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: 22.8% (vs 17.7% last week)
52 long bias: 49.3% (vs 58.7% last week)
9 short bias: 27.9% (vs 23.6% last week)
61 positions (vs 61 last week)
Additions: Ultrashort Oil & Gas (DUG)
Removals: iShares Signapore (EWS)
Top 10 positions = 33.2% of fund (vs 38.1% 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 showed a turn for the worse this week, with some ominous hints Monday after reaching out to grasp new highs for the year. As the news in the real economy worsened the past few months, the market has rallied on "it's all priced in" and "it's not as bad as we expected" or "even if it as bad as expected, it will be better in 6 months". As I said then, once the market turns down, the news flow really won't be that different - it is just a matter of when will the market begin to treat bad news as bad as opposed to good. For whatever reason crude oil @ $132 sets people into thinking that high oil prices might actually be bad for the economy, whereas crude @ $128 is just fine, thank you very much. That is one example - we have many. This will continue on for many many months ahead in fact - I expect the news flow to continue to be a steady beat of "bad", but some weeks that will be seen as "ok, it's priced in - tell me something I don't know" and other weeks it will be seen as "oh ok, I guess things are sorta bad out there". As always the market is in large part psychological as much as based on fundamentals or technicals.
With the market taking such a beating last week it would not surprise me to see some "hopeful" buying at some point this week - down 3.5% is not usually followed by an immediate down 2% more - but we never know. As always it depends on how much Kool Aid is out there - frankly, as I peruse the news, trying to find glimmers of hope I keep running into mounds of coal. We have a bevy of economic reports and I'm sure for at least a handful we'll be able to explain them as "showing signs of economic recovery". I continue to believe we are really just getting started with this recession (ahem, sorry) slowdown. I continue to believe 2nd half 2008 earning estimates are pure fantasy in most sectors, and if logic had any part in the market (which for long stretches it does not) as come down earning estimates for the future, so should be the price people are willing to pay for said stocks - just the opposite has in fact been happening the past 2 months - again very similar to September/October 2007. Unfortunately, following that period came November 07 and January 08.
For the fund, I've grown increasingly cautious the past few weeks - we've been able to partake in much of the rally while still maintaining a 10-15% cash exposure for much of it and a 10-20% short exposure - the long portion of our fund has been filled with some serious winners so even with a 60-70% long exposure for much of the past 2 months we've been able to keep up or even surpass the general market. So we've had our fill of the pie, and now I am stepping back from the table, but again as stated above - after such a horrid week it would not be surprising to see some uptick in the markets as hopeful bulls rush in. In that "hopeful" scenario - if it plays out, we'd lag the market with our current "cautious" exposure. Yet, I don't see any reason to really get overexposed on the long side for rallies that I believe will be short term in duration. Further, most names I really want to buy in scale, have had very large runs, so until they begin to falter and hit key support levels my purchases will be limited. At this point we have one major overweight long position in Trina Solar (TSL) - and that's about it. While solar stocks could fall 30% in 2 weeks (as they are apt to do when the market panics) the stock valuation discrepancy (versus peers and growth rate) is so out of line, either I am completely missing the forest for the trees on the next earnings report, or we have a major dislocation in reality versus expectation. Since I have most of the rest of the portfolio in a bomb shelter, I am willing to let this one fly since my "fair value" is so much higher than current levels. But if the market does trail off in one of its panic spirals I can see this one selling off very hard along with its sector - attractive valuation be damned.
Going forward, we've adopted a bit of a barbell approach - although the barbell is very weighted away from these "early cycle" names in homebuilders, financials, retail, etc. But if past is any indication once the market has beaten these sectors to a pulp; in a sustained selloff - it will then move on to the market leaders - and beat them to a pulp later in the correction... meanwhile running the early cycle names up on hopes of "economy recovery" - this has been the pattern over and over since August so that's the playbook I am going on - hence sometime in the next 4-10 days you will probably see me buying our few names in these sectors, mostly with a very ashamed look on my face since I don't believe for one moment there is any recovery coming soon - but knowing how the hedge fund computers love to buy these every 6-7 weeks, for no good reason. So we'll see if it plays out that "neatly" - the pattern has been SO precise it makes me believe it won't work out so nicely - because once something becomes old hat on Wall Street it quickly gets exploited and no longer works. But I own 2 investment banks and 2 housing stocks for just these reasons - that said, they won't be major overweight positions until maybe 12-24 months from now when I could see a "real" recovery happening. Not a CNBC created one.
