Bookkeeping: Weekly Changes to Fund Positions Week 22

Week 22 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: 2.7% (vs 7.4% last week)
56 long bias: 88.1% (vs 73.6% last week)
5 short bias: 9.2% (vs 19.0% last week)

61 positions (vs 59 last week)
Additions: US Steel (X), Petrobras, Diamond Offshore (DO), Smith International (SII)
Removals: FMC Technologies (FTI), NII Holdings (NIHD)

Top 10 positions = 30.3% of fund (vs 36.6% last week)
43 of the 61 positions are at least 1% of the fund's overall holdings (70.5%)

Major changes and weekly thoughts
Well as discussed in the weekly performance post there was not much to say about this week other than it was ugly. Luckily I was at near maximum short exposure (I set a self limit of about 20% maximum short exposure to maintain the "long biased" mutual fund thesis) I run this fund with, along with a decent cash position. I held this bias most of the week, and then Friday started reversing course as we started getting whiffs of panic selling. This does not mean we are at any sort of bottom or we could not have a tremendous sell off next week. It simply means I was positioned as well as I could be for this week, and am now seeing some buying opportunities in sectors/stocks I like so I am beginning to take advantage of them. I also fear getting caught with my pants down by some government announced interventions which seem to always come at times the shorts get most aggressive. It's been a good run of late, and you know times are good when even stocks you are selling off or cutting out of the portfolio are continuing to ramp higher - see Silver Wheaton (SLW), FMC Technologies (FTI), and the entire agriculture complex. With that said, I continue the strategy of rolling profits out of areas that are doing well and pushing the gains into areas that have pulled back.

In a general sense I remain negative, but just as I cull long positions after they make large runs, I cull short positions after they make large runs. Some of my short positions such as Ultrashort Real Estate (SRS) have made a near 20% gain in just over a week so to simply sit here without cutting back strikes me as greedy. Further certain sectors, such as financials and retail (while I remain bearish on) have been hit with shock and awe selling. If the playbook still exists, it would make sense for them to rebound at least a bit. Remember, the emotions of fear and greed are not too far away. The same people two weeks ago who were claiming the bottom is in with financials since foreign sovereign funds (i.e. smart money) were buying are now saying financials will go down another 50%. Neither is true, it's just emotional action. Will there be a "big one"? The "big correction" bears have been waiting on for years? Always possible. However, betting that way has proven to be incorrect for years. Eventually it will be correct, and buying dips will be "wrong". But if you can store up enough gains during the opportunities we do NOT have the "big one", then you should be somewhat ok when the big one "does" happen. Further keep in mind the various parts of the government (and governments across the globe) are working together to fight any "big one" from happening. One could argue the problem is bigger than the governments. Could be true. We shall see. Interesting times at the least.

My working thesis is we get some sort of bounce in the next week (maybe not Monday) after testing S&P 1400, and then yet ANOTHER lower high will be created. And then we will continue down as earnings season reveals a slew of earnings warning. Further the layoffs that are going to be announced in the financial system (and I suspect outside the financial companies) are going to spook people even further. Now that year end bonuses are secure in NYC, and the "man at the top" has his loads of million, look for "man on the street" to get the swift boot. In fact the next two weeks should begin these "notices" - Happy Holidays. I think January - June 2008 will be job cuts central. And the last "pillar" of a "short and swift" slowdown theory, will get its knees buckled. Remember, ignore the government reports and listen to the companies themselves. However.... perverse as it is, Wall Street loves layoffs because it means lower costs. Hence, once these layoffs are announced and the fear factor relents, the layoffs will be seen as good, as long as they are not overwhelming to the system (otherwise who will be left to buy anything?) I have already gone on record mentioning this will be the worst year in auto sales in decades, and I expect a lot of other areas to be hit as well - anything outside of consumer gadgets I would be worried about. But with that said, the retail stocks are starting to price that in.

