Bookkeeping: Weekly Changes to Fund Positions Week 25

Week 25 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: 5.9% (vs 0.0% last week)
49 long bias: 73.7% (vs 94.7% last week)
6 short bias: 20.4% (vs 5.3% last week)

55 positions (vs 57 last week)
Additions: Ultrashort Technology (REW)
Removals: CNH Global (CNH), Agco (AG), MedcoHealth Solutions (MHS)

Top 10 positions = 37.3% of fund (vs 39.3% last week)
45 of the 56 positions are at least 1% of the fund's overall holdings (80.4%)

Major changes and weekly thoughts
The market finally offered some gifts to the bulls this week, but only for those with the conviction to sit through an ugly day and a half Tuesday and through 2/3 of the day Wednesday. Once again, our rally has been very short lived (if swift), essentially 1/3 of the day Wednesday and Thursday. So the pickings remain slim on the long side. The market action Friday was a bit disconcerting; if this was simply due to a lack of confidence or people wanting to lock in "any" profits they had this week afters weeks of shellacking is an open question. Either way, we had hoped for more of a rally than 1.33 days. Looking at a chart of the S&P 500 we are still well below any meaningful resistance so the hope was of a larger rally off the lows, going into the Fed meeting at least. We shall see if we are given any of that early next week. Until proven otherwise, all rallies must be sold and used as an opportunity to remount short exposure. Again, this will hold true until we begin to make new highs, over and above previous high points. For the S&P 500 this is an easy number to remember: 1500. Breaking above that high, marked towards the latter part of December 07, would hint we can become more constructive and aggressive on the long side. Until then it remains a time to be highly cautious.

For the fund, I used this rally (however short it was) to lighten up on positions across the board, and rebuild short exposure. I had entered the month of January 2008 very cautious and believing that earnings estimates for 2008 needed to be ratcheted down as they were far too high. I thought this would be the catalyst for the meaningful move down to come; but it came even earlier than that and in far greater force than expected. So after being positioned well the first week and a half of the year, the next week and a half resulted in a lot of pain, and giving back a lot of earlier gains. Since my yearly goal is to beat the indexes I track against by 15%, and I already achieved that (and in fact was well ahead of this goal 3 weeks ago), there is no reason to bet the house here and take more chances than necessary. Easier money will be made to the long side at a later date, so I am going to try to remain more patient in the coming weeks and wait for those moments. I have 1 more week until my 2nd quarter ends, and time and time again I can see when the market has any sort of breathing room the majority of positions I hold rebound very well - so I am confidant I have the correct type of positions once the market finds its footing. So I don't need 90%+ type of long exposure to benefit when the market turns. So I'll be sticking with a larger than normal short exposure (and hopefully cash if we get another bounce) for the foreseeable future to reflect this viewpoint. I will let the technical condition of the market guide the near term views; as of now it is quite awful.



We can see from the chart above we are below both key trend lines (50 and 200 day moving averages) and we now have an intermediate bottom at S&P 1270-1275 or so. It would be doubtful that we do not at some point make a retest of these lows; which are parallel to a Dow 11,500 level. What happens at that level will be very important. If we bounce sharply off these lows a "double bottom" could be achieved... bullish. If it fails, and we break through this barrier, we than will go on to make further lows. The next key support, if S&P 1270-1275 is broken would be S&P 1220, which are summer 2006 lows. I do expect some sort of stand made there as that was a previous "double bottom", which created an enormous run.

One might ask why I am adding short exposure to the parts of the market that bounced the best this week - retail, financials, real estate, etc. It is a simple theory - if one believes this slowdown (recession or not) will be shallow (2 quarters or so), then one should be very constructive on stocks as they usually do very well in the 2nd half of a recession/slowdown (say we started one in November or December 2007). The reason being the major stimulus that is thrown at the market - we saw a lot of pieces of evidence this week. This seems to be the playbook of some (such as Cramer) right now. If your belief is the recession will be longer, than it is far too early to get too constructive from the long side on the market. I am still in the latter camp. While the lowering of interest rates and coincident drop in long term mortgage rates will help to buffer the fall, this in my opinion, will help a subset of the people at the epicenter of the problem (homeowners), specifically 2004/2005 (and earlier) mortgages - and only those with equity in their homes. Those people will be able to recapitalize their debt at lower rates, and keep the house ATM game going on (again the solution to the original problem of the house ATM, is simply to recreate the same problem). [30 Year Mortgage Rates Approaching Decade Lows] For the renters who don't have large cash banks available to them (i.e. savings), for the home owners who put 0-5% down, and bought in latter 2005-2007 and are now upside down on their homes, well there is really no saving them. I expect many to save themselves by simply walking away from their house (why pay for a depreciating asset that you have put either nothing or nearly nothing in from your own savings). So I expect that leg of the downturn to just be starting. Even if the government can push mortgage rates to 0%.

