Bookkeeping: Weekly Changes to Fund Positions Week 39

Week 38 Major Position Changes

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: 3.3% (vs 13.0% last week)
56 long bias: 77.7% (vs 76.4% last week)
8 short bias: 19.0% (vs 10.6% last week)

66 positions (vs 66 last week)
Additions: XTO Energy (XTO), Pride International (PDE)
Removals: Chicago Bridge & Iron (CBI), iShares Malaysia (EWM)

Top 10 positions = 31.3% of fund (vs 31.3% last week)
39 of the 66 positions are at least 1% of the fund's overall holdings (59%)

Major changes and weekly thoughts
I did a comprehensive review of thoughts in this week's performance review so I won't rehash it here. In summary, we approach an interesting time; closing in on some key long term resistance areas. The "on the ground" numbers continue to degrade but the belief system that is "everything will be ok in 6 months" continues to grow. So the question is does belief continue to trump reality? Again, there is a whole generation of NYC traders who have never lived through a recession (as adults) that lasted more than 2 quarters, and was never anything but short and sweet (early 90s, early 00s). This is what they are conditioned to, not anything of duration like the late 70s or early 80s. So they will continue to go to their playbook that "everything will be ok in about 6 months because that's how it always turns out" Only when enough evidence comes to the contrary will they change their views - and again we won't have "evidence" until October 2008 (Q3 earnings reports) or January 2009 (Q4 earnings reports). And at that point I expect the discussion to switch to "everything will be fine in 6 months" yet again :)

The reality is something has to give in a rising price environment - either corporate profits (if producers do not pass along all the higher prices to consumers) or consumers (if they are forced to eat higher prices) - the former won't be good for profits for obvious reasons - the latter will at first look good for profits at first because higher prices means profits can sustain themselves but eventually it will lead to demand destruction (consumers cannot afford such items anymore or in such quantity as before) - which means volume of sales falls. And that will hit corporate profits, in due time. This is what is happening in gasoline right now - we have finally hit a price where it is creating destruction of demand - it did not at $2, it did not at $2.50, it did not at $3.00 but it is now at $3.50. For every company which is reliant on US consumers (which are the companies rallying the hardest the past week and a half) this is their fate UNLESS inflation ebbs severely. Right now those $600 checks are being counted on to prop up everything from retailers, to restaurants, to homebuilders... so many people are relying on those checks you'd think they were $3500 not $600.

Again, reality does not matter in the stock market in the near term - only perception of reality. If perception is everything will be ok, than the market can levitate. Remember, we were at all time highs on the S&P 500 in September - October 2007. Was everything fine behind the scenes? No, things were degrading. But perception was the Federal Reserve would solve all the problems and that there would be no recession coming... so the market hopped, skipped and jumped to new highs making bears look foolish. Until a November correction and an even worse January correction. Just keep in mind, S&P 500 estimates for Q4 2008 are estimating 60% year over year growth over Q4 2007 ... that's how stocks are being priced... on full year estimates. So if you believe the corporate profit picture this fall/early winter will be 60% than last fall/early winter - this market is a steal. I'm not in that camp.

For the fund, the higher we go the more I am expanding short exposure - realizing it is hurting performance in the near term. While I do believe a "change in character" is about, and in fact the "early cycle" names are being bought on dips, instead of assuming they will fall off a cliff - they are now at quite extended levels so I do expect some pullbacks in relatively short order. But again, if we break through the 200 day moving averages on the major indexes, one must toss away all reason (as we did last Sep-Oct) and climb on the back of the stampeding bulls as they ride into the night cheering about the nirvana we approach "in 6 months". Until they get speared... and then we go back to the dark side.

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:

