Sunday, July 27, 2008

Bookkeeping: Weekly Changes to Fund Positions Week 51

Week 51 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: 18.9% (vs 1.1% last week)
50 long bias: 52.0% (vs 89.7% last week)
9 short bias: 29.1% (vs 9.2% last week)

59 positions (vs 65 last week)
Additions: EZCORP (EZPW)
Removals: Ciena (CIEN), Sterlite Industries (SLT), DryShips (DRYS), Vale (RIO), Mechel (MTL), Encore Acquisitions (EAC), EOG Resources (EOG)

Top 10 positions = 38.9% of fund (vs 34.1% last week)
32 of the 59 positions are at least 1% of the fund's overall holdings (54%)

Major changes and weekly thoughts
The month of July continues to frustrate us. As we spoke about last week, trying to time the "market" is much much much more difficult than making assessments of individual stocks but frankly the market has dominated trading the past year; as I like to type - we don't exist in a vacuum. Of the past 52 weeks I'd estimate the market's vicious up and down action has dominated at least 30 of them. And individual stock selection becomes nearly meaningless as the "everything must go" or "buy anything" mentality has dominated, with an obvious focus on the former over the past 12 months. Most of our outperformance has come during the "quiet" periods where the market is relatively listless and or at least not going up (or down) 2% a day, and individual company dynamics win out. Buying fundamentally good companies and allowing them to appreciate gradually is the market we thrive on, but that market has been absent for much of the past year. I've never seen some of the things we've been experiencing both from a governmental viewpoint and from a market viewpoint; many professional investors I've been reading for many years have written as much. As much as we tease Mr. Cramer some words from him this week that parallel much of what I am reading from many people I respect over the years.

New world: 5%, 10%, even 15% price swings don't mean much. Your screen is a snapshot that means little. You almost have to expect a 25% move in either direction in a financial over a couple of days. An airline doubles, halves. Oils slough off 25% in three sessions.

It's tough to own a financial and a resource company right now, the moments of elation so fleeting, the moments of depression so devastating. You almost have to trade them, which is way too hard for most people.

Here's where the real problem is. These stocks, like the financials, are not reflecting anything other than hedge funds buying and selling them. Should Chesapeake (CHK) have lost 40% of its value in a couple of weeks? Yes, if you think that natural gas is going back to $4-$5. No, if you think natural gas is going to be a fuel that will bridge the gap between carbons and naturals.

Yes, if you think that we will stop heating our homes and factories. No, if you think it will one day get cold or business will continue albeit at a lower level.

So as we've been saying most of the year - it is simply not a buy and hold market; heck "hold" doesn't even work on a weekly basis anymore because what goes up, gets demolished if not within months, then weeks... sometimes days. This is not my strength - my strength is finding stories early and riding the trend before the masses get there, allowing the ups and downs, and knowing I'll get it wrong some of the time. That is not this market. This market is waking up each day, knowing any position could be down 15%, and then tomorrow? Another 15% down or UP 25%. Totally random. This has simply taken a quite raucous marketplace where the house has the advantage but the individual can slip between the cracks to overcome and made it "Vegas" - total random toss of the die. I have my theories why which I've outlined in the blog, but "why" is not as important to me as "what". And it is "what" it is. We're trying our best to adapt with hopes one day we return to normal where fundamentals mean something.

Random statistic of the week - Berkshire Hathaway (BRK) is down 20% year to date. Many "safe" (non financial) healthcare, industrial, consumer non discretionary "grandma and orphan" stocks are down more. It's not easy being green - or staying so.

We've been calling for a global slowdown for a long time. The market sneered for a while, first denying there would even be a US slowdown last summer/early fall, and then when the pundits finally relented and said "minor slowdown but don't you dare call it a recession" the next sexy theory was decoupling - the rest of the world is immune to the U.S.. Considering the UK is a mini US, and Spain is making our housing bubble look like cake, we knew W. Europe would be toast, especially with a central banker who takes his job of price protection seriously. So that left us the emerging markets ... and with inflation rearing its ugly head there (remember inflation is not allowed to cross US Borders so we have very little here - ahem), the consumer in much of the rest of the world would be stressed. So here we are - the global slowdown we've been predicting for a long while has finally crossed over to consciousness to those who trade the billions upon billions of capital on a daily basis. Further, as more areas of the world weaken we've been saying much of this story of late (global growth) is based on the thesis that China will pay any price for any product - which they seemed able to do, but the first whiffs of drop off have been happening [Jul 6: Is the Buck Finally Stopping in Steel?] [May 17: Fast Rising Steel Prices Set Back Big Projects] [Jun 15: LA Times: Even the Chinese Expect Subsidy Decrease post Olympics] [Jun 26: Can a Near Term Top in Oil be Far Away?]

