Wednesday, June 25, 2008

Bookkeeping: Taking some DR Horton (DHI) Off the Table

I was startled last evening to realize with my cutbacks in my normal top positions, that DR Horton (DHI) had somehow managed to become my largest long position - a homebuilder! That seemed so wrong. Yet so right when we anticipated a commodity pullback. We've had a nice run in this name the past 48 hours, and our "barbell" approach (commodities on one side, and some of the out of favor sectors in smaller amounts on the other side) is helping to stem the losses. In the past on a day like this the market would be up 1% and we'd be down 2% as our quality stocks would get trashed in a "buy the junk" type of market (also our Ultrashorts in financials, consumer related, and commercial real estate would explode in our faces). Instead we just have a minor loss which I consider a "win" based on our typical holdings. This episode happens every 6-10 weeks, and lasts from 3-10 days. It seems to be happening a lot around Federal Reserve meetings (that was the last time this "junk" trade worked its best) as we hear about how Uncle Ben is now wanting a strong dollar and is going to fight inflation. All lip service (no action), but it's enough to get traders and their computers moving wholesale from global growth stories into US based stocks that have been pummeled.

Anyhow, we are not getting destroyed today as we'd normally be experiencing (the enemy, he is adapting), since some of our "barbell" plays are actually doing quite well. DR Horton (DHI) is actually a very nice chart set up - it's raced from an upper $11s range to low to mid $13s in 2 sessions (about 12% gain), with resistance ahead in mid to upper $13s. So the forward plan is simple - if this "move to the junk" ends soon, these stocks bouncing (probably mostly short covering for now) will falter as they encounter resistance. If however, this is part of a longer term move (again they usually last 3 to 10 days) they will break through resistance. If the latter happens, we'll remount this position on a move to $14 because it will mean the potential for more upside ahead as "2nd half recovery" is enjoined ($16s in DHI for example would be very likely)! Yahoo!

But for now, we're going down to a 1.6% stake from 2.3%, and monitor the situation from there.

On the flipside of this barbell I've bought very small stakes in a few coal, nat gas, and fertilizer names - but still anticipate bigger pullbacks so holding back the gunpowder. Until the gods from Mount Olympus speak to their minions at 2:15 PM this afternoon it's really hard to press bets in any direction. Expect a lot of thrashing about, as always, by knee jerk lemmings and then we'll see if the gods blessed us or not by 3 PM. See you then and we are sitting on our 30% cash stake seeing which direction we will break to next.

Long DR Horton in fund; no personal position

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