Bookkeeping: Weekly Changes to Fund Positions Week 48

Week 48 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: 3.2% (vs 20.2% last week)
60 long bias: 86.5% (vs 64.6% last week)
9 short bias: 10.3% (vs 15.2% last week)

69 positions (vs 62 last week)
Additions: Ultra Financial (UYG), Canadian Solar (CSIQ), Walter Industries (WLT), LDK Solar (LDK), Fuel Systems Solutions (FSYS), Energy Conversion Devices (ENER), James River Coal (JRCC)
Removals: N/A

Top 10 positions = 28.2% of fund (vs 23.7% last week)
48 of the 69 positions are at least 1% of the fund's overall holdings (70%)

Major changes and weekly thoughts
Another tough week in the markets - we won't rehash the news stories because anyone reading the blog for more than a few weeks has seen it all predicted here. As we were warning throughout that "it can't get worse than this" and "the recovery begins 2nd half of 2008" rally of April/May, I had repeatedly typed it had all the scents of that September/October 2007 rally of the same ilk - except the buzzwords then were "The Federal Reserve will fix this - don't fight the Fed" (they fixed it all right), and "the kitchen sink quarter in financials is in". Remember, the pundits were not even acknowledging the chance of a recession at that point - that didn't happen in most major brokerage houses until December 2007. Humans are if nothing else, very repetitive animals and we saw the same hopeful behavior, and same results. In fact we have now seen 5 such "corrections" since last summer, all coming off the tail end of a "ever hopeful" period of the "worst is behind us". The only difficulty as an investor is knowing when the Kool Aid stops flowing... we were typing in September/October the market was missing the story and this rally was ridiculous just as we were typing in April/May the market was missing the story and this rally was ridiculous. But to sit on the sidelines chiding the market for rallying 10%+ for no good reason, means leaving a lot of money on the table. So as always we try to act as the adult in the corner, chiding the kids while they bathe in Kool Aid but trying to stay involved so we get the upside, but make sure we keep a level head and realize the party will end badly. And so it has. Again.

As I always like to say, it only matters when it matters. Frankly the economic news is very unchanged from what it was for much of the winter and spring - the only difference is the acknowledgement of the circumstances. Some months the deteriorating situation is acknowledged (and the market falls); some months it is not (the market rallies). Unfortunately for the buy and hold crowd, I have to say I believe this is going to be the pattern for quite a long while. I think housing will deteriorate quicker than most people assume (i.e. prices falling) and most of the current "activity" in the hardest hit markets are foreclosure sales - not true buyers/selling meeting. Once the sellers who still believe they will get 2006 prices face up to reality (much like stock market participants) I believe housing prices will have their swoon and it will be relatively sharp. And from there we can have the makings of a bottom - my hunch is late 2009 into early 2010. But everything in this market is levered to the beast that was the housing bubble so until we get stabilization in housing prices I have a hard time seeing a new bull market emerge. Now on top of that we have Federal Reserve stoked (not created, but stoked) commodity inflation which is a wildcard - the higher prices go, the longer our recovery. But I do look forward to the day we have a very boring blog where all I type all day are "everything is going well, malls booming, auto sales booming, housing flying off the shelf". It will be a lot less work on my end - unfortunately, I don't see that day happening for quite a few years. Uncle Alan Greenspan's bubbles have created inflated assets worldwide and we now are seeing the other side of that. Once the deflation is over, we can go about our normal business.

