's money to incentivize me to do so, I plowed forward.
This was actually a time when greed would have been good.
Now, on to address some of the comments that I have received from those in the blogosphere.
Was Reggie Lucky in 2007 and 2008 or Does He Actually Have a Grasp of What is Actually Going On?
Hopefully, I have successfully communicated the disappointment in my
last three quarter's performance, but I must also put those three
quarters in perspective with the last 40 or so quarters.
You've just been lucky!
I have heard blogoshpere pundits quip: "You've just been lucky with
calls like GGP, or Ambac, or the Doo Doo 32", etc. Well, here is a list
of over 60 companies that I have been right on -Updated 2008 performance. If that is luck, I will gladly take it.
You are not willing to let go of your thesis!
A slightly more plausible criticism was, "You are
not willing to refresh your historically successful investment thesis,
basically you are not willing to change direction and let go of the
past". This makes more sense as critique, however it is far from true.
I am not only willing to alter my investment thesis, but I am willing
to switch from long to short, and jump between asset classes quicker
than a floozy jumps bed linen. I have no emotional attachment here, and
I don't consider this a contest to determine who the smartest is.
For those who have read my bio,
you know that I use to be a real estate investor. I started investing
in real estate in 2000. I focused not only on high appreciation areas,
but areas that also were undergoing gentrification. This gave the
thesis an added boost, and I made use of the extremely high (20x+)
leverage that was available at the time. The NYC areas of high
gentrification saw up to 18% plus annual increases in price. You can do
the math when incorporating high leverage over several years, combined
with rental income. For those who do not follow me, please refer to "The Great Global Macro Experiment, Revisited"
for a glimpse into my investment style. Reference the graph from this
treatise below, and compare it to the actual graph of prices below
that.
Understanding my proprietary investment style
Case Shiller index has been amplified by a factor of 10x for the sake of comparison to the S&P 500.
In the spring of 2004, I sensed the market getting much too
overheated with the hurdle rate for risk adjusted returns based on
rental income becoming harder and harder to attain upon property
acquisition (which is where the money was made, in my opinion), hence I
started putting buildings up for sale in a very heated market. I sold
off the bulk of the properties between the end of 2004 and the 3rd
quarter of 2005, with a final listing in the 1st quarter of 2006. As
you can see from the chart above, the NY market peaked early 2006. My
timing was apparently on point. To be honest, it really had nothing to
do with timing, and everything to do with the fundamentals. You see,
although rents and incomes in the areas that I invested in had
increased dramatically due to gentrification and a bubblicious economy,
they were increasing nowhere near enough to justify the price spikes
that were occurring. I would have loved to have considered myself a
really smart guy, which is why it appeared I was making money at a clip
that easily bested the broad equity market and many other real estate
investors, but the truth of the matter was the market was simply in a
over-heated bubble, and I was fully aware of it. Sensing the top
somewhere proximal, I decided it was time to go. I believe that all who
were in the real estate game at that time and had access to a
calculator or a spreadsheet knew the jig would be up relatively soon.
It's just that they wanted to pick up every single dime off of the
table. I am of the mindset that it is always best to leave a little
money on the table. Don't be greedy. Often, that last dime costs about
$1.20 to pick up!!!
I took a year off to spend time with my newborn daughter and prep
for a hedgefund launch, then started shorting everything that had to
with the run up in the real estate markets. I started this while most
were still much too bullish on both real estate and the ecosystems in
which real estate coincided. The rest of the tale is history.
This story (and accompanying chart) should also dispel the rumor that I
am a permabear. I am only bearish when I see bearish signs. I was quite
bullish during most of the real estate bubble, but I recognized it for
what is was, a bubble - and not a reflection of my outsized investment
acumen! I will be bullish on the equity markets when the time comes.
Now is not that time for I do not feel that the financial assets have
had the opportunity to fully correct from their bubble levels due to a
constant bid and implicit put option from our government that prevents
real and financial assets from correcting to a level that will bring
equilibrium to the markets. Thus, another, and very significant downleg
is due in the housing and commercial real estate markets, and by
extension the stock markets as well. As stated above, I am prepared to
profit if this thesis is incorrect, but the macro insight that allowed
me to profitably navigate this entire boom/bust cycle since the year
2000 screams "this is far from over". I will gladly compare my longer
term record with anybody else's. I may not be the best, but I am real
and honest, and observant.
