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: 17.7% (vs 18.1% last week)
53 long bias: 58.7% (vs 60.2% last week)
8 short bias: 23.6% (vs 21.7% last week)
61 positions (vs 62 last week)
Additions: Perfect World (PWRD)
Removals: Shaw Group (SGR), LDK Solar (LDK)
Top 10 positions = 38.1% of fund (vs 30.0% last week)
28 of the 61 positions are at least 1% of the fund's overall holdings (46%)
Major changes and weekly thoughts
The market enjoyed a very nice week, making up all of last week's losses and more. On a technical basis, we are (once again) at a key point on many of the indexes - all but the NASDAQ sit right below the 200 day moving average; the NASDAQ poked above this resistance Thursday and Friday. I wrote in mid January that the S&P 500 was in its worst condition in half a decade, as major technical averages were broken and we've had quite a ride since then. The government in many forms, seen (and I believe unseen) have come to the rescue, sloshing the world into another liquidity driven era.... maybe in our lifetime we will never be allowed to have a proper recession again. Or at least not one the government reports will show. As an offshoot of such actions, inflation is the course taken as opposed to allowing a full cleansing. I expect this to be a continuing course of action, until the weight of reality overwhelms the behind the scenes socialism in our "free markets".
The feel here is (to me) akin to September/October 2007 when we were told the market knows all, the market sees into the future and has discounted everything in the 6 to 9 month period ahead. Somehow (back then) the credit destruction, horrific stock fall in January 08, and historic measures by the Federal Reserve, most obvious in an implicit backing of all investment banks was not "seen" by the all knowing market. Nor do I believe is the consumer led recession we are embarking upon now "seen". Most market participants have grown up in short, sweet, and corporate driven recessions of 90-91 and the early 00s. Very few were around for the late 70s/early 80s or have bothered to read up on it it appears. So their textbooks all say buy a few months into a recession (although of course we are not in a recession) because if you buy 3 months in, we will be out within 3 months (since no recessions last more than 6 months in the past 20 years) ... again, not that we are in a recession. ;) Much like last fall, only when the evidence is so obvious and impossible to argue with, do I expect the market to face the reality. And when it does come, I believe it will be another sudden twist and turn downward that will catch a very complacent market from out of the blue. But timing all this is another matter entirely! But as I stated Friday "Risk is High" - we are starting to see speculation in "worst of breed" stocks, which tells me we are closer to the end of a move, than the beginning - but how close to the end I don't know. (if anyone knows, please email me!)
Economically the news continues to be poor; my belief is even when the news "turns" into good, it won't be a V shaped recovery but a long sideways "slow growth" period... and we are not even close to getting to that point. The market is betting on a V shaped recovery "in 6 months", from recent pricing action (reaching highest prices of the year). Again, one of my favorite phrases is "perception is reality" - as long as perception is everything will be fine in the near future, than the stock prices will reflect that. Commodities, China, and inflation hold the keys for our near term. We've had an enormous moves in the prices of commodities, and almost all themes now relate directly or indirectly to the voracious appetite of China to continue to consume and prop up much of the world. The price rises have been so vicious in commodities, that if oil repeats its performance of the past few months, in the NEXT few months we will be looking at crude $160 by end of summer. I don't think this will happen; while I am a long term bull, I believe a propensity to correct will be here sooner rather than later. If I am wrong and crude (and associated commodities) continue their run we are in even deeper trouble, as the implications will be dire for consumers worldwide and many companies. We are seeing the first hints of this with the warning from Fedex (FDX) a week ago Friday, and Deere (DE) this week [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] While I predicted from fund inception we'd see a sharp rise in commodity prices/inflation due to a "World of Shortages" - we've already taken some huge steps in that direction just since last August. The pace of increase cannot continue or we will be plunging into a global recession by 2009, as pricing for producers and consumers alike will eat into their income streams. Airlines and refiners will simply be unable to adjust to this sort of era, if it happens at the same pace we've seen the past few months. Demand destruction would intensify in the developed world.
The American economy is 70% consumer driven and I could make an arguement that many of the top 10 states, of which control 50% of the $13-$14 Trillion in US Gross Domestic Product, are in recession or heading there shortly - #1 California (real estate related) is 13% of the American economy alone, #4 Florida (real estate related), #7 Ohio (manufacturing) and #9 Michigan (manufacturing) are there. New York (finance based economy centered in NYC) will be slowing down considerably as the effect of its 2008 layoffs filter through (offset by its tourism from overseas I suppose) - one could argue either way on #5 Illinois, #6 Pennsylvania, #8 New Jersey, and #10 Georgia. Only #2 Texas (energy), do we see a clear path for sustained growth anytime during the next 18 months. Yet somehow the overall economy is not in bad shape and will rebound "in 6 months". Interesting. Again, I expect the market to whistle past the graveyard until they trip over headstones. I'd also ask if China drops from 11% GDP to 6% GDP, how would that affect the investing landscape? Almost all major themes and countries that are booming (ex: Brazil) are reliant on this 1 engine - especially as others in North America, East and West Europe, and Japan slow. So these are the things I'm mulling as we move forward towards the 2nd half (which according to everything I've been told since Jan 1, 2008 is going to be the boom time for the economy) We'll know soon, it gets here in 6 weeks.