Again, my overhanging long held thesis is the bigger issue hidden behind the mortgage mess is the real and pervasive inflation that the government reports are ignoring. Too much of our consumption culture has been based on the 1990s era of 3-4% wage gains with 2-3% inflation (exaggerated by free and easy credit). That's no longer the world and it started ending half a decade ago (except the easy credit which ended about a year ago). This reality was masked in the aggregate by the house ATM. I don't think it will be masked anymore, and this is why you hear voter after voter in the real world (aka outside the top 10%, and outside of Washington DC and NYC) say "I feel like I'm working harder but not making any progress". Hence, why I am more bearish than most on the economy. I think a lot of people are going to finally be having that moment where they realize they cannot spend (or live) like they used to. They are in fact, moving downward in a slow and steady erosion of living standard. With inflation the real culprit. The consumer is going to be in big trouble... his/her 3-4% wage growth and "live paycheck to paycheck" mentality does NOT work well in an inflationary environment. Again, some will be saved by their home equity but not until home prices reverse and start making meaningful strides upward can we begin to hide the truth about how people are falling behind incrementally, year by year (wages vs expenses)

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, I prayed the markets would never open. ;) [Worldwide House of Horrors]
   
2. On Tuesday, after the "it's a surprise, really it is" Fed cut, I did not do much but did cut some of my 5%ish short exposure, especially in the foreign Ultrashorts as they were up 12-15%. Also noting some strength in retail, financial, and small caps (relatively), I began lightening up on my Ultrashort Russell 2000 (TWM)
3. Wednesday, with the market in a major downswing most of the day in positions I held, I simply sat by and did not want to sell any positions into the depths of despair. I did close a tiny position in CNH Global (CNH) first thing in the morning after an earnings report, the Street deemed disappointing. While I like agriculture, I am most likely going to be focusing on fertilizer as opposed to equipment.
4. Potash (POT) reported fantastic earnings, as expected... I did take the opportunity to lighten up some on this position only because of the frantic market; I yearn for the day I can simply sit and hold these fertilizer names which are like buoys in a very violent ocean and being batted around in huge daily swings. But for now, it appears "buy and hold" investing is simply being sneered at by this market, even in the best of names, so some trading is required to make even the smallest amount of money.
5. Solarfun Power (SOLF) announced a convertible debt offering Thursday, which pained me. I don't want to be in stocks with convertibles, so I said I'd sell; instead of selling off the reactionary drop to $14 Thursday, I sold half at $17 not 24 hours later, and have a limit order to get rid of the rest somewhere in the $18s. If it does not hold true, and SOLF just continues to drop, at least I dropped my exposure from 2% to 1%.
6. I sold 33% of my position in Mercadolibre (MELI) and 60% of my position in Mastercard (MA) Thursday. The former due to the stock making a huge move off its "panic lows" and locking in those "gains", and the latter due to its position as a relatively highly valued stock in a market that does not take earnings or guidance very well, even good earnings and guidance - see Microsoft (MSFT) Friday. This reduced my exposure to Mastercard to 1% of the fund which I can sit with even if the market decides to drop the stock 25% due to whatever it wishes to, next earnings report. I will be a willing buyer if we get that gift (priceless?)
7. I did add some Suntech Power (STP) Thursday near $50 as the price is seemingly very low for what I consider to be one of the leadership stocks in the sector.
   
8. Friday, I closed agricultural equipment name Agco (AG), a peer to CNH Global (CNH) - simply based on yet another stock heading into earnings, and based on the treatment of CNH Global (CNH) I don't want to take a hit. I find a lot of value in these names, and their exposure to a true secular bull market but that doesn't stop the market from letting fear get in the way of a good story...
9. I closed a very small remaining position in MedcoHealth Solutions (MHS) - this was a "safety stock" that worked out pretty well for me in the January selloff since I sold near the top, but after I cut it back, it began tanking - apparently news that Walmart is making some noise in the space could be a weight on the sector. If it is truly effective or not does not matter - what matters is perception and perception right now appears to be that Walmart will hurt the incumbents. So I will need to find some other safety stocks/sectors, and once again this shows how hard it it to hold even the "safety" stocks in this type of market.
   
10. Friday morning I trimmed a host of names as listed here. I also listed in smaller scale many other names through the day to raise cash and buy more short exposure. Essentially I went through my entire long list and reduced a lot of positions 10-15% to raise some cash.
11. Along with the 5 Ultrashorts I've held since August (domestic) and October (foreign), I added a new name Ultrashort Technology (REW) to help offset some of my long technology exposure.

The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows.