Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 2

Year 2, Week 2 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: 15.4% (vs 22.3% last week)
58 long bias: 67.0% (vs 69.2% last week)
9 short bias: 17.6% (vs 8.5% last week)

67 positions (vs 60 last week)
Additions: Buffalo Wild Wings (BWLD), ReneSola (SOL), ICON (ICLR), Kendle International (KNDL), Life Sciences Research (LSR), Sequenom (SQNM), Mylan (MYL), Millipore (MIL)
Removals: McDermott (MDR)

Top 10 positions = 31.0% of fund (vs 30.7% last week)
37 of the 67 positions are at least 1% of the fund's overall holdings (55%)

Major changes and weekly thoughts
The market continues its "reversion to mean" trade - previously shoddy sectors are reviving and previous leadership groups are taken to the woodshed. While I understand the thinking, I don't agree with much of it. A weak globe does not, to me, signify a reason to rush into US retailers, autos, airlines, casinos and the like - neither does a few bucks saved every week in gasoline money. So with our timeline buying into these stocks well in advance of what I foresee as any real rebound is not in our near term future. Now, I could always be wrong and the U.S. economy will be showing a rebound "6 months from now" but I just don't see any evidence nor can I create a scenario mentally where an economy that is just now beginning to show job losses in scale, still suffering from a terrible housing market where foreclosures are accelerating, and a credit contraction environment as the backdrop to boot. Yes, Europe is weakening - we've been calling that for many quarters, and yes Asia is drooping which we've also been warning on - but aside from "by process of elimination all that leaves us is America" I don't see any reason to get too bullish about stocks that are dependent on a resurgence in the US economy. I think the economy gets worse not better from here. But again I could be wrong and ill positioned. We won't know until we look back in February 09.

Time and time again the equity market has "clung to hope" and tried to make a rally out of silver linings only traders, who apparently do not live on Main Street, can find. We've had similar 2 month rallies in Sep/Oct 07 and Apr/May 08. Both were proven wrong - the bond market signaled this in advance both times, and the bond market is once again saying run for the hills. But bulls are bulls and when they see the red cape they charge. We'll see if they get "speared" again. The S&P 500, which looked poised to finally break through the 50 day moving average, seemingly failed but rests right below this key support/resistance area. Right now that level is roughly 1305, and if the market could bust forward a run to 1370 might be probable. It would not make sense from an economic standpoint, but the market is not the economy. That said, we spent all last week getting rejected from this level so the onus is on the bulls.

I lack conviction about anything in this "George Costanza" environment where best is worst, and worst is best. Bad reports are being rewarded and good ones mostly punished. We usually hold some positions at 5-6-7% stakes but right now I have little trust in anything so most of our positions are at most in the 2%s range. I also have lack of conviction in any 1 sector so we're spreading our stakes over many sectors. That said, we've had a 2 month dismantling of the commodity sector and since they are no different then banks, retailers or homebuilders at this point; those groups had significant rebounds during the past year even when their fundamentals were deteriorating - so even if one believes the fundamentals are deteriorating at some point the market punishes the "crowded" trade - which at this point is sell off commodities. Maybe it won't be this week but my hunch is we are near to a bounce in the group. The question is how long will it last - but with broken charts everywhere we'll be selling into any bounce and if we are "wrong" and this is just step 1 of a much larger move up, we'll buy back positions as they show strength.

Outside of that group we've made some serious changes here the past 2 weeks, and have focused especially on healthcare and solar exposure. Solar is an example of a beaten down sector left for dead, treated no different than airlines or subprime lenders, so if the "pattern" of the "worst should rally eventually" continues - this group should have a rally in it. Healthcare is a quickly crowding trade but one of the few things working and the stocks are a traditional safe haven during recessions. That said it is ironic that healthcare which is a traditional safe haven (recession) is rallying, while "early cycle" stocks (which go up ahead of economic recovery) also are rallying. That makes little sense as they are complete opposite outcomes - but who knows how the PhDs have programmed the algorithms. So we added a lot of new positions BUT kept our long exposure consistent with last week - we simply moved the long exposure around into different sectors to strike a more balanced chord.

The larger weekly changes (chronologically) to the fund below:

