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: 19.3% (vs 28.3% last week)
51 long bias: 68.3% (vs 57.8% last week)
6 short bias: 12.4% (vs 13.9% last week)
57 positions (vs 56 last week)
Additions: DryShips (DRYS), DR Horton (DHI)
Removals: KBR (KBR)
Top 10 positions = 33.7% of fund (vs 28.8% last week)
36 of the 57 positions are at least 1% of the fund's overall holdings (63.1%)
Major changes and weekly thoughts
The market continues to be range bound, listless, and without direction. My overall strategy remains the same - ignore all the blathering on TV and in the online press about "the bottom is in" and "it's time to load up on financials and retailers and the consumer is ready to strike back", and continue to play this range until it breaks. This means, buy as we get closer to the bottom of the range (S&P 500 near 1320), and expand my short exposure/sell as we get to the top of the range (S&P 500 at 1370+). As always, it works until it stops working. It has worked for 6 weeks or so, so the longer it goes the more nervous I get that it will continue to work. My expectation remains it won't be working much longer and we will break down (not up). So when this happens my purchases at the bottom of the range will suffer, but I'll quickly remount my short exposure once key technical levels are broken. In the meantime I've continued to outperform the market and build up some cushion versus the indexes... I do realize when/if the market melts I'll be giving back some of these gains but that's part of the problem of being long focused in orientation. S&P 500 level 1320 remains key to me.
If we break this level, I do expect a retest of January lows (S&P 1270). What we do there will set the stage for the next leg of the market. A "bounce" and we could form a "double bottom" which is a technical term, but simply means two tests of a similar price point - more important to know is off this technical condition can come serious rallies. But if we break this level, it could get very ugly. So this is the road map I view and I continue to let the technicals give me an overview of how to position myself. I continue to view this as a bear market, even with all the Kool Aid floating around telling us how everything is great. Or will be in 6 months.
Even when we do rally I am not a big fan of the US economy at this point and I don't see any quick turnaround. However, I am coming around to the theory that with Kool Aid so rampant, and people so desperate for any shred of good news to drive the market higher (simple rumors move this market 5%), we could be setting up for a rally later in the year, and a sizeable one as Quarter 3 GDP is altered by the rebate checks. Bulls will latch on to that as "the bottom is in", and "see we told you everything would be great", and drive the market up. But I continue to see weakness into the following year, so while I'll try to turn course and follow this run up, I still won't be too keen on the US economy. Frankly, the only areas of real strength are things we are not able to outsource - natural resources and commodities... i.e. coal... i.e. agricultural products, and the export arms of U.S. multinationals. Everything else, in a consumer led economy is at risk and will remain so for a long time in my view. Especially as inflation ramps, and effective buying power of said consumer weakens in real terms. So while I expect great rallies in retail, homebuilders, financials at some point in the coming year as people ignore the reality on the ground, I think its within a framework of a secular bear in these markets. Spending over the past half decade has been a mirage based on easy credit, and the house ATM. If we go back to consumer spending levels of mid to late 90s, it's going to feel like a depression for some sectors. So I continue to focus outside the US and/or commodity based type of sectors who are reliant on cash rich customers (Asians, Brazilians, Middle Easterners). Even when these countries slow down (which they will) their growth rates will feel like a racing car versus what we will have here domestically. What turns the worm in the US? I'm not sure. When the cost of inhabiting a dwelling drops sufficiently people will have a lot more free money in their budget, but this process is going to take quite a long time to play out. Unless wage increases begin reflecting real inflation of 8-12%+, combined with the housing costs retreating, I just cannot be a bull on the greater US economy. Certainly not one, where US consumer is increasingly turning to credit cards and 401k withdrawals to keep their head above water. Frankly, a lot of other countries look like the US 10-20 years ago, so I don't see a reason to sit and wait patiently for the over extended US consumer to go back shopping, when there are great opportunities in cash rich countries whose political leadership seems to "get it" (relatively speaking at least). Sorry if that sounds so harsh. Hopefully there are some great innovations incubating in some distant corner of the US that will lead to some great growth drivers for the coming half decade, and get us going again.
For the fund, I continue to try to be neutral as much as I can considering I am a long biased mutual fund. My short exposure at end of week does not reflect how I was positioned most of the week as I took it down about 10% Friday in anticipation of the bulls trying to make yet another (fruitless?) run early this week. I've been doing this every Friday as we risk government interventions, bailout talks, or the like going into Monday. Then as the market peaks on Kool Aid, I usually add short exposure during the week, and then cut back afternoon Friday. Rinse. Repeat. It is a simple pattern really. We only seem to rally on hope, rumors, bailouts, or "in 6 months it will all be great again". We falter when reality hits. This has been the pattern for over half a year now. But again, most of the stocks I really like have had huge moves up so I am having a hard time applying new cash to these areas so it's a catch 22. I don't want to pile into stocks which are prone to profit taking, especially when the market stands at the edge of breaking down each time it hits S&P 1320. So while my long exposure is nearly 70%, about 10% of that is commodities of some sort or another... so it's not quite as bullish as it looks.