Despite taking some hits this week, I've been much happier with the fund performance on this go around (correction) than in previous episodes. Throughout June our global growth type of long positions continued to perform although we began liquidating them into the strength (too early in many cases) anticipating a week like this. We stood aside throughout the month with high cash and short exposure, ignoring the pundits call for the repeated "the bottom is in" and "it's time to get into this market full of great value". Our buying has been sparse throughout June, as we were waiting for merchandise we were focused on to finally become discounted. This past week was the first week we really saw that begin to happen. So following our strategy we began layering into favorite names, recognizing we have no idea what or where the bottom is, but when we see stocks we like faltering 20-30% in a week's time, we want to begin increasing exposure. Is this the bottom? I *still* don't think so, but that is a gut call and the market is famous for making people look foolish. If past is prologue we might have one of these transition weeks where the markets do falter (some) but not as bad as previous weeks - however the strongest groups of the past (global growth) take much more serious damage. So I'm looking to see a market that once again looks better on the surface but with potential for some individual damage of much higher degree - there have literally been weeks during previous corrections where the indexes were up, but the fund was down 4-5% as specific sub sectors of global growth were hammered as people ran to "early cycle" recovery stories in financials, retail, and homebuilders. To whit, I've cut back our short exposure to those sectors since when "this type" of week happened in the past, not only were some of our long positions losing 10-15% (sometimes in 1 day) but our Ultrashorts in Financials, Real Estate et al were hammering us to the tune of 6-10% losses. Again, there is no guarantee this is how it plays out but in each of the previous 4 rolling corrections we had a period like this so it would not surprise me to see this action soon. I've tried to position us better than in the past if this indeed is how it plays out. Again, one advantage of investing in a fund like this is, sometimes I will be correct - sometimes I will be wrong - but instead of staring at a NAV and not knowing the thinking behind the drops or increases, you'll at least be in on the thought process (even if you disagree with it).

I thought this week, I'd take the time to do something I use to do more often, but since it is a time heavy exercise with the data tools I have in Marketocracy.com (i.e. I need to do this all by hand) - and that is to break out the portfolio by sector. This is a good time to do it because (a) I want to explain why the # of portfolio holdings are increasing and (b) it shows a little of the strategy as we enter what I believe might be the tail end of this leg down in the market. What I have below is all our holdings by sector - the number next to each sector title are the # of stocks we own in this sector, and the percentage is what % of the portfolio that sector is as a weighting in the fund.


First, I've tried to keep the number of holdings generally in the 50-55 range (on the long side) but we are currently up to 60. Why? I am using a basket approach in every sector - and have increased this especially in the solar field (where we've been burned by focused holdings in 1-2 names) and our new "non solar alternative energy" sector which we've made a 3 stock mini basket. The way I view it is fertilizer, while being 4 stocks, is 1 position. Coal, while being 5 stocks, is 1 position. Natural gas, while being 4 stocks, is 1 position. US housing, while being 2 stocks, is 1 position. Why? These all tend to trade in tandem (directionally) although the degree of gains individually does differ. But which will be the "favorite" of the market - is anyone's guess. So while we have 60 names on paper, we have far fewer "positions" from a practical point of view. Please note - this basket approach doesn't apply to say technology or even financials where a Goldman Sachs (GS) is a very different company from Mastercard (MA). But contrast that to say natural gas where there are upwards of 40+ public companies - I have my thoughts on which are my favorites but the market may go in a completely different direction so I'll place out multiple fishing lines and hope the market chooses one (or multiple) of our holdings as the "Golden Child" of the next move up.

Second, what is the current strategy? This pie chart looked very different a week ago. Entering the week we had cut back our commodity exposure (global growth if you will) - coal was much lower, fertilizer was somewhat lower, natural gas has been cut back, and oil services has been cut back. Financials exposure was lower as I just bought Ultra Financial (UYG) this week. Solar exposure was far lower exposure - but these stocks have been decimated the past few weeks, so I finally created a sizeable position after some of these names have lost 40-50% of their value from recent highs. The "non solar alternative energy" was a target list of 3 names - 2 of which I was waiting for sizeable pullbacks - which we finally got over the past week and a half (I did not want to chase these names like most people do and then see them reverse 20-35% on me, which happened to a lot of people). So this position barely even existed 2 weeks ago in the portfolio but now is up to 6.5%. Etc. Etc. So with the sizeable pullback in coal (this week) I did begin to make a serious exposure there - is this the bottom in these names? Doubtful... we'll add more if they fall more. Same for fertilizer. You can see I still don't have much exposure to oil & natural gas - while everyone throws "commodities" in 1 bucket, I am discerning. Natural gas has held up the best, so I think it still remains most at risk for a reversal - I am willing (and wanting) to add exposure here but I want to see some pullbacks like we saw in coal this week. Will I get it? Maybe - maybe not. If not, we'll apply the money elsewhere. Same for oil services. The metals have been trashed and we began increasing exposure to Cleveland Cliffs (CLF) for example but I'd still be wishing for more of a pullback in some of these names to increase exposure.

