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: 22.3% (vs 25.7% last week)
51 long bias: 69.2% (vs 52.8% last week)
9 short bias: 8.5% (vs 21.5% last week)
60 positions (vs 62 last week)
Additions: China Medical (CMED), Big Lots (BIG), Buckle (BKE)
Removals: DR Horton (DHI), Mercadolibre (MELI), Goodrich Petroleum (GDP), Yingli Green Energy (YGE), Pride International (PDE)
Top 10 positions = 31.0% of fund (vs 29.4% last week)
30 of the 60 positions are at least 1% of the fund's overall holdings (50%)
Major changes and weekly thoughts
As discussed late Friday [S&P 1290 is our Moby Dick] the market might finally be showing signs of breaking out of a sideways range from a technical standpoint. Whatever the economic backdrop we have to respect the potential for change if the market wishes to go up. To that end we dropped quite a bit of our short exposure late in the week, as it punished us both Tuesday and Friday on the 300+ Dow days. We just about never keep up with the markets on huge up days due to our hedged nature but many of our long positions were still out of favor as well. That said, we still have work to do to prove we can make a real counter trend rally but bad news is now seen as good news and as long as oil continues to retreat the consensus is all the ills can be forgotten - so we have to respect that just as we stood out of the way for some/most of the September/October 2007 rally and the April/May 2008 rally - when the market went up despite what we perceived as more ills ahead. We were correct then about the economic fundamentals but that did not stop the market from making some very large moves up before falling hard later. I STILL believe there are still many more ills ahead but the market will do what the market does - the stock market is not the economy; hope is eternal.
The question on everyone's minds is clearly "is the commodity run over?" - again, it really doesn't matter if it *is* or *is not* - perception is always reality. If enough people get on the same bandwagon the trade will be over for now. That doesn't mean it is over for the next 1 year, 2 years, 5 years or 10 years. But it can be over for months or quarters if hot money decides it is. It is as simple as that. What happens in markets is a good thesis is bastardized by "speculators" (if that's the word you want to use). Chindia is a real growth story - and the most important theme of our generation (investing wise) - bringing online hundreds of millions to "1st world" status. Anyone who watched the Opening Ceremonies of the Olympics had to be impressed, and I'd argue one could say mildly intimidated when you think of the precession, prowess, and "can do" behavior. If you take the Olympics as a proxy for the China story - the sheer magnitude of the numbers involved in the opening act really says a lot. But as I've said many times - demand for oil for example did not increase 100% in the span of 8 months, only the commodity price. So the "thesis" some of us have been investing on was there years ago, it is here now, it will be there in 5 years or 10. But "hot money" will overreach and overreact as they always do and cause massive gyrations. And it will cause many to ask "is it over?" or "did I miss it?" or "was it all a hoax"? In my humble opinion, not by a long shot but when the next leg up happens is anyone's question - it could be days, weeks, months, quarters, or years. The price action will dictate it to us.
We went negative on oil as it went parabolic [Jun 26: Can a Near Term Top in Oil be Far Away?] We were correct within 2 weeks. However, what we underestimated was every commodity would be treated the same as oil. Lesson learned. Many of the commodities being bludgeoned don't trade on open markets such as oil or natural gas - the individually negotiated prices for say potash fertilizer or metallurgical coal are not subject to big (investing) money speculating on price and driving it to places it never should be. They are set by individual parties and the price is the price - so unlike oil or natural gas I believe those prices to be quite accurate. But that does not matter as institutional money sets the most important price - the stock price. So no matter what the commodity fetches between private parties who actually USE the product in their business lines - the stock prices can go in completely opposite directions. Which they have for now. So frankly we have to treat commodities as nothing different than broken down US banks or homebuilders for now, especially the ones whose charts are broken - because that is how the marginal customer (quant hedge funds) are treating them. When they trail back up to resistance levels on the charts we'll cut back. We won't buy the downward spirals because we don't know where they end - just as we didn't know with airlines, retailers, banks or any other matter of sordid company. Those who bought those items a few weeks ago look "shrewd" but they left in their wake many who have been bottom fishing for a year in the same merchandise and having their capital destroyed along the way. Same will go with the commodities or any similarly "broken" sector - there will be some price where "value" will be achieved but if it's "here" or 5%, 20%, 50% or 90% lower I don't know. How much more liquidation needs to be done by the hedge funds as they pile out is a question only the Magic 8 Ball knows the answer to. Some bottom fishers will miss by a country mile and their capital will be destroyed (just as it was for other unpopular groups) - other bottom fishers will catch near the exact bottom and benefit from the most dramatic part of the move upward (and crow about it). We won't be in either category - when the charts show absolute strength we'll jump onboard as one day we'll return to a market when moves upward last more than a few days. We'll miss the first part of the move (and perhaps the part that makes people feel the "smartest"). For example....
