Sunday, December 9, 2007

Bookkeeping: Weekly Changes to Fund Positions Week 18

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Week 18 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. I cannot short individual equities.

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

Cash: 29.7% (vs 17.1% last week)
53 long bias: 62.9% (vs 66.8% last week)
5 short bias: 7.4% (vs 16.1% last week)

57 positions (vs 58 last week)
Additions: Solarfun Power (SOLF)
Removals: Canadian, Dollar ETF (FXC), Aluminum Corp of China (ACH)

Top 10 positions = 23.8% of fund (vs 32.7% last week)
38 of the 57 positions are at least 1% of the fund's overall holdings (66.7%)

Major changes and weekly thoughts
This week, with the major indexes still below major technical resistance for most of the week (through mid day Thursday), I lightened up long positions into rallies and increased short exposure in the first half of the week. Once we broke through these key technical resistance levels which had served as a 'ceiling' on the market of late, mid Thursday, I flipped to a more constructive attitude and quickly cut back my short exposure to a more typical level, but kept cash much higher than normal. Generally I try to keep cash in a 5-15% band, but with the wishy washy market, it is hard to get committed further on the long side. I read an interesting piece Friday that stocks are being driven by news; not that stocks are offering the news. The evidence of this is, simply put, we have had since mid August these events
  1. Surprise rate cut/discount rate cut of 50 basis points
  2. Bush's first bailout plan in August
  3. Second rate cut
  4. Abu Dhabi investment into Citigroup
  5. Bush's second bailout plan this Thursday
On those 5 days, the market has increased 1200 points. Take those days out and you have a market trudging downward. So when perceptions are the government is going to bail us out (or foreign investors) the market rallies hard; all the other times when reality hits, the market in general has been going down. It's an interesting paradox.

At this point I remain aware that the market animal spirits can continue believing Fed cuts, government bailouts, and the ever present threat of more foreign investment into our financial system (maybe even homebuilders?) can drive the market ever upward. We are again back to the point where bad news is good news, the worst it is, the better it is because bad news = more Fed cuts. So in an environment where traders cheer bad news, you have to remain bullish, however reluctant. What will be interesting near term is the reaction to Wednesday's news - if markets cheer the cuts as our salvation, then we could simply rally to all time highs (under 4% away in many indexes) as perception is reality. And perception is the government will make all these real and present dangers that will increase next year go away. I still hold the belief that corporate confession season in January will seriously change that perception but between now and then we could go either way. S&P 1490 has been the key technical level for well over a month, so any pullbacks to that level without breaking through would now be bullish again. However, we have advanced to a level where a lot of charts do look more promising now, so one could certainly envision a "Santa Claus" rally followed by "performance anxiety" by hedge funds/mutual funds into the end of the year and a lot of cash coming into the market to drive stocks ever upward. Once more, until "bad news" is perceived as such, the market can continue up.

A lot of stocks I like from the long side have made quite serious moves in just 2 weeks time, so my preference if indeed we do get this sort of rally is some near term pullback, before they spring forward. If a 50 basis type of cut cheers everyone however, one might be forced to "pay up" (higher prices) to get back into positions. On the flipside if we only get a 25 basis point cut, the reaction might be more muted and we could begin backing down again as perception is raised that "Fed is behind the curve". Whatever the case, we've taken 75 basis points since mid August, with another 25-50 coming in a few days. And we look headed well to lower to mid 3%s by next spring/summer in this blogger's view. Whatever 'lip service' is paid to inflation is just that. The bugaboo in all this is the bond markets look just atrocious - so its strange to see such a divergence between equity and bond markets over a sustained period. Hence why these rallies are just hard to "believe in". But performance anxiety by institutional money can drive markets to places one would not think logical in the near term.... hence, one remains open to any movement in the near term. The fund for the first time in a long time has less than 30% exposure to the top 10 names - this is simply a function of such a large cash position and atypical.

