Bookkeeping: 'Rising Tide' Performance Year 2, Week 5

Year 2, Week 5 performance of the mutual fund

Comments: We continue down quite an amazing and historic time for financial markets. After we get through "this" however long "this" lasts, we're going to marvel at how easy the following era of stock market will be. I speak not just from my experience from reading the comments of many who have been in the market 20,30+ years - they all come back with the same comments "never seen anything like this in all my time". So if you feel twisted like a pretzel and feeling like banging your head against the wall - it's pretty much the same for all out there.

We've been churning for 2 months now. [Churn] This week we've broken out of the more narrow churn of the past month and into the wider churn range of the past 2 months. Now the question is do we mount an attack back down towards the floor of the churn? (S&P 1200) or move back into the range we've been "enjoying" the past month. I don't know. But this is classic bear market action folks - people are being dismantled sector by sector - the grim reaper is visiting all safe havens and making himself known. The action in individual stocks is far worse than the indexes. Some of the best managers, both in mutual fund world and hedge fund world are simply being blown to pieces. I highlighted earlier this week (before the Thursday meltdown) some of the "best of the best" mutual fund managers and how they are doing [Keeping Up with the Joneses] It is quite amazing to watch multiple 3% (or in some cases 4%) down days in some of these funds. Most funds can't, or choose not to, carry high levels of cash - the company line is "people pay us to invest, not hold cash". Technically I suppose that is true, but I think people would prefer to pay you to make the most amount of money over the long run? Or maybe that's just me.

As the data leaks out about the much more secretive hedge fund performance, we see there is a lot of carnage happening there as well. I have to say, not only do you have to be doing this full time (I'm not at this time) but you almost have to be watching minute by minute, since things turn on a dime (see today). I fortunately dumped some short exposure there this morning and went in and bought some very oversold merchandise or we would of had a bad day. Instead we did ok. For those curious on yesterday's results because I saw many peers down 3.0-4.5%, we were down 0.15%. On the flipside to that, we've been lagging when the market takes off to the upside so there is always a cost for caution, as well as a reward. As I keep repeating, the only thing that will really hurt us is a long sustained move upward and I just don't see that happening. The sideways action without any real move is not "killing us" but sort of like a leak in a balloon - a lot of individual stocks are doing worse than the market so we're getting the death by a thousand cuts during the churning period. So I simply go back to the opening sentence - we continue to live in historic (and difficult) times as many of you who manage your own portfolio are now experiencing. Not only do you have to process all the myriad data points, and sentiment changes but now we have to know whose hedge fund is liquidating and whose hedge fund is betting against someone else's hedge fund liquidating - that's simply not possible, so higher than usual cash and smaller than usual positions remain our standard.

Just as in August 2007 we now have a period where liquidations seem to causing some major dislocations in stock prices. While not predicting any market moves because usually those end up making one look foolish, we've been churning BELOW major technical averages which is bearish so I believe the greater trend is still down, although we've have oversold rallies along the way. Which will only serve to frustrate the majority of actors in this play we call the stock market. While there are periods like January and June 2008 where selling is endless, day after day, more common are the selloffs interspersed with oversold rallies which is similar to how we ended the week. But if you are positioned wrong you can lose 1-2% within an hour or so in this market. It is simply treacherous. As I've outlined over the past 5-6 weeks the best strategy now seems to simply wait for something to get beaten to a pulp and try to place some buys somewhere near to the bottom, wait for the short covering/bargain hunting - and sell into that rally. We're trying that again this AM with a series of buys, esp in coal and fertilizer - we could be out by Monday for all I know as the fertilizer especially rallied well the rest of the day. How do you trust any sustained move in this market? I just don't think you can. I call it the 'dart in and out' market - even for shorts you cannot stay too long (unless you are in commodities) or risk giving away your entire gain within 48-72 hours. The time frames for holding positions successfully simply remain out of realistic realm for mutual funds (and apparently most hedge funds who don't close their book and go to cash at 4 PM each day)

It sounds boring, it sounds repetitive but the best strategy right now is to "stay in the game" (i.e. don't lose say, for example, 38% of your clients money in 8 months) until the market turns more sensible and easy. If you don't have capital when things return to some semblance of normal, you won't have a chance to benefit from the turn in tide. So for a very short term time here we're more "long" than we've been in a while simply because of that treacherous day Thursday but by Tuesday/Wednesday (or heck Monday) we might be back to our turtle stance (hiding under the shell). Things are changing that darn fast around here. We continue to focus on healthcare although my fear is that area has "held up" so it must be punished soon enough and we continue to expand into (ahem) retail. Solar which helped us the past few weeks punished us relentlessly this week, however we cut back our exposure to some degree - commodities (which we also cut back on heavily) still hurt us badly even with the light-ish exposure we still have. When stocks fall 10-14% a day having just a 1% exposure across 8-14 names adds up. But they now appear to me, like banks 90 days ago, beaten on the side of the road - so we should get at least some oversold bounce - which we'll sell quickly. The inability to short individual names continues to hurt our performance as we've made some nice calls on "what" to short, but can't "do" it.

We had a short week with most of the fireworks Thursday: the S&P 500 lost 3.2% and the Russell 1000 lost 3.4%. Rising Tide Growth struggled Tuesday & Wednesday as solar/commodities got smashed but did well Thursday and Friday and ended up losing 1.3%. Considering the widespread damage this week, this is one of our better weeks in a while, and we made up some nice ground on the indexes. When down 1.3% is a good week, that's a reflection of a cruddy market.

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 are now at roughly $4 million pledged - thank you.

*** Year 1 Results here: +10.1% vs -14.0% S&P (+24.1%)

Year 2 Metrics

Price of Rising Tide Growth: $10.520
Year 2 Performance to date (vs Aug 1, 2008): -4.46%

Comparable S&P 500: 1242.3 (-1.43%)
Comparable Russell 1000: 678.6 (-1.69%)

Fund return vs S&P 500: -3.0%
Fund return vs Russell 1000: -2.8%

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 for year 2 is closing price August 1st, 2008.
SP500 : 1,260.3
Russell 1000 : 690.3

Please click here: fund performance for previous updates