Bookkeping: Weekly Changes to Fund Positions Week 14

Week 14 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 0.2% (vs 10.9% last week)
56 long bias: 98.7% (vs 81.3% last week)
3 short bias: 1.1% (vs 7.8% last week)

59 positions (vs 54 last week)
Additions: Tesoro (TSO), iShares Brazil (EWZ), Mechel (MTL), WuXi PharmaTech (WX), Excel Maritime Carriers (EXM), Millicom International Cellular (MICC), Baidu.com (BIDU), Google (GOOG), VMWare (VMW), Research in Motion (RIMM), JA Solar (JASO)
Removals: Pride International (PDE), Suntech Power (STP), Yahoo (YHOO), LDK Solar (LDK), Diamond Offshore (DO), Gmarket (GMKT), UltraShort Oil & Gas (DUG)

Top 10 positions = 35.2% of fund (vs 34.9% last week)
45 of the 59 positions are at least 1% of the fund's overall holdings (76.2%)

Major changes and weekly thoughts
Obviously the markets had a tough week - the velocity of moves downward have been obviously much more aggressive than moves upward since the fund was launched in early August. The NASDAQ which had been the leader among the major indexes gave back much of that lead and fell 7% in just a few sessions this week. The fund only holds about 25% NASDAQ stocks (probably higher Friday after I added some new positions in the 'teflon' high tech stocks to the portfolio after they took some major hits late in the week); but there was nowhere to hide this week, although agriculture and infrastructure (my 2 major sector weightings for the now and near term future) held up the best.

As I mentioned throughout the week S&P500 level of 1490 was a key technical point. Once it was broken the next move down was to 1440s-1450. This proved to be accurate. And as I mentioned earlier in the week while an index move down from 1490 to 1450 doesn't sound too bad and is not terrible percentage wise, that doesn't mean the drop in individual equities would not be far greater. Which also (unfortunately) proved to be true. I would say if we go through a traditional "10%" type correction, we are now about 75% of the way there, and it came in a very rapid fashion. The next 2 'stops' for the S&P500 is a minor support level at 1430 and more meaningful support in the 1405-1410 are which is where the August lows were (again I am excluding the 1 afternoon of total panic selling which actually took us down to 1370 on August 16th). So if we continue down these areas would be likely areas of support. In fact a 10% move down from the recent high of 1550 would take the S&P500 down to 1395. The amazing thing is that 1550 level was 8 sessions ago. So this move down has been quite violent with multiple 300+ down days in the Dow just this week. I remember typing that right after the last Fed cut (8 sessions ago!), we were only 1.2% away from all time highs on the S&P500. (and I mentioned it did not make any sense, but this was the logic of the market at the time).

Sentiment is quite bad out there, and until the last hour Friday, which was disheartening in how badly the market weakened, it looked like the truly washed out sectors like retail and financials were stabilizing. While I think we have a lot more pain ahead in the financials, this round of 'kitchen sink' disclosures should pretty much be out there - and the news was finally getting priced into these stocks. While I think we will continue to see more bad news for months and quarters from this sector - we seem to be near an overdone area in this move down. They are almost universally hated at this point. So I'd expect some oversold bounce soon (which should just be shorted since we have many more layers of the onion in financials to peel back and the stink is immense). As I wrote about 2 months ago when the first round of "kitchen sink" quarters were disclosed from these financial companies, and the market cheered and everyone from Fed governors to politicians to Treasure officials to the TV pundits told us "everything was contained"; we still have a whole house full of "sinks" to get through. If not, we would not be creating "self funded" bailout products. Hence, other than for very apt traders with short time horizons, this is not a sector you want to be playing with for more than 1-2 week counter trend rallies. Very similar to the home builders over the past year. Unfortunately this sector is a lot more important than home builders as it "was" >20% of the S&P500 but with the recent carnage it's already fallen to 18%. By the time this is all said and done I think sub 15% will be easily achievable.

As for retailers, aside from adding to Crocs (CROX) on its major emotional selling I did add my first (traditional) retail stock to the portfolio in months, Nordstrom (JWN) - again this is more of a near term trade on a very oversold sector/stock. Americans will still spend this Christmas, but just at a slower pace than year's past. Unlike home builders which are facing headwinds for many years, and financials which suffer from opaqueness and not being open about their downside credit exposure (along with a loss of revenue streams in the future), retailers will still sell things - Americans still love to consume - its simply a matter of ratcheting down expectations. In the near term, I think we are reaching the point where it is getting priced into these stocks, but again, not an area you want to be overexposed to as I believe the US is heading into (if not recession) a prolonged slowdown.