So the question with a thesis aside from whether you are correct or not is (a) when will the market finally wake up to it and (b) when it does wake up how much will it panic and overdo things? As an example we were negative on financials right from the beginning of the blog... but the market, after the first knock to the knees last summer, went racing off to new highs in September and October 2007 on confidence of the "Federal Reserve will save us - don't fight the Fed" and "this was the kitchen sink quarter in financials - it's all good from here" and "smart money aka sovereign wealth funds - are buying, so of course it's safe to buy financials". So we were routed in our positions betting against the financials. Because perception is reality. Were we "wrong"? Technically yes (prices went against us for a while) - but conceptually, heck no. So even those who are right intellectually can be destroyed in these markets if you bet against the herd in the near term. As a famous economist once said "the market can stay irrational far longer than you can stay solvent". So moving to the world economies (which obviously I've believed the pundits to be too positive on) - we're switching from "decoupling" to "no building or consuming will be taking place as the world shrivels into a ball" Many times there is very little middle ground in the market - people take things to one extreme or the other. The "shriveling" in China might take it to 7% growth rate, perhaps even (shudder) 6%. Growth rates we'd dream of. But we live in a day to day, week to week, month to month, and for hedge funds quarter to quarter world. People paid on the quarter only care about the next 90 days and exploiting gains in those 90 days. So we have to be aware of that and I contend technical analysis must go to the forefront over fundamental analysis in this environment. Because overreactions are replete and capital can be destroyed quickly in such situations. We are just mice dancing between the elephants of capital and their super computers. Just this past week, we found out that hedge funds have passed mutual funds in terms of volume of equity trading, despite controlling far less money. This is their era and the "marginal consumer" dictates the price - and they are the marginal consumer.

Keeping this in mind, and seeing charts that don't look too healthy we culled back a lot of exposure. 2 weeks ago we went to our largest long exposure since January 2008 (nearly 90%) since the market was down 6 weeks in a row and we anticipated All the King's Horses and All the King's Men would get their bailout hats ready for Fannie/Freddie this time (does that not rhyme? sorry). Guessing the market is a fool's game, but this one seemed obvious - we were correct. But we did not hold much of what the market ran into and managed to lose money on a oversold bounce week. Then this past week we lost money again in a flattish market. This does not make one too pleased. So we "called" the bounce but did not participate.

Now we need to see if we are at the beginning of a new trend or simply out of favor for a few weeks. We won't know until looking back a month or two from now but going with the technicals over fundamentals, things do not look promising in a lot of our favorite names. So we err on the side of caution for now willing to give up potential upside in the sake of capital protection. We'll have some great early tests this week with our favorite idea in fertilizer, Mosaic (MOS), reporting Monday and our favorite idea in coal, Alpha Natural Resources (ANR), reporting Tuesday. While coal is more of a 2009 story, we know the fertilizer story is booming so as always it is not the news, but the reaction to the news we care about. Will good news be ignored (bearish) or rewarded (bullish). Or will it even matter as economic reports (first revision of 2nd quarter GDP Thursday and the fictitious monthly labor report on Friday), oil prices, and the drudgery that is the banking system dominate the action. And with the "bounce" relieving an oversold condition we are back to where we were 3-4 weeks ago - not too happy of shape economically and a lot of stocks looking very troubled. As always an interesting week ahead...

Moving to a more defensive posture and seeing some of our favorite ideas breaking down we had another busy week in transactions (seismic shift actually), mostly built upon the idea of creating a larger pile of crumbs (cash). I've spent a very nice Michigan weekend trying to find new ideas that the hedge funds have not piled into, and its slim pickings out there - much of what is working of late outside of healthcare does not have what I'd consider "promising" fundamentals, but that is where the money flow has been. We do have a few ideas in the smaller cap arena which we'll present this week, and I might add some to the portfolio since frankly despite some warts they are where the money is flowing.