Double bottom forming? Perhaps...
.... but people were saying that at $28 as well; now RIO is below $26. Maybe $26 is the magical "bottom" number. Or $24. Or $20. Or $16. If a stock can trade at 10x forward earnings, why not 7? Why not 4? Logic need not apply - only herd mentality. For my style until I see the stock back over $34 this is just a stock lost in space. Will I miss the "huge move" from $26 to $34? Yes. But I was told I'd miss the move from $28 to $34 as well, by being cautious. Or the move from $30 to $34. That's the problem with broken stocks - there are a lot of trap doors. Eventually someone is going to "nail it" and catch the correct floor. But many will have broken legs (and destroyed capital) before them. Ironically this is EXACTLY the type of chart that is now rebounding in many other sectors - but we don't buy those type of charts because for every person who nailed the bottom on Delta Airlines (DAL) are 1000s of people who lost limbs buying at $18, $17, $16, $15, $13, $11, $10, $8, $6, $5 - and finally a bottom was formed - only the last few buyers are making money and countless others in the $10-$18 range are praying today just to be able to sell for break even after suffering massive losses. To whit, after this enormous move in the stock, someone who bought 6 months ago is still down 50%. That's catching knives for you.
There are many ways to skin a cat - there is no claim our way is the best; it is in many ways a conservative bent. But currently with the market favoring "broken, and bouncing off bottom" stories, and away from "former high fliers" we are out of sorts with the market. So the near term solution is to find charts we like in the sectors that are working, and we're beginning our transition since we don't want to be a money losing operation for the next 12 months. Or 6 months. Or 18 months. Or however long the current "flavor of the day" trading is away from our themes. In the meantime many of our stocks currently taking major body blows continue to get cheaper by the day as they raise future guidance, and their stock prices continue to be hammered. One day this will matter. That day is not now.
The larger weekly changes (chronologically) to the fund below:
- We were out of pocket most of Monday and Tuesday - but we did some transactions. Early Monday we noticed a 9% pop in Fuel Systems Solutions (FSYS) - it was up 9% on a mention in Investor Business Daily Friday which Jim Cramer quickly jumped onto and as we said, we took some off the table selling to the hordes who jump into any small or mid cap stock he mentions. The pattern has been any gains are quickly demolished by this market, and this provided to be true as FSYS gave back all its gains by the end of the day Monday. Since we were not at the computer I just put in a market order to buy back the shares I sold Tuesday morning, plus more since a press release was out that earnings would be announced Thursday. My normal course of order is to sell down exposure going into earnings but I felt confidant that the analysts were woefully underestimating this company's earnings potential so I actually increased exposure going to into earnings. Obviously earnings were monstrous but I was worried that the impairment charge would confuse people - in fact the stock opened at a slight increase to Thursday's close but then ramped quickly throughout the day. We sold 1/3rd of the position at $48 in case the market reversed (or the stock did) but the stock was very strong. We'll sell more should there be any jump Monday as the stock is now around $54. The chart is obviously parabolic with Friday's move so this is more about sentiment than fundamentals or technicals at this point; so we'll just layer out along the way. Note I do not have trailing stops in Marketocracy.com.
- Pre-market Tuesday I noted China Medical (CMED) had quite the earnings and I was boggled that the market had not rewarded it - I could not watch it that day, but within 26 hours the stock was up 18%.... instead of chasing it in the $53s I said I'd place a limit order in the gap that had been created in the $50s and we were able to initiate this position late Thursday on a limit order, which I added to very early Friday morning with another smaller share buy.