Timing the market overall is a fools game, but at this point the sentiment is quite bad out there, and it is certainly possible these indexes could fall further before we bounce - usually the last part of a move down is the truly 'emotional' part, and panic selling could ensue in the last leg. That said, we should be near to some sort of stabilization relatively soon, even if it's only for a few sessions. Again I don't have access to my portfolio this weekend, but in a general sense what I have been doing is positioning in areas that will be least affected by US recession and worldwide (eventual slowdown) - although the pundits still say global growth will continue unabated I just don't buy when 25% of the worlds GDP (USA) and another large chunk (Western Europe/Japan) slowing down that the emerging markets will continue to run unabated. While they do have an emerging middle class in these countries to help buffer their slowdowns, they still rely heavily on trade - and healthy trade partners. China still has food inflation and this past week actually uncapped (by 10%) their energy costs so their consumers are paying more on that end too. A world with China and India GDP at 5-8% range will be very different than a world with 10-12% GDP growth from those countries. It is just a matter of when. Base metals such as copper are weakening the past month +, so we might already be seeing the first signs of this slowing.

There are some extremely crowded trades (meaning a lot of people are *in* them), such as short US dollar, short financials, short retailers, long oil, long gold, etc. I am seeing tons of articles on Seeking Alpha with these positions (shorting financials? Now? Where were they 2 months ago when I was shorting them - oh yeh they were convinced last quarter was the kitchen sink quarter) but anyhow, these positions are now pervasive and what the masses are doing. While Big Ben is painted into a corner and must continue to cut rates in my opinion (watch what they do, not what they say) due to our over leveraged financial society, and this will only serve to weaken our dollar further, you'd expect some counter trend rally in these areas soon. When everyone is doing a trade 1 way, usually something snaps and you have a counter rally (however brief). But I still think these trades work for a long time to come because as we continue to cut interest rates, other countries such as Australia are actually raising rates (just last week) to fight inflation so capital will flow to those currencies - the world realizes inflation is real and rising. Only in the US do our gov't reports try to tell us, no it is not, it's all a figment of your imagination - just ignore those small items in your budget like food and energy. But average people living real lives in the US know the reality. Hence we have some serious trouble brewing, since we are the 1 country whose financial system is in such serious trouble we have to go against world trend of rising rates (or at minimum holding steady) to combat inflation. So Ben is between a rock and a hard place. And we have to bail out the financial system and worry about things that affect the 'common folk' (inflation) at a later date. So we will all suffer from that.

Remember, as recently as July the Fed was signaling increasing interest rates .... last, crude finally seems to be reaching a point where small signs of demand destruction are finally happening. Due to price controls in China we have not seen it there (but again, those limits were lifted by 10% this past week), and due to gasoline prices not rising along with crude (until this past week) we have not seen it here in the US. But it appears to beginning to happen. If crude were priced in a stable currency and not the peso... err, dollar - I'd expect to see a sharp drop coming soon enough, as this has turned into a speculation trade (all that liquidity the Fed is creating has to go somewhere). But if we get this counter trend rally (everyone hates the dollar), even for just a few weeks, we can see crude prices drop significantly (which would be great for the refiners I have been building positions in).

In a general sense if we do get this truly emotional selling next week, I do expect even the stalwart positions in the portfolio that have held up (agriculture/infrastructure) to take a hit, albeit it a short one in terms of duration, although they could be sold down hard. I also began (or added to) small positions in some of the high beta tech stocks late in the week, along with stocks that either have been hit severely or held up the best in this carnage - with the assumption that by showing the best relative strength that these will be the areas investors flock back into once the coast is (relatively clear). So, like everyone else, I don't know the near term for the market, but I am overweight in areas with great pricing power, and/or heavy backlogs - at the top of the portfolio. Once emotion subsides I expect these areas to provide the best return. I did drop most of my hedges (cash/UltraShorts) this Friday and went to nearly 100% long - probably a bit early, but unlike in mid August when I was 100% long much too early - this time around I was much more patient and got some nice prices in equities on deep sales.

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin under archives.

