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: 35.9% (vs 14.0% last week)
53 long bias: 43.7% (vs 75.6% last week)
8 short bias: 20.4% (vs 10.4% last week)
61 positions (vs 63 last week)
Additions: Alpha Natural Resources (ANR), Ultrashort Basic Material (SMN)
Removals: Schering-Plough (SGP), Millicom International Cellular (MICC), Peabody Energy (BTU), Thornburg Mortgage (TMA)
Top 10 positions = 25.7% of fund (vs 36.2% last week)
31 of the 61 positions are at least 1% of the fund's overall holdings (51%)
Major changes and weekly thoughts
After some hopeful technical action late last week, and early this week, the market reverted back to recent form with a break of technical support on Friday, off the General Electric (GE) miss. I expect a very similar pattern to continue into the future as we have had since last summer. A bevy of bad news - first taking down the market, then being ignored by the market - as scarred bulls emerge every few weeks singing songs of "early cycle recovery", "everything is priced into the market", "don't fight the Fed" and "you have to ignore the bad news and look out 6 months from now". This has been the calling card for a few quarters now, and shall remain so for quite a long time into the future I believe. Almost everyone in the market under the age of 50 has never experienced anything but shallow, short recession so that is their playbook - they will stick to their playbook until the facts overwhelm then - and even then - deny the facts and sell hope. So we have to constantly balance the reality on the ground versus the ignorance of said reality by the equity bulls - and continue to doubt every rally but respect the power of the herd during those rallies.
I continue to propose my stance since blog inception in August 2007 [Aug 31: Et tu, September?]- what we are embarking on is the first consumer led recession since the late 70s, early 80s - rife with inflation in things we must have, asset deflation in housing, wealth destruction, and an exposing of the "gutting of the Middle/Lower Class" we we rip away yet another illusionary wealth effect bubble. This was an outlier position then; and remains so - but slightly less so. All the theories I laid out were battled by bulls last summer and fall (with the market reaching highs in October 2007 no less) - when "there will be no recession" was the battle cry. Now the battle cry has morphed to "shallow, short, quick recession". They were wrong before; I contend they will be wrong again - BUT as long as "they" believe - the market will have it's fits and starts upward. Bottom line - in the long run stock prices are a reflection of earnings - as earnings degrade through the year (2008 full year estimates are much much much too high), unless one believes the market should see multiple expansion in a recessionary environment than one must propose lower stock prices are ahead. Or, taking into account the tidal wave of paper money being thrown into the system, stock prices that are held up at overinflated levels due to nothing else other than massive liquidity injections, in an environment where savers are told "you are dead to us". And you pay for this "benefit" in every other facet of your life through massive inflation.
For the fund, I spent the early part of the week (and late last week) allowing that the technical action had finally improved even though it made no sense from a fundamental standpoint for there to be any bullishness with the constant bad news flow. I don't buy any arguement that all the current data is "backward looking" - in fact I think in 6 months today's news flow will look like "good times". As stocks began reversing and the market could not break out to a new intermediate high (S&P 1390) I started getting suspicious and reigned back long exposure and began rebuilding short. The fund positions reigned supreme this week, and to be blunt, I actually hurt myself by being cautious as many names in the portfolio really ramped hard this week, but I was less exposed than I had been in the past in some names. That said, if the pattern of the past few months repeats - first they sell off the early cycle names as they realize their dreams of early cycle recovery get put off for another few weeks; the stocks that deserve a premium as they are not exposed to the subprime US market hold up for a while; and then eventually the negativity reaches the level where even those premium stocks get sold off 3-7 days later. At which time the early cycle names start recovering - and CNBC tells us about how this is the bottom (for the upteempth time).
Frankly, I am following this pattern because in the past I stuck to my guns that the premium names with little to no exposure to subprime nation should hold up (better), but I've been proven wrong as the baby gets thrown out with the bathwater. This market has not discerned between good and bad stocks for much of the past few months - everything gets sold off in rotational fashion. So this time around I don't want to give up as much outperformance as I've had to in the past when my commodity type stocks take 20-30% hits, so assuming this pattern continues, I've cut back exposure far more than I'd like to and am sitting in a lot more cash. Now I will say - this pattern is getting so predictable I am starting to doubt it would be so easy as to repeat itself - when things become so predictable on Wall Street they usually get exploited. But I'm willing again to play it safe and miss out on some upside as to protect shareholder value. The #1 rule of making money is trying not to lose it. Each time I've gotten about 20-25% ahead of the indexes I measure myself against, we have a major selloff that hits my type of stocks and I promptly lose 10% versus the indexes - so I am going to try to maybe halve that if it happens again. So that's my thinking today. Further, it's earning season which is always a time similar to dancing on a mine field.
Last, I spent the week closing out some minor positions that had not participated in the rally since a week ago Tuesday. (Similar reasoning to why I let go of Google last week) When the bulls are out in charge, and the technicals firm up for the first time in months as they did last week and early this week, and certain stocks do not participate that makes me worry, so I began shelving some of these stakes.
