Wednesday, July 23, 2008

Bookkeeping: Cutting Goldman Sachs (GS) Exposure

I have no idea what that was this morning, but it "felt" like a major hedge fund either being blown up or at the least being cornered and needing to puke up incorrect positions - everything financial was squeezed up, and everything commodities imploded. Almost 1 for 1. Just unbelievable action and really what does it say about our system when our major banks are moving 30% a day, and 100% in a week. Whatever is happening out there right now... it really has very little to do with investing. We should just move these exchanges to Vegas to reflect the current state of affairs.

Anyhow, I said yesterday I wanted to see that Ultrashort Financial (SKF) get down to the 200 day moving average of low $110s and we got there this AM. It has now lost just about 50% of its value in just over a week. Truly amazing. I began rebuilding it in the mid teens, but am a bit shell shocked by the action so I am treading slowly; I've taken it up to 1.9% of the portfolio - in the past this has been as much as 7% of the portfolio. This instrument could be $140 or $80 in a week the way things are going and odds could be 50/50 on either direction - hence no advantage. The viciousness of these reversals is something I've never seen.

Along with that I took another layer out of both the homebuilders (not a ton) but some and also cut back Goldman Sachs (GS) severely as it now approaches its 200 day moving average of $190. I sold in the upper $180s reducing the position from 1.2% to 0.3%. We made a nice profit here and these are the only things that have been working for us the past week or so. If it breaks through $190 and begins to gallop we will buy it back but I am assuming the financials need some sort of breather here. I could be wrong.

Frankly these moves have nothing to do with fundamentals anymore - simply huge short squeezes and huge transfers of money from 1 pocket to another. So you know just as much as I do what will happen in the next 5 minutes or 5 hours. It is completely random action and the magnitude both up and down is jaw dropping. In fact you have a lot more flexibility than I do, since I have a lot more positions and trading out of 20 global growth positions and into 6 financials, and then reversing the whole trade 2 hours, or 2 days or 2 weeks later is just not my thing. But that is all that is working right now. This market seems very dysfunctional to me. The market usually has inefficiencies but whatever is going on right now, is beyond me.

With my positioning I am still net long financials but barely. If you consider the homebuilders financials than I suppose I am more long and since everything is being traded as one big monolith these days I guess homebuilders might as well be financials.

At this point with the crazy action I would not be surprised if at some point in the next week the commodities did a move very similar to the financials, and they reverse roles. Or maybe some of these financial stocks, up 100% in 5 days, can put on another 100%. Why not, anything is possible in our socialized markets.

Long Goldman Sachs, Ultrashort Financial in fund; no personal position

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