The larger weekly changes (chronologically) to the fund below:
  1. Monday, little action of material value
  2. Tuesday, sold down about half our Yingli Green Energy (YGE) stake - we have a winning position here from the last purchases so I wanted to lock that in, as wins are brief in this market and the chart is not doing so well. Plus we entered the week low on cash. Solar has really underperformed for a long time; if its not fretting about one thing it's another. I still contend once Bush is shown the exit, even McCain is going to seem like a tree hugger and the mood will improve but for now we reduce some exposure to this group which is not working. The valuations in the smaller solar names are bordering on ludicrous but valuation means nothing to a bear.
  3. I added to a name the hedge funds have not ruined yet - A-Power Energy Generation (APWR) on a classic pullback to support, while filling a gap. Within 24 hours we were rewarded, as APWR signed a very material long term contract with Thailand, and the stock surged. While this is currently our largest (long) holding, I took some off the table late in the week simply because (sing along with me kids) everything gets sold off in this market. For all I know this could fall 30% from here if/when someone decides to naked short it (still not enforced outside of 19 financial stocks baby!) just for fun and games (and to make their quarter). So if the chart breaks I'll break away. This is still a 2009/2010 story for me, but we are happy to make some money in the here and now.
  4. I closed optical networking name Ciena (CIEN) as we caught an oversold bounce and my thesis of buying a "value" name in technology to take advantage of the "hey oil is going down $2, let's all buy a tech stock" institutional thinking that been going on of late, did apparently not apply to Ciena. I still find the valuation absolutely compelling but once again bears could care less about valuation and I'm going with charts for now.
  5. Wednesday, I closed Indian mining name Sterlite Industries (SLT) and dry bulk shipper DryShips (DRYS) - the former as I exit India, and the latter as it was a minor position and the chart was not improving. DRYS chart is indicative of many names, a break below support, drift back upwards but beaten with the ugly stick each time it makes an attempt to break through. Until we see these stocks make strong moves through resistance I consider every burst upward a selling opportunity.
  6. I closed Mechel (MTL) because as we discovered last weekend the government was raising some fuss about pricing and early this week Mechel was "happily" announcing new long term contracts in mother Russia. Which means profit opportunities were vaporized in the dust. As the stock broke down below its 200 day moving average I said goodbye. Little did I know the carnage to come the next day. This name is really a shame because it is one of my top long term ideas, and I was hoping to have this name in the portfolio for many years to come. But right now there is zero visibility - the CEO could be in jail in a few months and the company taken over or this could just be a "love spat". I have no idea. When I have no idea, I leave.
  7. Tuesday I was remarking on the potential for Ultrashort Financial (SKF) to make a 50% retracement, in just over a week. Amazing. It happened Wednesday and the stock fell to its 200 day moving average where I picked a bit up, but not a ton because markets can overreach and if $111 why not $90? I did add a bit more later in the day while also pulling back from some of my "barbell plays" (i.e. stocks in sectors I don't believe in that bounce like mad every so often during times the rest of our portfolio is trashed) - so I cut back on Goldman Sachs (GS), and a bit out of the homebuilders which we began lightening late last week on their bounce.
  8. After stellar earnings from (BIDU), the stock bounced a good 15% Thursday AM where we let go most of our position. Could it run another 25% from here? Of course - but locking in gains is prudent in this "not buy and hold" market.
  9. I cut back Gafisa (GFA) to a holding stake (0.1%) as it approached multiple resistance. I am saying this constantly but once again, dirt cheap stock that no one seems to want anymore. Much like DryShips, the EXACT same chart - broken stock bouncing to resistance - I don't care about the stock, sector, or symbol - I sell those and am willing to pay back a higher price if the stock proves me wrong.
  10. I closed Vale (RIO) at (all together now) a ridiculous valuation. I was hoping the January 2008 lows would hold and there is still a chance. This is one very oversold stock and I could be selling this name in particular at a bottom. A chance I am willing to risk to be cautious.
  11. I started a beginning position in EZCORP (EZPW) - pawn shops are the new fertilizer. Ahem. I usually don't buy something right ahead of its earnings, but the company has preannounced earlier in the month. I guess when Big Lots (LOTS) and Costco (COST) begin to break down we can sing the praises of the "recovering economy" - people are abandoning these names and heading to places to hock their gold. Great. That won't stop CNBC from clapping and cheering at the government rebate induced "better than expected" Q2 GDP coming this week.
  12. Friday, I closed 2 natural gas position Encore Acquisition (EAC) and EOG Resources (EOG) - both fine companies trading at cheap valuations but the market is dismantling natural gas These now trade at levels last seen when oil was trading in the $70s. So just imagine if oil goes to $100, maybe these stocks can fall to levels seen when oil was $25. Did I mention things are irrational out there? We lost a bit on these stakes but nothing major - mostly we lost a lot of unrealized gains.
  13. Same theme on the Cleveland Cliffs (CLF) chart - need to see more strength and a break above key moving averages - until then, it's back down to a holding stake. Aside from this another name with a lot of drama surrounding it with its top shareholder fighting the management.
  14. Same Bat chart, same Bat theme - 2 coal names bouncing towards resistance - cut back both Massey Energy (MEE) and James River Coal (JRCC). Let me emphasize if hedge funds decide its time to get back into coal early this week these stocks could be up 15% in 10 minutes. I don't know. But until trends begin to last for more than 5-6 hours this is not my type of market. I'm still a conceptual bull on coal.
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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