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. Most of my transactions this week were with the Ultrashorts, or smaller transactions that I don't outline individually on the long side. ($4K or less)
Some of the larger changes (chronologically) to the fund below:
- Monday Perfect World (PWRD) reported a stellar earnings report, but due to guidance issues (part of it earthquake induced) the stock took a hit, which it followed through the rest of the week. Nothing has changed for the long run and frankly the metrics in this earning report surpassed even my rosy expectations - but the market only cares about 90 days at a time and since the moody toddler didn't get what it wanted, PWRD was punished. I lightened up a bit on this position but as we approach support in the low $20s I'll begin upping this stake - $20, $21, $22 would be a great area to add. Even at current $24 range I am paying 15x 2008 earnings for 30,40,50% type of growth.
- Early in the afternoon the market was approaching yearly highs and had peaked its head over the 200 day moving average, which caused me to entertain the idea that this was just an unrelenting move and despite all the bad news, the market was unabashed in ignoring it, so if the day ended in this fashion we'd have to reverse course, and go with the bulls. Within 30 minutes this all changed with a nasty intraday reversal - and I was back on full caution.
- Wednesday, I cut some Trina Solar (TSL) near $52 after Solarfun Power (SOLF) put out a nice earnings report giving the sector a life, and ahead of a Suntech Power (STP) earnings report the next morning. I had bought much of this stake a week earlier in the low to mid $40s so I wanted to lock in some games and I took the name down to a 4.9% stake. I said, I'd like to buy this stake back near $46, which ironically we got the very next day - I jumped the gun and added up to 5.4% stake at $48 (just hard to be away from this value), and then went back north of 7% allocation as we broke back down to $46s. So we were able to squirrel away some profits in this 24 hour period, and not give it all away to mother market. Again, let me stress if people begin to panic sell this can be a $35 stock in a few hours, but at least we took some off the table and bought back at lower prices. The sector has moved so smartly, I anticipate a serious pullback in due time.
- I began a stake in Ultrashort Oil & Gas (DUG) on part trader intuition (this position has destroyed a lot of people of late) and part everyone and their mother was calling for oil $150. It just seems like a crowded trade - an added benefit is this position shorts against exploration and production companies - not the commodity itself so even if the commodity went up, if the market is weak; the individual companies could certainly go down. That is how it ended up working in retrospect - I set a target of $30 to sell, with my entry below $26 which would garner a 15%+ return. We already have a 10% return in 2 days; so far so good.
- I outlined how amazing the runs have been in coal; much like fertilizer still a favorite sector but it is too much at once - I am in full cautionary stance in regards to this sector despite improved fundamentals (China earthquake will cause even more need for imported coal). We've seen 40-50% moves in 3 weeks - remember, I was buying when CNBC was telling me commodities were dead and the hedge funds were selling due to the "strong" dollar. As always, thank you CNBC.
- Friday, I began making some sporadic "first layer" buys of positions I'd cut back severely on, in Mechel (MTL) down 15%, Mercadolibre (MELI) down 25%, and DR Horton (DHI) down 22% - the % falls are in a week or less. Again, this is not calling a bottom in any of these names - I don't have a crystal ball, but I sold these higher and now can begin to rebuild my positions at a lower cost basis. If they go lower (which frankly I hope they do), I can use the large stash of cash (and or convert some Ultrashort exposure into cash) to buy.
- I closed out iShares Singapore (EWS), as the first signs of demand destruction in energy cross the globe - once Asian economies lessen their subsidies, this destruction (and concurrent economic slowdown) will accelerate. Unfortunately, petrol is still the lifeblood of Earth 2008. Maybe it will be a different story Earth 2023, but we have not even begun to take the problem seriously as a globe. So the way to suppress demand (temporarily) will be a global recession. On the positive front, at this level of pricing a lot of alternative energies come into play as will "old school" supplies of energy, long closed off or forgotten as too expensive to access. I expect years of this pattern ahead (a decade or two in fact)
- And that's about it ... it was a quiet week - I was not interested in buying stocks until they hit some of my initial targets - despite the selloff, most of it happening in sectors outside of what we hold so we did not see the large scale type of selloffs I am looking for to build up positions. I would not be surprised to see those selloffs in our holdings relatively soon.