As an aside, this weekend was the first I started seeing the food shortages I have been predicting for a long time, finally hitting the mainstream press - saw an ABC TV news report, saw the first wave of blog articles on SeekingAlpha.com noticing this "brand new situation" - etc. Welcome to the party folks - always late, but there is always room on the bandwagon. I am also seeing a bevy of people writing about inflation all of the sudden - again, something we said was a predictable outcome a long time ago - but fought tooth and nail by the masses up until... well the past week it appears. Remember, your Federal Reserve assures you as the US economy slows, inflation will disappear like magic - they apparently forgot the 1970s and early 80s.
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 closed drug maker Schering-Plough (SGP) after the fundamentals I had bought on looked like they materially changed. Instead of selling at $14 in the panic selloff last week, I waited for a rebound and was able to get our near $17. I do believe the stock could certainly rebound to say $19-$20 or so, but I am not willing to buy more and risk it at this point so I decided to simply exit and use the cash elsewhere. The stock ended the week in the low $17s.
- I started taking profits off of some of the major holdings in the portfolio, especially in the coal group, and even larger profits in the 2 solar names, Trina Solar (TSL) and LDK Solar (LDK) as they had very large runs in a short period of time and I wanted to lock in profits. I also began expanding the Powershares DB Agriculture Fund (DBA) as the chart began firming up - too bad rice is not a component of this index.
- Ironically by that afternoon an update on earnings by Arch Coal (ACI), caused a relatively traumatic selloff in the coal names and in fact the whole market dived - the irony of it all was upon reflection all they did was reiterate earlier guidance but in this trigger happy, shoot first environment people sold. Obviously many investors in the "new sexy" sectors of coal, fertilizer, and the like have very little long term conviction. I bought more Arch Coal on the selloff (replacing the shares I had sold off in the morning), which I promptly sold off the next day 10% up.
- Tuesday, I closed 2nd/3rd world cellular play Millicom International Cellular (MICC) - I continue to like this stock from a fundamental point of view but the chart was beginning to look poor and again, this was not a stock that was partaking in the recent rally. So like a good hunter I cull the weak and sickly and out she went in the mid $95s. By end of week MICC was down to $87s.
- Due to all the great news in the metallurgical coal space, I made a slight change in my coal exposure moving from Peabody Energy (BTU) to Alpha Natural Resources (ANR). Frankly, I like both names a LOT, but I want to run a concentrated portfolio and don't see a need for 5 coal names - even 4 is a lot. Alpha Natural has a higher exposure to metallurgical coal and a lot of pricing potential for its 2009 vintage of coal as much of it is not yet under contract so hence the switch. I had to choose one name to go, and Peabody was the one. I did not buy a huge stake in ANR yet simply because the stock (and sector) was extended, so I have a beginner stake I plan to add to on pullbacks.
- I had been adding to a large stake in Russian steel/coal/iron ore name Mechel (MTL) in the $115s to $120s range 2 weeks ago - I was curious why it had not participated in the rally last week while many of its brethren were taking off - for whatever reason it rocketed up with a few day lag. On Wednesday, within a few hours of writing an early morning blog entry on the name, the stock began to rocket hitting mid $140s Wednesday, and then into the $150s Thursday. I took profit both days, anticipating the pattern of "the end of the commodity story; it's all a bubble anyhow" that always seems to hit these names. So Mechel is down from a nearly 5% stake to 2%. Only due to the market's propensity to hammer every stock eventually, regardless of fundamentals.
- Speaking of which, I began a stake - which I added to later in the week in Ultrashort Basic Materials (SMN) - which frankly is full of names I believe have the best prospects. But since much of my portfolio is based on these names (or similar) on the long side, and they have had significant rallies this week - I am holding this hedge so when (if?) they sell off I have at least something in the portfolio working for me. Granted it's only 3% of the portfolio but better than nothing. And if I am wrong, and these type of stocks don't sell off - more power to me; that means the rest of the portfolio is doing well and I simply will lose a bit on this insurance policy.
- Thursday I closed high end mortgage company Thornburg Mortgage (TMA) - far and away the worst position in terms of realized loss for the fund. This one simply did not work out, so instead of holding on for no good reason I ushered it out the door.
- Friday, Trina Solar (TSL) was an absolute outlier holding on to gains all week despite the selloff on Wall Street. I did take some off the table early in the day anticipating the GE news would cause everything to sell off - well I was mostly correct as the market worsened as the day went on, but Trina Solar held up like a champ. I continue to believe fair value is significantly higher but again, I am employing a very conservative stance which is more about protecting capital than chasing outsized gains at this moment.
- As the week ended I took off about 5% of my short exposure late Friday, going from 25% to 20% simply because I am sure "hope" can be introduced as some point in the coming week. It will be another tricky time and for those who have been around a while, you see I have modified my short exposure strategy quite a bit. Not only have I added 2 new Ultrashorts in the past 2 weeks, I have not gone overweight in the Financials or Real Estate as I have in the past (many times holding 6%+ stakes). Simply put there are so many federally mandated backstops and "hopes" by longs in these groups, that the underlying long positions can remain elevated far above where I believe they should be on "faith" in either Federal Reserve bailouts or Federal Government bailouts. (that's socialism for you). So while I continue to be bearish on these groups, I don't know if the market will agree. As we've seen there have been times that these groups have in fact rallied 20-30% off washed out bottoms as "hope springs eternal". Therefore, I've just adopted a broad based short exposure, assuming if there is a sell off, some of the Ultrashorts will do better than others. Since logic is abandoned in this market, it might not necessarily be the type of stocks at the vortex of our problems.