- Late Tuesday I was able to access a computer and I saw the commodity stocks just blasted to the downside as the market rip roared 300+ points. As I yelled "they have no idea!" I put in a series of buys - since I now treat commodities as subprime lenders. I was hoping after such a horrific selloff that HAL 9000 would lay off the liquidation for 3-4 days and I could get an oversold bounce in which to sell these positions into but all we had was a 1 day bounce before the woodshed action began again. While I understand the "pure commodity" name selloffs, I continue to be blinded to the logic of why the global engineering / infrastructure stocks are taking such a bludgeoning. Most of their contracts were signed at crude $70 (or below) - remember crude was at $70 last August - people forget... so now with steel prices falling (purportedly) there should be less chance of projects being cancelled. However it appears global engineering projects are nothing different than a barrel of crude oil to HAL 9000.
- Wednesday, I closed homebuilder DR Horton (DHI) - the stock did show signs of life Friday but I decided to go with other methods for the "consumer is back now that gasoline is back under $4" theme. There are other homebuilders with better charts and there is also an option of buying an ETF to get a basket of homebuilders who much like solar stocks, all trade in 1 big group. Why I'd be buying a basket of homebuilders 2 years before a housing bottom is beyond me, but if the quant hedge funds want to buy them, we need to be along for the ride. We still own Lennar (LEN) in case the "trade is on".
- We closed Mercadolibre (MELI) and Goodrich Petroleum (GDP) - both were popping Wednesday, and with the market changing its mind 180 degrees every 24-48 hours we decided to just close out these 2 stakes. The former *could* fall back into favor since the "when oil is bad, technology is good" trade seems to be taking hold, but since it's in Latin America and all Latin America is, is a barrel of crude oil surrounding by a rain forest (to quant hedge funds) - we just don't know how it will play out. As we pointed out, until this stock breaks above both major resistance lines (50 and 200 day) it is all dead to us.
- We started a position in Big Lots (BIG) Wednesday - in this topsy turvey market - the following day retailers reported dismal same store sales AND weekly unemployment claims crossed the 450K threshold - the market imploded BUT the very next day oil was down and the previous days news was quickly forgotten because $3.50 gas will make all the pain go away. It is sort of utter nonsense but we began our move into retailers so we had some exposure to the consumer outside of housing stocks... this worked out well by Friday as retailers vroomed up. Polo Ralph Lauren (RL) also impressed us with earnings and that might be another option.
- We added Research in Motion (RIMM) in 2 large purchases, first Wednesday we took it from 0.3% to 1.9% of the portfolio on what looked like a breakout - Thursday during the market carnage it did not sell off (a good sign) and then it resumed its takeoff Friday where we moved it up to a 4.4% stake.
- We closed one of our Chinese solar names, Yingli Green Energy (YGE) after a disappointing reaction to what I considered quite a good earnings report. After all, who needs solar in a world of $30 oil (which we area headed to!) - while I like this name fundamentally the chart stinks and fundamentals mean little to me at this time. One day this sector will be in favor and the stocks will pop 40-50% in 2 weeks as they do a few times a year. I am eyeing First Solar (FSLR) as the sector proxy and frankly it is a chart in trouble.
- We closed oil sea driller Pride International (PDE) - hoping it would of been bought out by now - on its earnings spike Thursday.
- Thursday we initiating a position in Buckle (BKE) another retailer whose been able to produce great same store sales comps in a terrible environment. Plus oil is headed to $30 so the malls will be teeming with indebted Americans.
- Of Tuesday's "they know nothing!" buys only A-Power Generation Systems (APWR) bounced and that is only because what appears to be a bear raid (naked shorting) took the stock down to $19s before a huge 20% type of reversal in the last 45 minutes (yes, very normal behavior - not) - anyhow we took some of that profit off the table. I like this name - a lot. But the market could care less and until it breaks above moving averages we cannot have the type of size we want in the stock.
- Every contract research organization in the world has ramped by a large amount the past few weeks - except ours. The stock of WuXi PharmaTech (WX) really behaves with no rhyme or reason but it *could* be beginning a breakout - I added some late in the day Friday but if it begins to break down (which it has done continuously for months on end) we'll get right back out.