So this is a general "roadmap" of what we are doing - we began to increase exposure in names that have been hit the hardest but still holding out for worsening action in groups that have not. Meanwhile we're "rotating" to the absolutely trashed groups in the meantime, trying to catch a 2-3 week wave of "oversold" bounce in those groups. Which we'll sell - and then eventually short against (retail, financial, homebuilder). Could we have what I term a "waterfall" selloff and each and every group demolished next week(s)? Definitely - but hard to model a long mutual fund in that regard. We have followed our gameplan to the maximum, and still hold 3%ish cash and 10%ish short exposure - even after a bevy of buying this past week. Again we've held out all of June in 20%ish cash and 20-25% short exposure waiting for the final shoes to begin dropping. To start rolling that last part of the cash/short exposure over to the long side we are going to be needing to see 8-12% type of drops in individual names. And if that happens, we're going to be like 99% of other mutual funds (for once) and be quite near 100% long. While I think this market has a long period of sideways to down (with large "oversold" rallies contained within it) nothing goes straight down (or up) - although it has been straight down for 5 weeks. Timing is paramount in such an environment.

As for the week ahead, believe it or not we have earnings season kick off with the traditional first big name - Alcoa (AA) on Thursday. As if we did not have enough to deal with ;) Only a few interesting names on the docket from my end with global infrastructure name (and former holding) Shaw Group (SGR) out Wednesday but we do have General Electric (GE) out Friday. After the disaster they sprung on us last earnings period [Apr 11: GE Warnings and Import Prices Show us Real Inflation] , the contrarion in me says after such destruction in the market, and such a bad mood - simply an "in line" number from them will brighten the mood of the market and we'll go back to "it's not as bad as we though, we can come out of our fox holes" type of thinking. Unless crude oil is $155+ by that point. ;)

After a lull for most of June, it was a very hectic (short) week for us - the larger changes (chronologically) to the fund below:

1. Monday, most transactions were of the ETF variety...
2. Tuesday was an incredibly tricky day, as the market opened down - threatening to break support - than rallied hard - then broke down again - once more threatening support and looking as if it was going to roll over - before a rally towards the end of the day saved the markets. Early Tuesday I continued what we've been doing for weeks - cutting into the "generals" (the leaders) in fertilizer, coal, oil services, and natural gas. By the end of the day that looked like a foolish move since we had such a promising reversal but by the next day it looked smart as coal fell off the cliff and other leadership sectors were also blown apart.
3. We cut Apple (AAPL) as it headed towards the 50 day moving average (from below) - the chart actually held up quite well all week and we'd be willing to buy back on a push above the 50 day ($173s) as this would signify great strength in a perilous market.
   