For the sake of privacy, I do not release my personal positions or statements to the public, but if
you are an investor or asset manager of significant size or stature and
their is a strategic reason for me to verify my personal results to
support my historical success in navigating through the Asset Securitization Crisis, I am open to doing so. Simply email me here.
I have nothing to hide, but since I do not run investors' money, I
prefer to savor my privacy. The blog's research can be verified using
the downloadable tools that I have made available via the links below.
The method that I used as a proxy for the blog research (assuming a
simple buy and hold) has become to cumbersome to produce and
unrealistic, thus I have not continued to update it. The spreadsheets
are still available for users to update on their own, though.
Hey Reggie, if you really made 500% on your portfolio in 2008 (a nice round
number), why are you peddling your research via the internet instead of just
managing your own money or running a hedge fund or living on a beach?
I have actually heard this several times, and this is a direct quote
from one of those many anonymous guys in the blogoshpere. The answer is
actually quite simple. The blog actually started out as an investment
diary when I began the process of opening a hedge fund. I actually went
through the process of creating the structures and the legal work in
2007. I then realized that I value my freedom, independence and my time
far too much. I am a family man, and time with my children mean more to
me than money ever, ever will. I work a lot now, but I do so on my own
schedule. I have also learned that most investors are the ultimate in
fair weather friends. Although I am very disappointed with the result
of the two or three quarters, to be honest the losses PALE in
comparison to the gains since my blog was established 10 quarters or so
ago. They also pale to the average returns as well. Despite that, it
appears that many only care about "what have you done for me lately"
(for those that didn't get it, that's a quote from a Janet Jackson
song), with lately increasing being defined in shorter and shorter time
frames - time frames that don't necessarily coincide with workings of
fundamental and forensic analysis.
As for why I sell the research, well I paid to develop the research,
it is high quality research, and apparently there is some demand for
it. Thus it would make good business sense to attempt to monetize what
would normally be a sunk business costs, would it not? I actually
stumbled upon the research business model by accident, totally unaware
of the demand that was out there for truly unbiased, quality research.
Hopefully, I have answered most of the questions my readers and
subscribers may have. I look forward to a very profitable 2010 and
beyond, and while historical results will be difficult to replicate, I
stand prepared to take advantage of significant moves in the market,
regardless of direction for the new year. The fundamentals are speaking
loudly in one direction, though.
I will be releasing a rash of new research this week, including the
front portion of brand new pan-European research, and a study of those
assets likely to fly in the face of the fundamentals should this bear
market rally persist. I am also refreshing strategic bank research from
last year.
Links of interests.
Market neutral strategy analysis
1. Recent strategy analysis sample available to the public
2. Additional bi-directional option strategy analysis
3. In this difficult to trade market, you have to be more than just right...
4. Option Strategy Analysis Comments
5. Option Strategy Analysis Update
Sample Research and Performance for 2008
We have made a downloadable sample of our research available without registration. Simply download this zip file: Research_Samples 11/17/2008,
to your local machine and open to reveal the research reports in PDF
format. To learn more about my proprietary investment style, see "The Great Global Macro Experiment, Revisited". The most recent annual performance numbers are available here: Updated 2008 performance. Adobe Acrobat Reader version 9.0 or higher may be needed to view the files
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Reggie you are getting some backlash due to your arrogance when things were going well for you challenging anyone to match your returns. Being down 39% in a year the laugh is back on you. The chirping birds are never the ones who are around for the long haul.
I still offer anyone to compare my returns. I don't measure performance year by year. I measure them over several years. I never "challenged" anyone, and if you percieve comparisons as arrogance, then so be it.
