Sunday, June 22, 2008

Bookkeeping: Weekly Changes to Fund Positions Week 46

Week 46 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: 24.0% (vs 15.6% last week)
51 long bias: 54.7% (vs 58.3% last week)
9 short bias: 21.3% (vs 26.1% last week)

60 positions (vs 60 last week)
Additions: Powershares DB Agriculture Double Long ETN (DAG), Ciena (CIEN)
Removals: Powershares DB Agriculture Fund (DBA), Morgan Stanley (MS)

Top 10 positions = 28.3% of fund (vs 30.9% last week)
38 of the 60 positions are at least 1% of the fund's overall holdings (63%)

Major changes and weekly thoughts
It has been a rough few weeks for the markets - the S&P 500 is now down over 8% from its interim peak reached about a month ago, and 6% in the past three weeks. I have misspoke on some earlier entries when I wrote we have broken the March "Bear Stearns" bottom; in fact we are just at the April lows in the 1320s on the S&P. Aside from 1 day of panic selloff (Bear Stearns Monday) the market has bottomed out at mid 1270s both in January and March 2008. So if we continue downward this is the technical level everyone will be looking at. I would expect the market (if it gets there) to make a stand there as "those in the know" realize this level must be held or all the hedge fund computers and technicians will be throwing in the towel (read: selling) if this threshold is broken. That said, markets that sell off this harshly typically have some vicious bounces in the opposite direction (up) which tend to punish those who are pressing the short side, so I can assume it will be a tricky market for bears and bull alike. When we do have rallies, shorts can lose a lot of money in a very short amount of time, even if the interim trend is down.

As for this week, looking at the calender Wednesday will dominate the news as the Federal Reserve meeting takes place and everyone will be pinning their hopes for some magical elixir from our favorite sugar daddy, Uncle Ben. The Federal Reserve continues to be in a box - can't cut rates because they've already stoked structural inflation, and can't raise rates because no one has been that courageous since the Volcker era (raise rates into a slowing economy) This is a much more political "independent" body, than in days past. If I were Ben, I'd actually raise rates by 25 basis points and then at least signal to the world I had an ounce of credibility on inflation - that 25 basis points would mean nothing in the big picture but at least would be a decorative move to show inflation is now a concern. Instead, I assume we will get "strong language" in the statement. Big deal.

Further on Wednesday we have a slew of earnings reports from some of the best companies out there so we could have a good psychological day. Monsanto (MON) on the agriculture side, Nike (NKE) on the global brand side, Oracle (ORCL) on the big cap tech side, and Research in Motion (RIMM) on the must have gadget side. So it is quite easy to get overly negative here, but nothing in a straight line (even if you are a full blown bear) - we should expect head fakes along the way, causing pain to whatever side of the tape you are. I personally would like to see capitulation type (what I call "waterfall" selloffs) where almost every well know stock drops 8-12%, and the stocks that have held up the best finally are trashed. This would jack up the fear factor and from these events come at least intermediate bottoms. Most of my favorite names both in the portfolio and names on my "to do" list in terms of what I want to add to the portfolio have still stubbornly held up, so I am still awaiting price targets to add to these positions, or introduce new names to the fund. As always, we won't catch the bottom - and some of our buys (if we do indeed get some waterfall selloffs) will immediately go underwater but without a crystal ball one just must scale in, into the painful selloffs - and look 3-6 months out and realize the best names will recover. This strategy has generally served us well. Most of the fund trades of late have been with asset allocation (moving cash/short/long exposure around as the market ebbs and flows). I do expect, if we do get a more serious sell off in the week(s) ahead to have a lot more transactions into the teeth of the selling. This was a relative quiet week.

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 of the blog under archives.

Some of the larger changes (chronologically) to the fund below:
  1. Monday, we took some solar exposure off the table as both Trina Solar (TSL) and Yingli Green Energy (YGE) made what I considered to be dead cat bounces. I'd like to increase solar exposure at lower prices, and broaden out the exposure to new names - unfortunately the ones I was interested in, made some huge gains early this week so we missed them this time around. This is a volatile group and if we do get waterfall selloffs, these names can drop like a rock.
  2. Similarly on Tuesday, we cut some ICICI Bank (IBN) on an identical technical bounce to the solar names, stocks below key moving averages that bounced too (and subsequently failed to move through) resistance. Right now touching anything Indian is toxic as the country grapples with inflation.
  3. After mulling over the fact we called this move in corn almost perfectly but did not have a pure play available to us to take advantage of the 40%+ move, I switched our agriculture commodity exposure - not by much, we simply entered a vehicle that has 2x the movement of the old vehicle we once owned. This allows us to control the same "movement" with (in theory) half the exposure. If the greater market sells off, I'll be interested to see how these commodities react - will they move down in tune? Or move in the opposite direction. Either way I believe food is going to replace oil as the inflation of back half 2008 that is most talked about.
  4. Wednesday, after a review of Morgan Stanley's (MS) results, and just how poor they were in relation to Goldman Sachs' (GS) I closed out the position and put some of that cash into Goldman Sachs. While I believe the companies hit the worst will rebound the most once the tide turns in financials and hedge funds start buying this sector (and don't forget how quickly short covering can move the worst stocks up), I am willing to give up some of that in return for the "relative" safety of the best of breed. So we are changing from a "mini basket" of 2 investment banks, to just one - the one.
  5. I don't normally highlight individual Ultrashort transactions because I move the position sizes often but since this was a relatively large change in direction and counter intuitive to market strength, I mentioned the increase in both Ultrashort Basic Materials (SMN) and Ultrashort Oil & Gas (DUG). I'd rather short some individual names as hedges, but since we cannot short, we have to use this method which is a very blunt object instead of a fine instrument.
  6. Friday, I began increasing my financial exposure (again counter intuitive) with one of our other long held names, asset manager Blackrock (BLK).
  7. I went through a list of about 25 tech names, to pick one to add exposure to this sector as a "non commodity" idea that could be in favor as hot money might try to escape commodities sometime in the next few weeks - I went back to a beaten down former fund holding Ciena (CIEN) - mostly because unlike analysts I liked their earnings report, and the stock just reported earnings so we do not have earnings risk for another 2.5 months unlike most of its brethren. In other words, hopefully much of the carnage is already in its past... the stock did behave very well Friday but in waterfall selling nothing will be safe - its all "relative". I am not sure how long I will hold this position - for now it is more of a trade. Truth be told, I'd rather buy more of our current tech holdings, but wish for lower prices to do so.
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.

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