Friday, February 8, 2008

Bookkeeping: Cutting Back Ultrashort Russell 2000 (TWM)

TweetThis
I am also cutting back Ultrashort Russell 2000 (TWM). Strangely, the small caps which are most tied to the US economy, are acting better than large caps of late. I think this simply goes to the strength in financials (many smaller regional banks in Russell 2000), homebuilders, and retailers, etc. The "playbook" of what to buy when Fed cuts rate so starkly. While I disagree with the assessment of a fall rebound in the US economy, I am not going to fight 10,000 hedge fund computers who insist the economy will rebound in 6 months and hence are buying these names hand over fist.

I am cutting back 375 of my 675 shares in Ultrashort Russell 2000 (TWM). This brings my exposure down to 2.3% of the fund.

To be blunt I have to rethink what to short and what not to short. Perception is reality on Wall Street. If perception is the economy will be booming by this fall, then small caps, financials, retailers, real estate will all go up. Even if next October we see this theory was blatantly wrong. We saw this the 2 weeks previous to this week, when those washed out sectors rallied hard. What is funny is all the facts that are coming out are pointing to a quickly degrading economy. But that doesn't matter because perception is all that matters. So quite frankly I am not sure what to place my short hedges at this point because facts say to short one area, and perception says to short another area. I don't know which area will win out in the coming months - facts or perception. So it is something to mull over. I still contend the areas rallying the most of late (retail, homebuilder, financial) have a lot of issues and it won't be resolved by this fall. What I am laughing at yesterday are investors rushing into retailers who say 2008 estimates are "so and so". The same retailers who cannot forecast accurately 4-8 weeks ahead of time. But when they say "2008 will be not so bad after all", people believe them. And people rush to buy the stocks because "things are going to be ok". Huh? No one call tell you what the environment will be in 6 months, yet when the retailer CEOs bring out their crystal balls and insist things will be ok in September 2008, we are supposed to believe them? That is how desperate bulls are right now - any silver lining they cling to. And people short those sectors get whacked as hope triumps reality.

I do plan to still keep relatively high short exposure overseas for now - or at least until perception changes to "well the huge US rebound this fall means overseas markets will also be booming this fall". I also am sticking to my commercial real estate short because while residential real estate might be washed out, commercial real estate is a direct tie to the slowing US economy. Further, we don't have bailout plan after bailout plan to try to save commercial real estate like we do for financials. So I'm going to stick with that position until it starts to hit the street that yes, we have too many stores, each talk of store layoffs and store closing means more pressure on commerical REITs, etc etc. I don't think thats priced in yet.

Again, this is an impossible market to game as reality on the ground differs 100% from the "playbook", and if all the institutions use the "playbook", it doesn't matter what the reality is. We saw that all September and October 2007 when the market went up week after week, in the face of an avalanche of bad news. Even harder now is "opinions" are changing daily. On days economic reports come out people seem to accept the facts that things are bad... other days, they seem to cling to hope. There is again, no rhyme nor reason.

So until bad news matters again, it won't matter. And right now people have decided the Fed will save us again and small caps are reacting very well to that perception. If that perception changes (again) which could be in the next 10 minutes - I'll re-up my exposure to this position.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.


Site by codeeo
Original WP Premium theme by WP Remix