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: 5.6% (vs 5.9% last week)
51 long bias: 70.9% (vs 73.7% last week)
6 short bias: 23.5% (vs 20.4% last week)
57 positions (vs 55 last week)
Additions: Kinross Gold (KGC), Powershares DB Agriculture Fund (DBA)
Removals: N/A
Top 10 positions = 39.6% of fund (vs 37.3% last week)
40 of the 57 positions are at least 1% of the fund's overall holdings (70.2%)
Major changes and weekly thoughts
A strange week all around at least from my viewpoint. Much like the past year we have a very narrow leadership, only at this time the leadership (ahem) is in the most beaten down sectors of 2nd half 2007. I hesitate to call it leadership because my going assumption is a large part of the move is a short covering rallying, combined with computers who know nothing else other than the programmers who coded them saying when the Fed cuts so heavily it's time to buy so and so sectors. I still have a lot of doubts with these names. The irony in it all is the groups running are early cycle names - names you buy coming out of a recession. A recession? We haven't even BEGUN a recession yet... or if we have - it's been a 5 week recession. But now we are buying stocks that the playbook says you buy as we exit a recession? Strange. Very strange.
The irony is I did call for this sort of action 3 weeks ago (Jan 13th), however the ferocity of the rally in these groups is beyond belief. I was thinking 20% type of rallies; we are getting 40-60% type of rallies.
The stocks that did move this week were many times sectors I would not touch except for a very short term trade - hence not really in the style of this fund. For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.
Let's look at where we stand technically on the S&P 500. As discussed in 'S&P 500 in Worst Condition in Half Decade' we have a series of 5 bottoms created from Aug 2004 to Aug 2007. This trendline, formed by connecting a straight line from all these bottoms was broken in the January 08 selloff. And we still trade below that level. If/when this trendline is cracked and we get back above this level, we can become more constructive on equities. We'd have to trade above S&P 1450-1460 area for this pattern to change. Now, by being cautious now, we are falling behind the indexes - but if this is simply a bear market rally we will do better than a 100% long exposure on the coming pullback. So I retain a cautious stance. Further, as mentioned in December [Like a Moth to a Flame - S&P 500 and 1490], we had begun making a noticeable series of lower highs (bearish), and that pattern has also not been broken. You can see below from the 6 month chart we are still far from making a higher high, than the last peak - if you draw a line from the (a) early Kool Aid Fed cuts save everything Oct highs to the (b) Fed inspired Halloween high to the (c) Fed inspired (more cuts on the way mid December) December high, to the (d) end of year fake markups so we can get our year end bonuses high - the pattern is still intact. It looks like, once again a move to S&P 1450-1460 is probable without breaking this trend. That would begin to break the pattern and it would be confirmed if we break past S&P 1500. (the late December high)
Now if this happens I will be poorly positioned, but this would be an atypical type of breakout. That said, everything the past 6 months has been quite atypical so I leave every option open. I just find it a bit mind boggling a market that was about to fall off the cliff can now figure everything is fine, due to 125 magical Fed basis points. Quite a story.
In a big picture sense I just have to say I am amazed at the market - we have the biggest writedowns in financial history, we have the most serious threat to our housing asset class, we have a contracting consumer, we have rampaging inflation, yet we are higher than we were during the March 2007 selloff. So essentially we've shrugged it all off. This shows you the power of liquidity and central banks determined to flood the world with currency to inflate assets. But while this feels good for the investor class there is a very high cost to pay for Main Street. Liquidity is a very blunt instrument - not a fine tool. It inflates everything - not just equity assets. Gas a year ago was in the $2.10s and gold was near $600. So approximately 50% increases in both in 12 months - all the while the Fed claims no inflation. :) More important, this is the price we all pay as people who need to eat, consume energy, and live - to bail out the financial system. It's not a free lunch (speaking of food....). As I keep saying 12% return on stocks in a 10% inflation environment (and folks, it is very close if not over 10% annual), is a 2% real return. Anyone in a money market or a CD trying to get 3-5% is simply burning money because you are losing value each and every day. Your paper money becomes more worthless. All of our paper money is becoming more worthless; once people wake up to that fact then the genie is out of the bottle and inflation begets inflation - circa late 70s/early 80s. It took some tremendous steps from the type of man as Fed Governor that would not be accepted in today's day and age... 15% Fed funds rate?? Laughable in this environment where traders cry for mommy when rates even get near 5%. And this is why I continue to be very worried about the US consumer. In previous years his 3-4% annual wage increases were causing him/her to fall behind on month to month bills. This past year? It's gotten much much worse. 2008 will continue the trend. If you don't believe how high rates once were look here (courtesy of Bespoke blog) The AVERAGE over the past 40 or so years was 6.55%. But we've been below average since Greenspan really hit his full stride in the early 90s. Anything to keep this charade going. I simply ask - what happens in my "World of Shortages" scenario with persistent inflation? Will any Fed Governor (it won't be Bernanke) be allowed to do the things Volcker did? Again I am talking years out... 2010-2012. But it could get that... bad. And none of that is priced in. Not a bit. I'm firmly in my stagflation camp, as I've been for a long while - but my worry is what happens after this next asset "boom". I am of the mind the powers that be simply are buying time in the hopes home prices start rebounding by 2009-2010 at which time we can continue a weaker charade of what happened in 2002-2006. But each injection of crack works less than the last, as the patient builds up immunity. So we can continue these games for a few more years I suppose. Heck maybe a half decade or more. One day however, the patient will need to go cold turkey; and that will be a very ugly era.