For the fund, we continue to mint winners in coal, and of late have added some nice gains in solar, global infrastructure, oil services, metals and (gulp) housing. We continue to avoid the bulk of financials and retailers, which despite tremendous bounces from time to time, I still contend have many headwinds coming in the next 18 months. I've moved one solar name to a major overweight, anticipating a very nice earnings report and an extremely underestimated valuation versus peers - I had just been waiting for the technical condition to finally show promise which it finally did. If the solar stocks continue to ramp through mid week I plan to take a substantial amount off the table as solar stocks are a volatile group and when they correct, it is not pretty; we are the tail end of this ballistic move in the group in my opinion. I've also pared back severely in all energy exposure, only leaving a small overweight in coal, which I won't be cutting any further than I have now. We sit with large cash and short exposures for our long weighted fund; we will have to reassess this market if and when the market breaks out over its major resistance lines. (the 200 day moving averages) Frankly (almost) all my favorite names have made tremendous moves and I don't really want to chase stocks up 40-50%; we have made a lot of money and are beating the indexes by a large margin so I'd rather play safe than sorry for a while here, and give up some potential gains in return for a lower risk profile. The one thing I would reverse would be the heavy short exposure if we break above resistance, as it makes little sense to continue to give back profits gained from long exposure, on the short side. But I'd be more focused on adding to cash rather than new long positions if that is indeed the scenario.
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 was quiet. After the bell, LDK Solar (LDK) reported good earnings but a degradation of future margins, as stated I would of liked to sell some in after hours as the stock was near $38 but we don't have that option in my mock portfolio so I decided to cut exposure Tuesday instead, and after further thought (and a reallocation to Trina Solar), cut the position entirely on Thursday. I still am bullish on the name long term, but think we have better upside in other names over the next few quarters - this was exactly the rationale for cutting Suntech Power (STP) out of the portfolio a few months ago.
- Tuesday I cut exposure to the global infrastructure group - in retrospect too early as the sector had a great week.
- I followed that up with a closing of Shaw Group (SGR), which again was too early in timing considering how hot this sector was - but I owned so little it would of not impacted the portfolio. I've decided to winnow this group to fewer names for now - I sold Shaw Group for non performance which it immediately (once I sold) decided to show me up - it put on a huge move Thursday and Friday.
- I had spent the early part of the week building up the position in Trina Solar (TSL) to about 3.3%, after the stock broke above its 200 day moving average ($46) I quickly took this up to 6%+ and I added more on strength later in the week. Unfortunately, the speculators ran into Solarfun (SOLF) late in the week driving it up a massive amount ahead of earnings - it would of been nice if that had happened to Trina instead. But at the core I like growth at a reasonable price and Trina is the cheapest among its peer group; by a staggering 50%. Meaning we can see 100% gains and still only trade at peer valuations - hence for someone of my ilk, it is too hard to pass buy to chase into stocks of similar composition, but are being chased by momentum daytraders. Maybe this will be Trina's week.
- Along those lines, I cut back my Yingli Green Energy (YGE) ahead of earnings after a nice run. I did not get the top but compared to where we bought the position we still made a nice gain. This is an example of a direct peer to Trina that trades at double the valuation for no apparent reason other than the world missing the forest for the trees. So we've pared out solar names from 3 to 2, and overweighted into the cheapest name.
- I pared some of home builer Lennar (LEN) - nothing special here - I buy it when it sells off, I sell it when it runs a little - I expect to continue to do this for the foreseeable future, along with DR Horton (DHI). I don't believe in any imminent housing rebound but the stock market continues to treat these guys well, so they stay in the portfolio.
- Thursday, I rebuilt part of a position in Chinese travel company Ctrip.com (CTRP) - we had sold this one in the upper $60s on May 2; so we were able to rebuy the stake at $56-58 this week. That does not mean it is the bottom, or near the bottom but anytime I can create a transaction for 14-16% in 2 weeks time, I'll take that all day. I'd like to add more in the lower $50s. This stock has been great to me for any number of years, despite never being cheap. That said the Chinese earthquake might cause some problems in the position for the next 3-6 months.
- I cut a smallish stake in WuXi PharmaTech (WX) after a large gain (following months of poor performance). I still like the long long long term story here, but I'd like to see more normal trading. Right now this name seems to be in the "Chinese small cap" speculation that comes to the stock market every few months where every Tom, Dick, and (insert chinese name here) gets run up - if they have good prospects or not. We are now in one of those phases which makes me even more inclined to believe a stock market correction will be coming sooner rather than later. Random speculation is usually a sign we are near a top.
- I started a new position in Chinese gaming company Perfect World (PWRD) - a bit risky to do this ahead of earnings, but I like the space and this company has multiple drivers for upside. We'll know Monday how this move turned out in the short run.
- Friday, I took out what probably is my last layer of energy stakes. I've culled this area sharply the past few weeks and am now at a portfolio weighting where I'd be content holding these through a selloff, whether minor or major, in the group.
- Late in the day, I added to my Intuitive Surgical (ISRG) position, which I might reverse (sell what I just bought) if the stock drops below support (i.e. fake breakout). If we see $295 I'll be pushing this stock back down to 1%ish.
