Bookkeeping: 'Rising Tide' Performance Week 51

Week 51 performance of the mutual fund

Comments: Whew, we are closing out our first year in traumatic fashion. All things considering (5 corrections in 12 months, or is the start of the 6th? or just a continuation of the 5th?) we had been tracking to an excellent year but have given back nearly 5% of gains in the past 2 weeks, and the entire month of July has been the complete opposite of June when we avoided the market meltdown. I'm still reeling from last week when we correctly positioned for an oversold bounce with 90% long exposure AND our #1 position at the time had a takeover bid but we lost 2%. Talk about owning the wrong stocks. It's just been one of those... months. The rubber band that is "reversion to the mean" is definitely attempting to snap us back. This week continued the woodshed action, notwithstanding a day of respite Friday. It's still a good year but memory is freshest from more recent experiences and we cannot seem to escape this particular woodshed.

Frankly we are at a cross roads. Good results in the "global growth" space are not being rewarded because oil = potash = coal = iron = corn = coffee = natural gas = wheat. It's all the same. Apparently the global slowdown means nothing will be consumed any more. I don't mind being wrong and getting blown up by companies reporting bad earnings (ok I do mind but that has not been the case) - but right now you cannot win for losing. Some of the best earnings production I've seen in a decade is being systematically sneered at. So we're stuck. As I wrote earlier today [NuVasive - At What Price Growth? It Seems "Any" Price]

I really believe the dirty secret in this market is something I complain about weekly in the technology sector. There is very little serious growth (i.e. >25%) in the >$1 Billion market cap arena outside of commodities - we have a few pockets here or there, but most of those names are trading at stratospheric levels and/or reside in China or solar, where they get a P/E ratio of 8. And once you go below that size of company the risk increases substantially (smaller companies have potential for huge reward but many stumbling blocks along the way).

So on one hand it makes it easy on growth investors to target stocks in this era because the choices are so few. But with so many "growth" investors piled into these names, the valuations make one dizzy. It will work, until it stops working. And then you get Chipotle'd. Or worse - Crox'd!

So are choices are limited - (a) buy these worst of breed airlines, retailers, autos, financials, restaurants, home builders at the exact right moment and hope we nail it so we can ride the +40-50% in 5 sessions and then sit on the sidelines for the 8-10 weeks after that move. OR (b) pay 70-80x FORWARD earnings for the few companies with serious growth in non commodities [Jul 23: Healthcare Companies that Start with the Letter 'I' Outperform]. OR (c) buy the "safety" sectors that are immune from oil that the hedge funds ran to when abandoning global growth - oops, that [Jul 17: The Google Gap] did not work out so well [Jul 18: Did I Mention Healthcare is Safe? Gilead Sciences Down 9% on Earnings] for them either. OR (d) buy these ridiculous "global growth" companies that fit my "growth at a reasonable price" wheelhouse that trade at 10-15x forward earnings for 50-80-100%+ growth. Oh wait, those are the stocks down 30-45% in the past 2 weeks because crude could (gasp! cringe!) fall to $100. So that's not an option at this moment either.

I've been revamping and redoubling the hunt for names that the hedge funds are not piled into (going into smaller and smaller market caps in my search), so when the rats all jump ship we are not capsized - we've bought a few but the choices are limited if you want any sort of true secular growth and profitability in 1 company. In the larger and mid cap areas, few companies outside commodities without valuations in the 70-100x forward level, are not beset with troubling charts - look at Mastercard (MA) - look at Apple (AAPL) - these are not charts you want to show to a young child. They look to be breaking down.

So as they say, when in doubt, sit it out. As you can see from my posts, I have been using this respite (all 1 day of it) to build up cash, and sell off exposure to anything a hedge fund computer wants to destroy on the next leg down. The few areas I do want to be in, are not being rewarded for fundamentals. So that leaves us nothing but technicals, and their charts have bad set ups now that the hot money has gone to chase lovely Citigroup (C). We are in quicksand right now and frankly it's beginning to feel a lot like 2001-2002 in terms of the market. Speaking of - the bulls cannot even put together a proper rally even with levels of governmental socialism Putin would be proud of throughout 2008. You know things are pathetic when even an attempt to retrace to the 50 day moving average is a pipe dream, and the spindly 20 day moving average can beat you back. Either we are carving out one of the saddest bottoms I've ever seen or a lot of bulls are going to be trapped shortly. Again.

For the fund, we began making some more systematic changes late in the week after the stocks we owned in the global growth area failed to rally off either the Peabody Energy (BTU) or Potash (POT) earnings report. I don't consider Friday's action to be any sort of real reaction - just the type of oversold bounce after a hellish selloff that we've been seeing in (gulp) "early cycle" stocks the past year. Precursor? Further, I polled the readership and 84% of blog readers want to buy the commodity dip (no surprise since I would like to do it to) but the contrarian in me was alarmed it was still that high of a percentage. *grin* Since nothing on the fundamental side is working, that leaves us for now with these darn charts. And I have countless charts, in both the portfolio and watch lists, which look just like this

Regardless of name of the company or the sector, I generally employ a similar strategy on any chart that has this set up. If I've been "stuck" in the stock (holding it while it breaks support) and it bounces to resistance (former support) I am going to cut back exposure. I did a lot of that Friday. Then one of 2 things happens - it pulls back and I'll be "correct". Or it will push through and I'll be "incorrect". If it's the latter, and we see the beginning of a new move up (that is sustained longer than a few days that is) we should have many percentage points of gains ahead, so missing the first 3,4,5% should not be a huge burden. If it is *the* move (i.e. breakout) and not just a head fake. If it's the former, then we protected our hides to some degree. Seeing we have so many stocks in this position I spent the latter part of the week employing defensive measures and tossing in stock into the bear's mouth and raising cash. If we have to reverse that Monday or in 3 days, in 3 weeks or 3 months I am fine. For now - playing defense. Simple as that. I'll give up some upside for that "insurance". In fact another two of our fertilizer companies report Monday, so we'll have a test very quickly to see if gains can actually be held or if this is just another trap.

Both the S&P 500 and Russell 1000 only lost 0.2% this week (which considering the past 2 months is akin to a 3% gain in the old days). That makes it 7 out of 8 weeks of downside for the general markets. Rising Tide Growth, continued a very poor July with a 2.7% loss. Capital destruction has been hot and heavy this month; 1 more week to finish out the year. We're still far ahead of our goal to beat the indexes by 15% each year - it just has not been back weighted, that's for sure.

As always if interested in pledging an investment when fund is ready to launch (shooting for late 2008) please attach a comment here, or send me an email (need your state please). We have now breached >$3 million pledged - great news and thank you.

Price of Rising Tide Growth: $11.111
Lifetime Performance to date (vs Aug 3, 2007): +11.11%

Comparable S&P 500: 1257.8 (-14.16%)
Comparable Russell 1000: 688.5 (-13.52%)

Fund return vs S&P 500: +25.3%
Fund return vs Russell 1000: +24.6%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of July 2008.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates