Thursday, February 14, 2008

Bookkeeping: Layering Up the Ultrashorts

I added a bit to all 6 Ultrashorts here after we've had a nice rally off oversold levels of last week. We are, as discussed yesterday, at yet another inflection point in this long series (since October 07) of lower highs. One day this will reverse and a breakthrough will be achieved upward, and short positions will get splattered. But the onus is on the bulls to provide that point. Short of a government intervention, or bond insurer bailout, I am not clear what will do it in the near term. Overall we seem to be in a range now over the past 4 weeks, and to break out we obviously have 2 choices: up OR down. I still think the prohibitive favorite scenario technically is down. So I'm positioning for that; and the bond market is telling us risk remains high.

Cash is now up to 16.8% of the portfolio

Ultrashort exposure as follows with today's layering on of new lots.
Ultrashort Real Estate (SRS) 6.0% [commercial real estate, not residential]
Ultrashort Financial (SKF) 4.9%
Ultrashort Emerging Markets (EEV) 3.3%
Ultrashort Xinghau China 25 (FXP) 3.2%
Ultrashort Technology (REW) 3.1%
Ultrashort Russell 2000 (TWM) 3.0%

I've also taken some more off the table in my top 2 fertilizer names: Mosaic (MOS) and CF Industries (CF) - following the same pattern of recent days of simply cutting back, even among my most favorite names, anticipating more market mess. From here I've cut back all my favorites to about as low as I'm going to take them, and if the market pulls back I'll have resources to buy them back lower. Unfortunately this is the market we have nowadays; no trend seems to last long so trading around a core position is the only way to outperform. This is a lot of work, and transactions, to make very little traction against the market - but it's not the market we enjoyed the past 4 years where the pickings were relatively easy and holding positions for months on end and enjoying a non volatile ride was the order of the day. So this is the adaptation I believe is necessary to not get sucked into a vortex of losses and give back even the minor gains. In essence this is like investing in quicksand.

Dryships (DRYS) reports tonight - since my time frame is longer than 2-4 days for holding a position I simply missed this trade. It ran too quickly on me, and at this point it is probably overextended - while more upside potentially remains all I would be doing is buying for a short pop, then cutting back immediately as I have done with everything else. Not worth the trouble. So this is just one to let go and see if we can catch on the next go around. I am assuming they will report a very good number. Same goes for Bucyrus (BUCY).

I'm simply going to sit and wait at this time, and wait for the market to come back to me and provide better entries. Again, defensive stance...

Long all names mentioned excluding DryShips/Bucyrus in fund; long Mosaic; Ultrashort Real Estate, Ultrashort Financial, Ultrashort Xinghau China 25, Ultrashort Emerging Markets in personal account

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