Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 7

Year 2, Week 7 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 (1 position [SHV] + cash): 38.5% (vs 34.9% last week)
37 long bias: 49.8% (vs 47.5% last week)
7 short bias: 11.7% (vs 17.6% last week)

45 positions (vs 46 last week)
Additions: Luminex (LMNX), AeroVironment (AVAV), Constellation Energy (CEG), Amazon.com (AMZN)
Removals: Fuel Systems Solutions (FSYS), Exactech (EXAC), American Superconductor (AMSC), National Oilwell Varco (NOV), Alpha Natural Resources (ANR)

Top 10 positions = 23.2% of fund (vs 25.2% last week)
31 of the 45 positions are at least 1% of the fund's overall holdings (69%)

Major changes and weekly thoughts
I keep typing "a historic" week over the past year, but they just keep getting more historic. But it will be tough to ever top this one. Not only the events that unfolded, but the volatility - four separate days of 4%+ moves, in diametrically opposite directions to boot. Amazing. It is very difficult to read anything into any stock price right now because now not only are fundamentals thrown out the door, so have technicals - it's all trading based on news flow which is impossible to predict. I do expect the bailout of the century to pass but over the next few days as the political kickball happens I expect the market to react viciously one way or the other and there is simply no edge to that for us. Who knows what will be announced on CNBC at 11 AM versus 3 PM etc.

A quick word about the "mother of bailouts" from what has been coming out this weekend. I threw a roundball guestimate of $500B. It looks like it is going to be $700B. But that even has a caveat from my interpretation. It is a $700B limit at "any one time"; i.e. this is the amount in liabilities that can be outstanding at once. This is a 2 year program. So therefore a scenario could be built where the cost is far higher than $700B as assets (I use that word loosely) are bought to the $700B limit. Then some are peeled back off into the general market, as another tranche is bought by the government. Hence the ceiling is quite limitless - for 2 years. The other question is what price will the assets be bought for... many say if you put the current market price out there - it would push many financials into insolvency. Which is not exactly the reason for the bailout. So will the government pay a "higher than market" price? Making it harder for the new owners (us) to make money on the transaction? Oh the devil is always in the details. Last - we were promised late last week this was to buy up mortgages and mortgage securities. Ah, promises - made to be broken in Washington.

• The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities. Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
• The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.
• ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''

If the US dollar somehow rallies on this, I really give up on making any sense of it all. The potential obligations have ballooned in the past two weeks and we're looking at a very adverse outcome for all of us - meaning much higher long term interest rates as the "risk" of the United States rises exponentially. Remember, we pointed out the US could lose its AAA rating many months ago [Apr 15: Could the US Lost its AAA Rating?] if they did the (then farfeteched) Fannie/Freddie bailout. This is way beyond that. Now the question is the general asset deflation stronger than the government re-inflation forces. Very interesting but either way the US dollar should be moving farther and farther into junk territory - not the 'safe haven' proponents are touting it to be.

The market sold off tremendously in the first half of last week and then rallied just as ferociously in the back half of the week to essentially end where we began. Which is right below long term resistance. With all the cross currents - along with movements against short sellers it really makes what was already an impossible market to gauge even more so. So I am ambivalent going forward and assume anything can happen. But for now we remain below key resistance areas - 1260 on the S&P 500. Many stocks now have huge "gaps" in their charts as we had a market open Friday in which countless stocks opened much higher than they closed Thursday. This does not seem the type of market that those gaps won't be filled.


Again, as we've discussed many times in the past we have 2 issues - financial/systematic and economic. Everyone is so focused on the financial/systematic risks the degrading economy gets put to the backburner. While the bailout of bailouts will offload risk out of the private sector and into the public sector and hence is a "win" for Wall Street we will still need to deal with the real economy. And a system with fewer players, and tigher credit has real implications on the real economy. As with all things on Wall Street most only look at the tree ahead, instead of the forest behind it. There are still many issues ahead of us, and we are in for a period of extended malaise in my opinion - in the economy. The stock market has a mind of it's own many times, and euphoria can overtake reality many times... we can look back at the huge rally in financial stocks off the July 15th bottom. Which obviously was reversed within a month and a half - in dramatic fashion. Again, this makes the market more tricky than ever. We have been swinging between hope and reality - and you never know when one will dominate. Those who were naysayers on that rally off the July 15th bottom (hand raised) were "correct" eventually but not before taking pain and missing out on some of the action to the upside.

