Friday, May 23, 2008

Bookkeeping: 'Rising Tide' Performance Week 42

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Week 42 performance of the mutual fund

Comments: Week 42 brought a potential change in character for a market in the throes of ecstasy for 2 months. As I've been writing the past few weeks, this period has reminded me of September/October 2007 when the market rebounded off August lows, on the backs of the "Federal Reserve will save us" thinking, and "kitchen sink in financials is out, it's all upside from here". That has been replaced with ... frankly, the same "Federal Reserve will save us" thinking, and "rebate checks will save us" and "2nd half recovery is coming because it cannot get worse" thinking. Just as the thinking in fall 2007 was incorrect... as I did then, I now believe the same optimism is misplaced. This is going to be a long drawn out process with multiple headwinds facing normal Americans. What has changed since the fall is the degree of government intervention into markets, and the first marks of socialism we saw in late winter/early spring - where risk has been shifted from the corporation to the people. I expect this to continue as things degrade in the coming year, as well as a spike in the human frustration and societal angst among the populace in the bottom 2/3rds of America.

In the interim, the bull will be stubborn clinging to the joy of the upper 5%; only when evidence overwhelms his senses to a massive degree will he relent. Frankly the news this week is no different than it was last week or a month ago; only the mood to accept such news. Below the calm surface we saw a rip tide happening with 2 late day intraday reversals in the past week and a half; the latter coming this Monday. At this point I decided to step away from the punch bowl (Kool Aid of course) I've been stuck at, and adopt an even more cautionary stance... which served us well this week. Again, the bull is stubborn (so stubborn he is trying to make a bull case out of $140+ crude) so nothing will be straight down (or up), but I believe caution is best served for the foreseeable future. The economic news only continues to degrade although market participants have been overlooking it, pointing to the horizon and July 1, 2008 - the magical day when the 2nd half recovery we've heard now for 5 months.... begins.

We have massively outperformed the market since inception so I see no reason to press bullish bets here - aside from Trina Solar (TSL) I spent the majority of the week selling, not buying, and storing cash like a squirrel heading into a Maine winter. I'll treat all near term rallies as suspect and sucker bets, as the technical conditions have in my view, degraded. This pattern is looking awfully suspicious - first the financials falter, than come retailers, and homebuilders... while commodities hold up and everyone assures us "this indicates the economy is a lot stronger than the doomsdayers report". (this is where we are today) Then within 2-6 days the "impervious" commodities are shown the backside of a woodshed and summarily destroyed to the tune of 30-40% selloffs. Thank you very much. At which point, the hedge fund computers think it's a bright idea to buy "early cycle" recovery names since "that's what our programmers say to do since every recession is no longer than 6 months". So homebuilders, financials, and retailers will rally after being decimated - CNBC will tell us (again) it's "a sign of strength in the economy's near future" (just like the commodity strength was a sign - notice EVERYTHING is a sign of strength in the economy according to these people). The dollar will rally 0.4329832% and we'll be told, just you wait, this is yet another sign of strength... and we'll be told how the European Central Bank is itching to cut rates so they can throw their middle and lower class to the wolves of inflation. Then we'll wait... and wait... and wait... and then they'll put that story in the freezer to roll out 6 weeks from now during the next cycle.

So let's see if that is the story the coming weeks - if so, it would simply be a repeat of the same dog and pony show we've been doing since last August. The same pundit ignorance and spiel - costing people money over and over as they follow into these same trends repeatedly trotting out the same 1960s thinking - destroying the net wealth of anyone listening. You know - such classics as "subprime is contained, the bottom is in financials" or "housing has never gone down nationally, not to worry" or "even if housing did go down nationally it is only 4.5% of GDP so why the fuss" or "oil will never pass $100" or "all these government reports point to a strong economy, I have no idea why consumer confidence is at 26 year lows; if they only read the reports they'd clearly see everything is fine"... well you get the picture.

For the fund not much was happening this week, since we had a big stash of cash and unlike previous weeks where our hedged positions (shorts) hurt us as Kool Aid spilled into the streets, this week it helped to offset many of our losses in long positions. But with 1/3rd of our portfolio out of play and stored under the mattress it was generally quiet out there for us; coal did continue to rock - but after such a run I've cut it back to its smallest exposure in many months. Frankly, almost everything I like is still much too overextended, although I've made a few smaller buys late in the week as things on my buy list fell to support (first support). While this will sound counterintuitive, I'll probably be building up positions in our investment banks and housing stocks next week IF the above pattern begins to repeat (they've been trashed the past week and a half); because a rally in these sectors cannot be too far off on the "2nd half recovery" thesis. Especially if oil falls to $110 - then the consumer will be booming by August, and houses will be flying off the shelves (houses people cannot afford gas to go visit open houses, but that's beside the point). Jeez, I can almost write these CNBC scripts at this point with 1 eye closed.

The S&P 500 dropped an unattractive 3.5% this week with the Russell 1000 following suit -3.4%. Never thought I'd say this but Rising Tide Growth Fund had a massive week with a whopping +0.3% gain ;) All things considered that's quite acceptable (When do I get my own CNBC show - Boo Yah?). Cash was not trash this week. My goal is to beat the indexes by 15% in any 1 year, and with 10 weeks to go in "our" year 1, we are almost double that pace. I also wouldn't mind finishing as the #1 fund in my category (out of 1800+ competitors) when we measure at the end of July 2008 with a full 1 year track record. So that's the next goal.

As always if interested in pledging an investment when fund is ready to launch please attach a comment here, or send me an email (need your state please). And have a good 3 day weekend.

Price of Rising Tide Growth: $12.310
Lifetime Performance to date (vs Aug 3, 2007): +23.10%

Comparable S&P 500: 1,375.9 (-6.10%)
Comparable Russell 1000: 754.0 (-5.30%)

Fund return vs S&P 500: +29.2%
Fund return vs Russell 1000: +28.4%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of April 2008.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

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