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. After a nice rally last week and through Monday, I took some fertilizer exposure off the table - fertilizer stocks were 3 of my top 4 positions for most of the past few weeks. As mentioned throughout the month of November, when these stocks were (unfairly) sold off with the rest of the market, once the overall market got some footing, investors would flock to these stocks.
  2. I added some Research in Motion (RIMM), Monday right below the 50 day moving average, but truth be told the chart is still looking weak, as the stock was unable to break back above this key technical level even with great rallies in the general market Wed-Thu. That concerns me near term. Hence I have not added in scale. If the market rallies, and RIMM starts a breakout, I'd be more interested in adding in larger fashion.
  3. Tuesday, I cut back my smallish exposure to LDK Solar (LDK), as the stock made a quick move from $30 to $40 - solar stocks have been very hot in this 2 week rally, and the fervor has returned to the 2nd tier type of names. LDK Solar (LDK) has an audit/earnings result coming soon - my gut says the market will react very favorably to the news coming, but I don't invest on gut, so as stated many times, I'd rather pay up for this name once more information is exposed, than gamble. If the stock were to fall back to $30 for some reason before then, than the risk/reward is more in my favor. At this point I do think LDK Solar can see $60 on the upside, or $30 on the downside dependent on what news is brought to the table.
  4. I cut back some Best Buy (BBY) exposure, after a very nice short term rally in this electronics retailer that I just added 2 weeks ago on the expected flocking of consumers to electronic gadgets this Christmas. So far this position has worked out like a charm.
  5. I continued adding all week in small increments to my two "recession" plays Huron Consulting (HURN) and FTI Consulting (FCN) - these companies will do well do even better than they already are if we start to see waves of restructurings in the next 2 years which I believe we will, especially among smaller, middle sized companies who are reliant on the US economy. These 2 names are now in the top 10 of the fund.
  6. I cut back my position a bit in Riverbed Technology (RVBD) after it rallied >10% on Wednesday off an analyst report. Stocks like Riverbed Technology and Blue Coat Systems (BCSI) which are still technically weak, are exactly the kind of names I would quickly add exposure to, if/when the market decides to go into a year end rally mode - I would expect both stocks to quickly clear their 50 day moving average and begin to take off. Hence I'd rather buy these sort of names, rather than stocks which already made a huge move if we are indeed entering another bull run.
  7. I sold down some of my WuXi PharmaTech (WX) as it also has had quite a recovery. Many of the smaller foreign stocks have had huge rallies in this 2 week period i.e. Gafisa (GFA), Mechel (MTL), so I have been trimming them along the way but I have been expecting a pullback which has not been happening so if the trend continues upward, I have already cut these far enough and will just hold current positions.
  8. I closed my position in Canadian Dollar ETF (FXC) since the Canadian government buckled and began cutting rates. The weak dollar play was a theory that the US will be continued to be forced to cut interest rates to bail out the financial system, whereas other governments would keep their rates elevated to stave off inflation. As I thought through this deeper in ensuing weeks, I came the conclusion that we would start to see a concerted worldwide effort by central banks to cut rates to help the US out, and this started happening this week with both Canada and the UK cutting rates (both surprise moves to observers). Again, if the global growth economy is in such 'fine shape' as pundits tell us, and the US is "fine", why are all these cuts suddenly happening worldwide? On the flipside this should help precious metals and my silver stock, Silver Wheaton (SLW) had a good week once we saw central banks beginning to work in unison to help save the King (George W that is)
  9. Thursday, I closed out the last of my position in Aluminum Corp of China (ACH) after a while ride - if I am going to play large cap Chinese stocks there are more attractive names out there. But truth be told, I'd rather play the Chinese market through other companies throughout the world who benefit from Chinese growth.
  10. I bought some more First Solar (FSLR) when it dropped to its 20 day moving average Thursday (and very early Friday). I also started a new position in Solarfun Power (SOLF) on weakness Thursday, and added to Suntech Power (STP)
  11. I usually don't break out the Ultrashort position changes in detail but since this was a large scale change, once the market broke above key technical levels Friday, I dropped my exposure to this area very rapidly, on a scale of 40%. If we break down back below those key technical levels OR we make a large run upward, I will begin rebuilding these positions into larger exposure with the thought process that January 2008 earnings season will be a tough one for non multi national large cap stocks.
  12. I did some selling of Foster Wheeler (FWLT) after a tremendous run from $130s to $160s, to lock in some profits and added to two positions discussed which "finally" broke back above their 50 day moving averages late in the week - infrastructure name McDermott (MDR), and oil service name National Oilwell Varco (NOV). I mentioned late last week my thought process on these latter 2 names, and how I was waiting to see the chart confirm the fundamentals - so a week later it finally did happen and investors seem to be returning to these names. (hopefully). With continued strength I will continue to layer into more buys into these 2 names.
  13. I cut back on refiner Frontier Oil (FTO) Friday. While my call for weak oil pricing from $100 a few weeks ago was dead on, my thesis that this would help the refiners tremendously (since it should help their margins) did not play out. When crude dropped, investors dropped these stocks right along with them. So this is a case with an accurate near term prediction on the price of crude, but an inaccurate assessment of how it would help a subsector of the energy space. With that said, since I had cut back my oil service exposure I did save from losing some money in those names. I will say the deep sea oil drillers have looked very good this week ... this group is overdue for a move.

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