4. We began a new "trading" position in Ultra Financial (UYG) which is the inverse of the tool we've been using since last August - Ultrashort Financial (SKF). This ETF is down 35% in the past 30 days, so hopefully we are catching it within the last 5%ish of it's fall and can get some nice hedge from it on a "rotation" into these names (however short term). The hope is to hold this for a few weeks to 6 weeks and derive a nice gain when the inevitable "oversold" bounce happens in the sector. Then we'll switch back to SKF - the carnage in financials I'm afraid is going to be with us for a long time.
5. I've changed tactics on solar - since my individual selections have been not what the market likes I've decided to adopt a more basket type approach that we utilize in other sectors, and used the recent selloff in the sector to really add across this group. We started off with a new position in Canadian Solar (CSIQ) - the thesis here was the stock had held up the best, and was holding its 50 day moving average unlike all other peers - and was down 30% in just 2 weeks. Well that theory lasted all of a few hours as the stock was pummeled for another 15%ish loss within 48 hours. We added a bit more later in the week (Wednesday/Thursday). This is one group I am abandoning my typical strategy of buying on strength or on breakouts because simply put the moves are so quick, and so strong by the time you are buying on strength the move is sometimes 1/2 over. So we are just going to systematically buy as they fall, knowing that momentum will return at some point to solar. This happens over and over and over in the 2 years I've been investing in this sector - frankly it is a bit bemusing to watch crude oil $145, coal at records, natural gas flying and solar stocks (which should benefit from this troika of events) demolished to the tune of 40-50% across most of the stocks. But no one said logic had any place in the market.
   
6. Wednesday the coal carnage began with many names down 17-20% in 1 session alone. This was long overdue as the charts had turned parabolic. We began a new stake in an old favorite that we never pulled the trigger on, Walter Industries (WLT) - much like solar I have some favorites in this sector - but unlike solar the market has agreed with me on whom the favorites are, but I am willing to take a broader basket approach in this group too.
7. We restarted an old position in LDK Solar (LDK) - just another name to the solar "basket" - we had last sold this name around $36 only to watch the stock run to mid $40s. But now we are able to rebuy near $32. If you haven't gotten the picture yet - solar is a very difficult sector to "buy and hold" - the inherent volatility of this group is among the highest I've ever seen. I added more to a current position in Yingli Green Energy (YGE) as well.
8. We began our 3rd name in the "non solar alternative energy" space with Fuel Systems Solutions (FSYS) in the $32s, with a target of adding more on next support at $28. We got that $28 level within 24 hours - this is such a "generous" market, eh? While we overpaid in the short run with the initial purchase - we did not chase it up in the mid $30s and into near $40 range, so we did not suffer (most) of the quick reversal many did in this name (Louis Navellier by the way recommended it recently in the upper $30s - his subscribers must be happy) Again, I wish I had bought in the low to mid $20s when I first identified it but I wanted to do more research before I pulled the trigger and the stock simply was a moon shot straight up with no pullback. So now we get the pullback and we have to stick with the conviction despite the stock price acting haywire and take advantage of the opportunity. Certainly it could go lower in the near term for all we know.
9. We added to some Goldman Sachs (GS) - the financials, all things considered, held up well this week. Only when the market truly looked like it was about to fall off the cliff (which was multiple times) did they weaken....
10. We had cut back our position in Cleveland Cliffs (CLF) to almost nil far too early and left a lot on the table - as the stock fell from $120 early this week to mid $90s we upped our stake materially to 1.7% - we added a bit more Thursday on the morning drop (not substantial) - a move to the $80s or $70s would have our tongues wagging and we'd love to make this a top 3-5 type of position in the fund at those prices. I remain amazed this company has not been bought out.
    
11. Thursday, to finish off our solar basket we had waited very patiently for Energy Conversion Devices (ENER) which we felt was overpriced and without sense in the mid $80s to fall to a meaningful support level - we achieved that with a move to $59 (50 day moving average) in the morning and struck. Does that mean it was the bottom and it cannot go lower? Certainly not, but we got a 30% discount from prices just seen in the recent past.
12. We bought in the abyss Thursday morning - spreading purchases across a lot of the generals we had just sold off Tuesday for much higher prices, along with some other names we had been waiting for "sale prices" on.
    
13. To finish off our coal exposure we began a trading position in James River Coal (JRCC) near its 50 day moving average in the low $40s - a move to the mid $30s or so would have us adding.

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.