For the fund we continue to shrink in size, and exposure to the market. It is dangerous from both sides - as this week has shown. One can lose massive amounts of money just from being away from the computer for 2 hours as this or that announcement can move the market 3-4%. To end the week we let go quite a bit of long exposure into the rally expecting a failure. This has been the pattern for much of the past year - eventually this pattern will fail and it will be wrong to sell into the rallies. When that day comes we'll miss the first part of a new bull market but so be it - a real bull market will have many quarters of gains ahead. All we have now is a trading environment - nothing sustained. So we're treating it as such until the market treats capital better for periods of times greater than 48-96 hours. We remain very low in terms of long exposure and our top 10 holdings as a % of the portfolio. As of now I remain relatively low on short exposure because "news announcements" could potentially take us up. It is impossible to model sentiment so we have a lot less exposure to the market as a whole. In terms of individual names the one big mover this week should be Sequenom (SQNM) which will have updated clinical trial results on its Down Syndrome test in the first half of the week. As always it is not the news but the reaction to the news that matters in the near term. Lennar (LEN) reports this week and we expect continued awful results for US homebuilders but the hedge funds are piling in as the "playbook" says you have to get in early (they tried it a year ago before getting smashed - one of these years they will get it right). As for long positions we're taking a few more as trades of late, rather than holds. As of January 2008 when we've crossed below the 200 day moving average I consider this a bear market, and we remain so. Until we get back above (S&P 1340) the market is not to be trusted as an investment vehicle, but simply remains a place for traders to jump in and out. Not a place for investors.

On the economic front the only report of interest to me is the existing home sales (existing homes make up far higher % of sales than new of course) and Kool Aid drinking bulls will tout even a "slowdown in rate of degradation" as a reason to cheer, so we'll look for that. I don't expect any V shaped recovery in housing when it comes - and we're still falling, not even talking about bottoming yet. A few retailers report earnings this week so we'll keep an eye on them as they are far better exhibits of consumer strength than faulty government reports. And then next week we're already back to the beginning of the heart of earnings season. And away we go...

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

1. Monday, the market was plummeting - we did add one name that was holding up - Blackrock (BLK) as we felt the buyout of Merrill Lynch (MER) took off the table the potential of selling their stake in BLK in an emergency measure to raise capital.
2. Tuesday, the market made a partial bounce back on the indexes but a lot of individual names continued to be hammered. We took the selloffs in individual names to add some names we've had on our radar for a while but have been awaiting a lower price - healthcare diagnostic company Luminex (LMNX) and defense company AeroVironment (AVAC)
3. Sticking to our recent rules of the bear market, we cut back Alliance Data Systems (ADS) to a 0.1% stake once it broke its 200 day moving average near $61. In fact we mentioned it would be a good short position until it hit $52 - which it did within 24 hours.
4. We bought Constellation Energy (CEG) on a large panic selloff in the upper $28s; simply as a trade. It continued its free fall the next day, but a lowball bid came from Warren Buffet late in the week. For now we are waiting to see if a counterbid offer comes in.
5. Wednesday, the market plunged again - we cut back healthcare company Millipore (MIL) to a 0.1% stake due to exactly the same strategy we outlined in Alliance Data Systems.
6. Wednesday afternoon the doom was palpable - I decided to add 3 material positions in Lennar (LEN) - a homebuilder, Ultra Financial (UYG) - double long financials, and healthcare company Sequenom (SQNM) anticipating some sort of reversal soon. As I wrote - we either were going to crash (5%) or reverse hard (95%). I also cut back my short ETF exposure very seriously.
   
7. Thursday morning the market started decently with a rally but fell throughout the day - I was dismayed with the inability to hold the oversold rally and cut back the positions named above, and got back all my short exposure as this lack of follow through indicated the potential for very bad things ahead. I also closed 3 positions entirely - Fuel System Solutions (FSYS), American Superconductor (AMSC), and Exactech (EXAC).
8. Obviously at 3 PM, the world changed as CNBC reported the mother of all bailouts. By the time I was watching the market had already rallied quite dramatically but realizing the sentiment switch I dumped the vast majority of the short exposure (so I was positioned back similarly to how I was positioned Wednesday night) but still took dramatic hits from the purchases at mid day. I also piled back into Lennar and Ultra Financial - we missed the majority of Thursday's moves and the fund was actually flat for the day. But by doing these emergency actions we did not take a drastic hit Friday as even a 20% short exposure Friday would of been horrific.
9. Friday as the market rallied strong again, we closed oil rig service name National Oilwell Varco (NOV) - nothing company specific but right now about 300 names in the global growth/commodity space trade "as one". Until companies detach from this monolithic trade and separate based on individual merits there is very little reason to own multiple names in the space.
10. Based on technicals and having so little long exposure we took a trade in Amazon.com (AMZN) - if this stock breaks down we'll be out just as quickly as we got in.
11. We closed Alpha Natural Resources (ANR) for identical reasons to NOV. We own 4 coal stocks, and they all trade as one company - so no need to own 4, when in reality one will do. At least in this market.

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