I don't think we can put in any ultimate tradeable bottom until the two "holy grail" sectors fall - those being agriculture and solar. These are the 2 favorites of the 2 classes of investors - agriculture with the institutional class, and solar with the retail class. When I see those thrown to the curb in relentless fashion in panic selling then I will feel more comfortable that we are near a panic type of low. That might happen Monday or Tuesday for all I know, or not for a few weeks. But notice in all my buying Friday (except for a small addition to Suntech Power (STP)), I added nothing in those sectors. While 2 of my larger positions are in solar stocks, these two names have actually already taken larger hits in the past few months, so I am trying to stay with either leaders in the sector OR "value" names (hopefully not value traps). Not stuff sailing along at near 52 week highs. It is hard to find good value in most other names in this sector which have run up tremendously on "hope". A misguided hope in my book [The Long Term in Solar] To be blunt, the type of investors who have piled into solar stocks in the last month are the same piling into dry bulk shipping stocks 2 months ago, Chinese small cap stocks 3 months ago, Macau gaming stocks before that, etc. Hence the whole sector has me worried - these are not 'strong hand' investors - they flee at a moment's notice and are notorious for buying at the top.

Due to the nature of this week I am breaking my weekly summary of transactions into 2 pieces - Monday thru Thursday, and then Friday (which was an extremely busy day)

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) Monday - Thursday to the fund below:

1. Monday, I took some profits in Honk Kong Infrastructure stock KHD Humboldt Wedag (KHD) as it bounced off a near term low, and I was able to make a nice short term trade around an existing position.
2. Tuesday, the University of Michigan football team romped over Florida in their bowl game. Ok, that wasn't really a financial transaction but I just wanted to make sure you knew. ;)
3. Wednesday, I mentioned despite the substantial morning pullback in stocks in the first hour, we had more to come with a test of S&P 1440 (which the market held Wednesday and Thursday), and then a retest of S&P 1400. Needless to say I did not anticipate it coming in such a fast and furious fashion but the market seems to go down much quicker than it works its way upward. I did not cut back on my Ultrashorts Wednesday, holding out for further losses. I also gave a heads up on Monsanto (MON) in that post (not a fund holding) but the strong performance continued to elevate the agriculture sector; one of my favored sectors for the next few years.
4. LDK Solar (LDK) gave some guidance on 2008 and 2009; I took the opportunity to take some profits in this name over $50, mentioning the stock is probably range bound for a while in the $45-$51 range. As the week closed the stock went back to its lower support near $45.
5. I closed my position in oil service name FMC Technologies (FTI) after 5 months of holding the stock. Needless to say within hours the company announced a $1 billion contract and the stock was promptly up 13% the next day. Needless to say I bounced my head off the wall. :) I did mention I was interested in replacing this name with either Cameron International (CAM) and/or Smith International (SII) - with the late day selloff Friday I did add a beginner position in the latter.
6. I continued building my position in WAN optimization/security name Blue Coat Systems (BCSI) as the stock hit the $31s; I mentioned the 200 day moving average was $28 and the stock looked headed for it - needless to say this level was reached the very next day as the stock went into freefall - I continued to add to my position there, and Friday the stock actually held up well until the last hour or two of emotional selling when not much was spared. At this point I have a technology company growing 30% over the coming 3-5 years, trading at 24x this year's earnings (whose fiscal year ends in April 08). And 20x next year's estimates. While I don't advise catching falling knives since they can fall much farther than we assume, we are starting to see some silly valuations out there.
7. I was able to buy back some of my Huron Consulting (HURN) position that I took profits on last week, at a 7% lower price, in the $77s - I mentioned there is some support at $75, which is where the name fell to in the emotional selling late Friday. If the US is hit with a wave of restructuring the profit potential for a name like this should increase substantially in 2009.
8. I sold about 350 shares of top position Trina Solar (TSL) both Wednesday and Thursday in the $54s and $55s - this was simply to lock in some short term gains as they were bought in the $52s, and also as I mentioned continuously of late if the pattern of the November sell off is repeated, after the teflon tech stocks fell, the next to go would be solar, infrastructure, and agriculture. So with the tech stocks weak Thursday, and agriculture and infrastructure making a strange massive rally, I wanted to cut back some solar exposure with hopes of getting back in lower.
9. I added some Illumina (ILMN) on a pullback Thursday to the $58s area, and mentioned support at $57 as the next level of a pullback - which is where it fell Friday - I added more Friday as well. My purchases in Illumina and MedcoHealth Solutions (MHS) - the latter of which was rallying hard this week, are in an attempt to get some diversification away from the the main sectors the fund holds. MHS is a 'recession' play and 'flight to safety' play, so in a way we don't really want to see this stock making such strong moves upward.
10. I sold some Foster Wheeler (FWLT) Thursday in the $167s, taking advantage of the huge ramp in infrastructure. Still among my favorite infrastructure names but I'd like to add more at lower prices.