We have a jobs number Friday that will move the market significantly one way or the other. I don't believe in this government report since it so flawed but it does move markets and with simple rumors able to move this market up 5% in 2-3 days, any perceived good news will take the market up. Last, we are about the stage where people can begin to cheer about Fed rate cuts in mid March... so we will get (yet again) a potential anticipatory rally at some point. It is sort of old at this point, we rally on the same things over and over; as if the first 5 cuts did anything for the market, but of course this is the one we need to rally on because it will be the game changer. Or so that's the backwards logic. Just like we will say once again in late April when we have another 50 basis point to take us to 2%, and our Fed chief will disavow any inflation, or tell us "it will go away in 6 months when the US economy slows". Even though all these rallies are based on the US economy bouncing in 6 months. So we can have it both ways, can't we? That's Kool Aid.
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, as I always seem to be doing of late I increased my short exposure after lightening up the previous Friday. This week in particular as the market skyrocketed on S&P affirming AAA ratings on the bond insurers (a laughable situation), I was able to get some nice prices on my Ultrashorts. AAA is effectively a meaningless designation after this episode in our history.
- I added some infrastructure exposure ahead of a slew of earnings in the group, by buying more exposure across most of the basket of names I own.
- Foster Wheeler (FWLT) had an earnings report Tuesday that did not please the lemmings, so I added (too early) at $72 and later in the week around $67 and $64 and took this from a 3% type of position to 5%+ when all was said and done. Once again, people are not happy, but a lot of the earnings miss was 1x type of items that has no particular impact on the long term business. We had a very similar situation last summer where the stock was demolished, only to nearly double within months. I continue to love the book of business and not only the type of business (mostly energy related) but where the business is (Asia/Middle East). I can't say the stock will bounce any time soon, but I think 6-9 months from now people will look back at this as a massive buying opportunity just like last summer's sell off proved to be. Again we live in a day and age where people's timeframes are measured in days or weeks... anything longer is old fashioned.
- I began a trading position in DryShips (DRYS) @ $79 and said I'd sell if we break $75. Simply due to the nature of the sell off Friday I did not want to overreact but I am watching this closely and if it breaks down further my original intent was to sell, and I will as this was a trading stake, nothing else.
- I sold off some of my Russian Mechel (MTL) after an incredible move. The more I read about this name the more I like, and next time it dips I need to make it a more sizeable position - I've held this generally as a 1.5-2.0% stake, but it is flush in multiple secular bull markets. I took some of this money and spread it, along with some cash, into multiple oil service/driller names.
- KBR (KBR) had a solid quarter, but I decided to remove it from the portfolio - one less infrastructure stock from my basket.
- Wednesday, I continued to cull my fertilizer stocks, as these generally get sold off very hard when the market tanks (but they held up good on Friday, disproving my theory), and continued to add to Powershares DB Agriculture Fund (DBA) on it's recent "weakness". The fertilizers are a group I love the fundamentals, but in this type of market it is hard not to trade them, cut them after huge runs and await a pullback. So I am hoping for a sizeable pullback.
- Thursday, Apple (AAPL) rallied on a reiteration of iPhone targets - I used this opportunity to lighten up in the position.
- I took some of my precious metal exposure off the table, cutting Silver Wheaton (SLW) and a little Kinross Gold (KGC). As the Fed continues to signal it could care less about inflation and the dollar continues to swoon, these hard commodities continue to run. I do expect volatility to continue to increase as more and more hedge fund money piles into commodities but I laugh at this bubble talk - same junk we heard at crude $50 a few years ago. Our policies are literally inviting hedge funds to pile into these groups as we destroy all credibility with our bailouts by flooding the world with more worthless paper money, so I continue to place myself at the epicenter of this situation. Much like the fertilizers, I continue to love these groups for the long run, but I am hoping for a pullback in this traders market, to add exposure.
- Friday I had some fortunate timing; I doubled my stake in Huron Consulting (HURN) just under $51 as a "poor man's" play on the great quarter from FTI Consulting (FCN) - the stock actually went to $54+ later in the day before pulling back to $53 in the very tough market.
- I began a trading stake, similar to DryShips earlier in the week in homebuilder DR Horton (DHI) after the stock fell nearly 20% in 2 sessions. Again, I am not a big believer in any real bounce in this sector, but will see if we can squeeze some money out of this on any market rally. So far my history with "trading stakes" in the fund has not been very good, as opposed to things I like to keep for the long run, so we'll see if I can break the streak.
- Unlike fertilizer, the coal names did pull back to some degree so I began re-adding exposure, simply buying back the portions of these stakes I had sold off lately at higher prices. If the market does break down of course these stocks will go lower, but in between we can hopefully squeeze some trading profits out of this group while we wait for the market to make a move that lasts for more than 3 days.