I actually did not do that much this week for the fund. While we made money, we lagged the indexes big time this week. We have had 2 incredibly enormous weeks in January, a 5% down week and a 5% up week. Quite breathtaking action and for buy and holding it's a very difficult environment. Simply a traders market at this point. I have taken a big step back to re-assess everything as I do in times like this and I simply don't see much sense in what is happening at this point. The irony is the companies most affected by the issues at hand (both financial and economic) have gone through 50-60% type of corrections. In the past month, many of my type of holdings who are relatively immune to these issues have gone through 40-50% type of corrections. So what the market is saying is, if you are the heart of the problem you are going to be hit with about 10% more of a correction than innocent standbyers. Interesting.
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:
- Monday, I mentioned I wanted to get some gold exposure even though I was late to the game, so I was eyeing Kinross Gold (KGC), but wanted a bit of a lower price which did happen later in the week. In an ironic twist, as the Fed cut, gold prices actually fell into the end of the week so I added more.
- Tuesday, I trimmed a bevy of positions to raise more cash. In retrospect it was not a bad move even though the market continued to rally because aside from Mastercard (MA), the market wanted nothing to do with most of the stocks in the list I trimmed, so they sat their shunned all week. I trimmed Mastercard much heavier last week in a "better safe than sorry" move, but in this case it did not work out.
- I sold down my National Oilwell Varco (NOV) position due to the savage beating the oil service stocks have taken of late - Smith International (SII) was hit this week based on some softness in the US, and Cameron International (CAM) [not a fund holding] also took the same pain later in the week.
- Wednesday was Fed day, but Thursday was Google (GOOG) evening, so I wanted to trim my smallish Google position (I've never really had it more than 1% of the fund), ahead of earnings. I do believe no matter what Google said, they would of been sold off as anything not financial, retailer, or homebuilder is now eyed with suspicion. I actually like the valuation of Google here, but we've never seen Google go through a potential ad slowdown (recession) period, so it will be interesting. That said, I like the value of most of my names but that does not stop them from going nowhere since they are not in the holy trinity of sectors.
- Wednesday was a strange day that pretty much represents everything this market is - directionless, nonsensical, and moving based on rumors and innuendos. The Fed cuts, the market cheers. 1 hour later rumors of bond insurer issues, the market swoons. Next day, rumors of bond insurer bailouts, the market cheers. And so on and so forth. Anyone want to talk about individual company fundamentals anymore? Apparently not. I did add some short exposure into the rally post Fed, which proved to be fruitless as the market was happy on Kool Aid Thu/Fri.
- Thursday, I added to coal position Peabody Energy (BTU) near $50 as it sold off 10% on its earnings. This proved to be fruitful as by the end of the week the stock had regained all the losses. Based on all I am reading worldwide about energy issues [China/South Africa were the latest] I am simply even more bullish on coal than I was even in September when I turned positive on the group.
- Friday, I finally bit the bullet and started Powershares DB Agriculture Fund (DBA), an ETF I've been watching since late summer, but never pulled the trigger on. While I think the "easy money" has been made in this name, I think in a general market pullback or generally choppy market this type of vehicle should hold up quite well. Hence, I expect it to ying when the market yangs and can provide some offset to the day to day fluctuation in the markets. I plan to keep this position as my "safety" stock, combined with Philip Morris International once it IPOs in March.
- I decided to cut back the last of my Mastercard (MA) to take advantage of the ramp up. I'm still not a believer in this rally so I'll take profits when I can get them. If this is an inflection point and we are in an liquidity driven equity boom 3.0, well I am going to miss the front end, and will need to make it up later in the year, plain and simple.