1. Monday, we added to Apple (AAPL) on a breakout around $171s, but by Friday we cut the position back sharply as the stock seemed unable to break over $180. This is an example of the type of chart we used to make a lot of money on, as breakouts lend to sustained moves up - now those opportunities are much harder to find and seem to be located in very specific sectors.
2. I "capitulated" on coal, cutting back Massey Energy (MEE) and Walter Industries (WLT) in the morning, by that afternoon the stocks were plummeting but they seemed to stabilize (going sideways) later in the week. This might be a hopeful sign. I added a touch back late Friday but nowhere near our old exposure. Coal prices continue to hold up, unlike oil - but the quant hedge funds see no difference in 1 commodity versus the other.
3. EZCORP (EZPW) walked away from a deal it had previously announced; which management said would reduce the quarter earnings and full year earnings by 1 cent. In return for that the stock fell from $18 to below$14, or nearly 25%. That's the market for you. This is a very fragmented sector so it is not like Value Financial is the only company they can acquire for accreditive earnings. We doubled our position, up to a 2.6% stake but we were early buying in the $15.60s. This is right above the 50 day moving average which I had been hoping would hold (the stock broke down the next day). Now the stock is right below the 50 day moving average so if it does not quickly move back up, we have yet another broken stock that the hedge funds can short away at for technical reasons. So we'll monitor this one and if it begins a downtrend we'll be cutting back sharply - we are in take no prisoners mode. Fundamentals mean nothing.
4. Since restaurants and retailers now deserve double the PE multiple of companies growing 40-50-60% (for fears they might drop to 30% growth in the future) we started a stake in Buffalo Wild Wings (BWLD) - which is a company that actually growing in a very bad environment. That said, I am a bit worried we bought near the top and if we have another rotation (good is bad, but bad is good in reverse) this could be a losing position quickly - again I have no conviction in some of the stuff "working" right now so it's hard to buy and "tuck away".
5. After LDK Solar (LDK) obiliterated earnings estimates and raised guidance by an epic amount, we made some solar adjustments. We added to our LDK Solar position despite a very large move in the morning; we started a new position in ReneSola (SOL) as it is the clearest parallel to LDK, and we cut back Canadian Solar (CSIQ) ahead of earnings as we though it could face a similar fate to Yingli Green Energy (YGE) last week i.e. nice earnings but hurt by currency exposure and hence not enough of a "beat" to satisfy momentum lemmings who pile into stocks the night before earnings "gambling" for a headline number to drive a stock up. We were right on the CSIQ call as it was down 8% immediately post earnings. We continued adding to the solar exposure, especially ReneSola as the week progressed.
   
6. Our string of "good luck" continued as China Medical (CMED) surprised us with a convertible debt offering which is an invitation to short the common (institutions to this to hedge against the debt) The stock immediately dropped from $55 the previous day to $48s which was the 20 day moving average - 13% loss in a few hours. I had hoped that level would hold so I increased exposure; but it broke the next day so we cut back as the stock fell to the 50 day moving average ($45). If we did not have bad luck of late, we'd have no luck. If the stock breaks below $44, the 200 day moving average we officially have a broken stock and we'll run away even if the fundamentals are the best I can remember for this name since it came public. Fundamentals don't matter.
7. I spent the week cutting back one of only 2 big winners this earnings season, Fuel Systems Solutions (FSYS) - we took a 1% stake out in the $56s Tuesday and I took more out later in the week in the $58s. It's now down to a 1.3% stake and we've locked in a 40-50% type of gain here which is a rarity nowadays. I was able to read some institutional research and one plant is shutting down 3 weeks in August (Italy - Europeans are off) and 2 weeks in December so in an environment where people have heightened expectations that makes me a bit worried since there is some 'seasonality' - not due to the end market but simply due to their production ability.
8. Wednesday, we created a Contract Research Organization basket of 3 names: ICON (ICLR), Kendle International (KNDL), and Life Sciences Research (LSR) - we identified this sector a long time ago but (mostly) did not pull the trigger - the one name we bought was a Chines firm that has done nothing but go down despite solid earnings since last fall. While this is a bevy of names I consider this "1 position" for all intents and purposes.
9. Continuing our healthcare kick we decided to finally pull the trigger on diagnostic testing company Sequenom (SQNM) - this is a more speculative play than we normally have but a very unique company that could eventually be a big winner for us. In the near term it is impossible to guess which way it goes since this will be dependent on sentiment.
10. Despite not making any sense on a fundamental basis, I cut back Mosaic (MOS) Wednesday on the "good day" this week for commodities (4 days down, 1 day up) as it hit resistance. This worked out as the stock was pummeled on Friday. That said, I have hopes a double bottom "might" be forming on the chart, if it can quickly reverse and bust back through $106. Technicals mean everything; fundamentals mean nothing.
11. I started a position in generic drug maker Mylan (MYL) for a boring slow growth healthcare stock with a good chart. Again our "good luck" continues as competitor Watson Pharma (WPI) jumped 10% Thu/Fri on option activity indicating "hopes" for a buyout. Right sector (healthcare), right subsector (generic), wrong stock.
    
12. We closed McDermott (MDR) a global infrastructure company we've held since day 1 of the fund - without the ability to sell in after hours, after a ho hum earnings report - we were forced to sit through a gosh awful day in this name, and then sold on the bounce. This worked out in the near term as the stock was decimated for a large loss Friday. The stock is quite cheap here, despite some disappointing earnings, but that would be based on fundamentals which are currently not being used by the market.
13. Speaking of this group, Thursday we cut back Jacobs Engineering Group (JEC) - ignoring the great fundamentals and obeying the chart. This worked out (in the short term) as the stock immediately reversed on Friday.
14. Friday, we added to Mastercard (MA) on what hopefully is the beginning of a bottoming formation.
15. We started yet another healthcare company, Millipore (MIL) on nothing else than (1) sector and (2) chart.
    
16. Along with Apple, we cut back some Research in Motion (RIMM) to end out the week - RIMM's chart is not quite as toppy as Apple so we'll give it a longer leash.

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