When things were going well, I clearly warned subscribers that these were abnormal returns and they would not last. The same goes for a down year (well actually down two or three quarters). All in all, things have went quite well for me, at least investment wise :-)
A comment like this goes against the fundamental structure of ZH. Isn't a paramount of ZH the idea that who writes the story doesn't matter compared to the story itself? Just because you associate an alias with a post doesn't make it any less anonymous. It seems that anonymous posters are only trolls when they go against what is being said. Are we so self-righteous that we are shades of the ruling elite where as long as you agree, you're our friend?
If you subscribe to that comment by Reggie, you need to re-evaluate your own value system.
Fraud, manipulation and collusion within the banking industry, the Federal Reserve and the Executive Branch of the federal government at a time when we could have crashed like its 1929?
Come on, what did you expect. How many investment banks were we really going to allow to fail? Did readers think America's leading international bank, Citigroup, and America's leading domestic bank BAC, were also going to fail? Paulson and Bernanke told Congress we were looking at the end of the world as we knew it. That's what got us TARP. Readers here should pull the picture of Pelosi et al after that meeting and carefully look at the picture. Those people looked like they'd had the you know what scared out of them.
Its naive to think that this web service, or any other, can construct a logical analysis about market events and assume the federal system, the Federal Reserve and the leading investment banks are going to let the system go down the drain.
That said, everything done thus far has been based on playing for time. The assumption being that economic activity will indeed resume and in the near term everything will not be allowed to end up at zero.
I fought the bull until I was bloody in Spring 2003, so I know how these things can go. Decided never to do that again and didn't fight the bull last year, with better results than in 2003.
Keep up good work. People read you for insights that help complete their own picture, not so much for being right every time.
Still haven't figured out the `Session data` thing...
If every ZH contributor had the mindset to fill their postings with blatant spam this website would have been flushed down the toilet a long time ago.
We disparage your technique because we care about the high quality format at ZH. A universal truth; Spam sucks. We are bombarded by it every click we take.
Guess why banner ads were invented? I'll give you ten guesses as this may take a while...
While we wait lets hum a tune. May I suggest "Forever MAC'in" by the Isley Brothers?
It amazes me that you occasionally boast that you don't trade, then you write an article about your successful trading...
Flag away.
Sorry... no flags for you...
One mans 'spam' is anothers steak sometimes. My eyes are capable of almost instantaneously determining which is which however...
For others apparently? Not so much.
I sympathize for your plight Scooby Dooby Doo... empathy?... once again... not so much!
I've been getting killed as of late also. Most of my puts don't expire until Jan 2011, so I have time to wait out the BS manipulation.
The same thing happened to me in early 2007. The dow went up like 23 days in a row. I waited it out and eventually did very well by years end.
Thank you Reggie.
Ignore the trolls, you're smarter than that.
p.s. MAC executives selling and I saw the ceo of SLG dumped a bunch.
Thanks, Reggie. This is helpful as a sanity check. It's amazing that things could be so bad and the banksters are still reaping huge bonuses. Amazing.
Reggie,
I think as far as your struggles and trials in '09- very similar to mine which is some solace- you are preachin to the pope methinks.
There is nothing wrong with struggling- it's like death and taxes- it is inevitable. However, it is wrong to hide the fact that you struggle like everyone else. You not only do not hide it but you learn from it and change.
That's the key and the absoloute hardest thing to do...change. That tops the list of inevitable things that will happen in '10.
I've been getting killed as of late also. Most of my puts don't expire until Jan 2011, so I can wait out the BS manipulation.
The same scenario happened to me in 2007. I was getting killed early as the dow went up something like 20 days in a row. I held tight and made a killing later on.
good stuff Reg!
You will never be right all the time but more than wrong still produces positive results.
As far as the longest rally in history thanks to Uncle Sam's manipulation who could have forseen it.
"As far as the longest rally in history thanks to Uncle Sam's manipulation who could have forseen it."
That is what Reggies critics have really overlooked. You would have to have been insane to go 'all in' on the market with the fundamentals and economic prospects being so weak unless you were in on the scheme like GS et al. (Correct but insane none-the-less!)
Reggies calls were as always very rationally on the mark. Comments to the contrary reminds me of the criticism Buffet used to get for "missing out" on the Dot.Com bubble actually...
Thanks Reggie