Some of the larger changes (chronologically) to the fund below:

1. On Monday, based on refining margins starting to improve and the tender offer in the sector I added to my 1 refiner, Frontier Oil (FTO) and started a new position in Tesoro (TSO). Later in the week, after some stellar earnings from Frontier Oil, I added even more of this position. If the company can make earnings in an environment where crude (their input) is so high, they should be able to really print money if crude shows any signs of weakening. And if not? Well they are the one refiner which was able to INCREASE profits in the face of a huge move up in crude this past quarter.
2. There had been some pullback in the previous week as well as Monday in the foreign indexes so I added to my basket of foreign ETFs. I added to 3 current positions - iShares Malaysia (EWM), iShares Singapore (EWS), and iShares Hong Kong (EWH). I also wanted to start 2 new position, iShares Brazil (EWZ) and iShares Australia (EWA) - unfortunately due to an error in Marketocracy.com process, the iShares Australia purchase did not go through.
3. I started 2 small stakes in new foreign positions on Monday, Mechel (MTL), a Russian coal/iron/steel play - this is my first foray into Russia and probably my only as it is the one 'BRIC' country I do not favor, and I also began a position in Wuxi PharmaTech (WX), a Chinese pharma outsource company - I added to both positions as the week progressed - the former held up incredibly well all week (relative strength) while the latter weakened considerably through the week so I was able to buy more at far cheaper prices at the end of the week.
4. I initiated a stake in my first dry bulk shipper, Excel Maritime Carriers (EXM) after a very severe pullback; the stock pulled back throughout the week so I bought in increments later in the week as well.
5. On Tuesday, I was worried with how Foster Wheeler (FWLT) was reacting ahead of earnings, so I cut back the position by half in a 'better safe than sorry' scenario; obviously the company nailed the quarter, and I was very fortunate that the market was down so heavily so I could get back into the position the next day at only a 4% premium from where I sold. The stock tacked on $10+ the very next day.
   
6. I closed the last of my Suntech Power (STP) position as solar had been extremely frothy for the past few weeks - I was a few days early (as always).
7. On Wednesday as the market continued to tank I added to 3 existing positions in sectors I am overweight, McDermott (MDR) in global infrastructure, CNH Global (CNH) in agriculture, and National Oilwell Varco (NOV) in oil services. I also began a brand new position in a retailer as the sector appears close to being washed out. Not a typical buy for the fund, and more of a near term trading opportunity - I added Nordstrom (JWN)
8. I started a beginning stake in Millicom International Cellular (MICC), a cellular company that does business in Africa and more remote countries in South America (I added more later in the week)- to raise cash I had to sacrifice something so out the door went deep sea driller Pride International (PDE).
   
9. On Thursday I wanted to raise cash and buy some more UltraShort exposure so I closed a short term trade on Yahoo (YHOO) that turned awry, I closed a position in LDK Solar (LDK) on the solar mania tact (again, a 'better to be safe than sorry' trade), and I closed another deep sea oil driller Diamond Offshore (DO) - some bargains were being created on the long side as well, so I needed cash.
10. With some of this money I began a position in high flying tech stock VMWare (VMW) which had fallen quite severely in the past week - I added to this position later in the week.
    
11. Late Thursday I actually had some pretty heavy short exposure but the market turned up in the last 2 hours (ex-Nasdaq) so I decided to lighten up a bit going into the close as we appeared to be very oversold after a week of heavy selling... of course this proved to be a bad move short term as once again Friday morning... we commenced selling.
12. On Friday I started back up positions in Google (GOOG) and Baidu.com (BIDU) - the twin powers of search, along with the fund's first ever exposure to Research in Motion (RIMM). I also added a bit to my Apple (AAPL) as tech stocks were smashed for the 3rd straight day. None of these are huge positions, but now I've built a basket of the high tech stocks that (once the market calms down) will be where institutions run right back to, to get performance.... to raise some of this cash I had to close out my position in UltraShort Oil & Gas (DUG)
    
13. I closed Gmarket (GMKT), the S. Korean e-retailer which had pretty uninspiring earnings.
14. After being completely out of solar for oh... 24 hours... I did get back in, starting a new position in JA Solar (JASO) Friday after stellar earnings, but the stock had run up so quickly with fast money chasing the solar sector, that the stock tanked Friday - especially late in the day. While the earnings were stellar and the guidance was "good", people are already worrying about if they can keep up the pace (which should moderate), and if margins can keep up. Always something to worry people.

So this was a VERY atypical week since so many positions were either completely EXITED or ENTERED. I had substantially reduced my tech stock exposure in the past few weeks (sold off Baidu.com and Google last week in fact as they had just run too much, too quickly), so this week was an opportunity to begin positions in stocks that had been hit very hard. I also had to find some cash to take advantage of new opportunities that are now popping up in the market so I had to find some positions to sell to keep my concentrated approach of 55-60 positions maximum. Hence the very large turnover of positions this week.