So it was a pretty normal week until Friday - then with the fireworks going off I went from a more bearish stance back to a more neutral to bullish as individual names started getting thrown to the curb Friday. It was an extremely busy day and the portfolio exposure changed quite significantly within those 6.5 hours.

1. With the bad jobs numbers, I began paring back some of my larger than normal Ultrashort exposure as my expectation that the drumbeat of 50 basis point cut (despite inflation) starts ringing very loudly and the market could begin to rally (Pavlov dog) off this, even though earlier cuts have done nothing. As an aside lost in the carnage Friday was news that the Fed is increasing the size of its auctions from $15M each to $30M (and they will continue indefinitely). I did another round of paring late in the day, and my Ultrashort exposure went from about 19% to 9% Friday. 9% is still a bit higher than usual. Again I use these as my insurance policy and/or strategic bets against certain sectors (i.e. commercial real estate). Worked to perfection this week.
2. In the morning I made a series of buys, with my 2 favorite consumer gadget stocks - Apple (AAPL) and Research in Motion (RIMM), started a new position in Petrobras (PBR), a Brazilian oil major who actually will be increasing oil production in the coming decade - along with a big sugar cane ethanol play, started rebuilding some coal exposure in Consol Energy (CNX) a position I pared back on a huge move in December, an addition to New Oriential Education (EDU) which was showing tremendous strength ahead of earnings, infrastructure name McDermott (MDR) on a pullback, and Crocs (CROX) in the $34s... Crocs ($32s), and Apple (low $180s) swooned even further later in the day and I added more there as well. Along with Research in Motion late in the day.
   
3. I started 2 new positions, one an old name to the fund and one brand news. Diamond Offshore Drilling (DO) is a deep sea oil driller I've had my eyes on for weeks - it finally has pulled back some so I started a position. I am hoping for more pullback to build an even larger position. US Steel (X) is more of a trade for the fund, and it has pulled back severely in a few short days (13% in 2 days), so I am going to try this one more for a near term swing trade for the fund. (not a typical strategy)
4. Since the # of positions is starting to bloat past 55 on the long side, I cut out long time South American business cell phone name NII Holding (NIHD) with a sizeable loss, but I don't see any near term catalyst aside from earnings, and with the new additions I needed to cut something to stay focused on a select amount of names.
5. I added some Ctrip.com (CTRP) late in the day and took my Ultrashort Xinghau China (FXP) down to a 1% type of position as the Chinese stocks have seemed to do relatively well of late after major haircuts the past 2 months. I still expect more swoon in this area later in 2008, but for now a near term bottom might be being created (unless the US markets begin an implosion of course)
6. I bought some more of asset management firm Blackrock (BLK) late in the day as well and just missed out on Mastercard (MA) under $200 as the market closed before I could get the order in. These are the only 2 financials I hold, and plan to hold for a long time (except VISA). I do expect the financials to be good for a swing trade sooner rather than later here (brokers, banks) as they have been devastated of late - along with retailers) but that is not in the context of this fund. After they bounce here in the coming weeks, I plan to add exposure to Ultrashort Financial (SKF) as the credit unwind (credit cards, auto loans, student loans, and prime mortgage loans) accelerates later in the spring/summer/fall. Perhaps the federal government will bail us all out of all our debt obligations as they are trying to do with subprime loans.
   

So there it was, a quiet week up until Friday. As I mentioned above, certainly we could continue a major swoon next week but "usually" 4.5% type of down weeks are not followed by yet another devastating week down. One day the pattern will break and we will get back to back devastating weeks - when that happens I do expect to underperform for that time frame, but in general I go with higher probability outcomes. The higher probability is either an event or simple selling exhaustion/fear reach a level soon where some near term bounce is created. That does not mean we don't have a few more ugly days ahead before that happens. If we continue down, I will continue lightening on Ultrashort exposure and continue buying stocks whose fundamentals I believe in, and who will bounce once the market regains its (shaky) footing.