1. Monday we did very little except admire the gap up in Cummins Engine (CMI) (apparently a good mention in last week's Barron's), and the crushing earnings report in Sohu.com (SOHU)... we did double our position in Gafisa (GFA) as the stock bounced off its 50 day moving average and I wrote "the chart is starting to look more promising"
2. Tuesday, Mastercard (MA) put out yet another (starting to get old hat) impressive earnings; since the stock gapped up, I did take a larger part of my position off, realizing the stock could jump to $300 or so ... but willing to leave some on the table.
3. After the "strong dollar" thesis had played out for nearly a week, I began a position in natural gas giant XTO Energy (XTO) - while I have no idea how the "strong dollar" hocus pocus belief will last, the balance sheet of the US is dysfunctional and any rallies will not be systematic in my opinion. And they are not really a good reason to sell natural gas anyhow, but that's what the hedge fund playbook says - so I am going to be on the other side of that trade and acquire more as these commodities fall as our "World of Shortage" story is only in the top of the first inning.
4. Wednesday, I closed out a position in infrastructure name Chicago Bridge & Iron (CBI) as the chart has now degraded. I still like this name for the long run, but I have enough infrastructure names as it is, and this miss was so large it indicates management is missing something. I'm sure in a few quarters this name will rebound, and we'll revisit it at a later date. In the meantime I expect somewhat dead money although I could be wrong.
5. Cummins Engine (CMI) came out with an, as expected, very good quarter on (drum roll), great international sales and weak dollar. Since I still find this name cheap, I did take some off the table but still kept a meaningful position.
6. I did sell some Mosaic (MOS) in a very short term move in the $122s, and added it back later in the week in the mid $110s. While this stock can fall on the strong dollar nonsense, the fundamentals of this group are simply ridiculous so I don't want to be on the outside looking in during the next leg up... we might consolidate for a few days, weeks, or a quarter - but I expect another huge leg up in time. Barring politicians getting a conscience and killing off corn ethanol subsidies.... but i doubt they'll come to senses before November 2008.
7. National Oilwell Varco (NOV) had a very good quarter, yet again, but since oil is $113 instead of $120 the stock sold off - because as you know all their business drops off as crude drops 3-4%. That's the theory by hedge funds anyhow; again I'm on the other side of that trade and (slowly) adding.
8. After the gods on Mount Olympus granted the peons another 25 basis point cut, I did add more short exposure in a meaningful way - while it did work out Wednesday as the stock market sold off, the minions came to their senses by the next morning and realized the Gods would make everything ok "within 6 months" so they bought up everything in site Thursday. Sometimes the faith in the Federal Reserve as all powerful is akin to a religious revival.
   
9. Wednesday, I took the 2.1% position in Gafisa (GFA) down to 1.5% with some sales in the $43s (I saw Brazilian stocks jumping but was unaware of the S&P upgrade); I noted I'd sell more north of $45 considering my cost basis is in the low, mid and upper $30s. Friday, I took another 1% stake out right below $50. I'd like to add these shares back in the lower $40s sometime in the next few weeks/months.
10. Thursday, I began incrementally adding to my coal exposure as many of my favorite names had pulled back to their 20 or 50 day moving averages. That doesn't mean they were bottoming, but it's a good place to layer back in - this move was rewarded in the short term as by Friday almost the entire sector was up 4-8%. Again, unless the dollar strengthens by a factor of 400-600% most of the commodity stories (ex gold) really don't change, but the flood of money in sector rotation doesn't care about facts like that.
11. Unlike in the past when I held no homebuilder or financials (ex Blackrock or Mastercard) I did actually buy some of this during the past few weeks/month in anticipation of a "strong dollar, early cycle" nonsense rally happening sooner or later. So I began dispensing with some of those positions into the week+ long rally, cutting back on Morgan Stanley (MS), and Lennar (LEN). In the past these cyclical rallies have lasted 5-14 days so we are at about day 8-9... closer to the end than the beginning. One of these times the early cycle rebound will turn into a full blown rebound, but I'd assume it would be closer to a true economic rebound, not a "rebate check goosed hope" one. I also cut Apple (AAPL) but simply to lock in some profits, still like this one to $200+.
12. Friday, I restarted an old position deep sea driller Pride International (PDE) as a takeover bait play. When I sold Diamond Offshore Drilling (DO) late last week I opined I'd replace it with Noble (NE) on a dip - since then NE dropped from $59s to $54s... so I had considered adding both positions since I like NE more as a company... but I am trying to avoid "portfolio bloat" so with 56 long positions already in place, I just went with PDE. Of course NE rebounded nearly 5% Friday :)
13. After a sizeable rally, I cut Ctrip.com (CTRP) to almost nothing. Now the "consensus" was Chinese stocks would not sell off and it was safe to hold them to the Olympics... of course Shanghai has dropped 50% since that "consensus"... but with that correction out of the way I could now see a shorter term rally into the Olympics so I'd like to buy back some of the Chinese inventory I've sold off of late, on pullbacks.
14. Friday, I cut iShares Malaysia (EWM) - chart has been facing some resistance, I have some profits in the name, I fear inflation in the emerging markets, and I am trying to keep my portfolio from getting too large - since I added 2 names this week, I am looking for more candidates to cull out. Due to my shortage of cash this was one I chose.
15. Due to low cash position I took out some long exposure in Intuitive Surgical (ISRG), Morgan Stanely (MS) and Foster Wheeler (FWLT) to close out the week. My cash is still very low, but this is because I've increased my short exposure to have more of a hedged exposure as we now move into key technical (resistance) areas on the charts.

The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows.