Monday, November 3, 2008

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 13

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Year 2, Week 13 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): 54.8% (vs 28.1% last week)
30 long bias: 33.5% (vs 53.1% last week)
7 short bias: 11.7% (vs 18.8% last week)

38 positions (vs 39 last week)
Additions: PIMCO Strategic Global Government Fund (RCS)
Removals: Thoratec (THOR), ShengdaTech (SDTH)

Top 10 positions = 26.4% of fund (vs 45.6% last week)
22 of the 38 positions are at least 1% of the fund's overall holdings (58%)

Major changes and weekly thoughts
I spent most of the week selling; I'm neither bear nor bull here in the near term. With the hope that either fundamentals or technicals begin to work again we'll use technicals first with hope their signals work first. On the S&P 500 we've been below the 20 day moving average essentially for 2 months except 2 days in late September. We are now back there (S&P 970), despite moving through it intraday on Friday. So I'll call this the top of range 1; the low end being the lows we hit multiple times - literally 4 times in the past month including 3 of the past 6 sessions on an intraday basis; S&P 850. On range 1, we are at the very top but only in a very oversold rally should we not even be able to break the 20 day moving average... that's a serious bear. The next range higher, "range 2" would be the space between the 20 day and 50 day moving averages. In this are S&P 970 is not the ceiling but the floor if you will. If we can make a move above that than a move onward and upward to reach the 50 day moving average - currently at 1070s range and falling by the day - would be a logical conclusion. We have not meaningfully over the 50 day moving average since the first few days of June....

This is a lot of technical mumbo jumbo for some, but frankly in a market where industry veterans have been robbed of every tool that has worked for years from the fundamental point of view (and the past few weeks the technical side as well) you can bet every super computer - and human trader- is looking at these same spots. As I said Friday this is an abnormal market where it seems when the S&P 500 is up, every stock is ok to jump into and when the S&P 500 (or whatever index) is down - everyone flees every piece of merchandise. This is not healthy action and needs to stop for us to be intermediate term believers. Stocks within a sector need to separate themselves and the good trade different fromt he bad. The same goes for sectors themselves - they need to act coherently and not in one monolith. I call this "student body left" or "student body right" - that has been the action for a long while now and until it changes it's hard to get behind the market. That does not mean we cannot rally - it just means it's going to be an oversold rally that is based on nothing but reversion to mean. For the uber bulls, and it is still far too early to talk about it but there is a "range 3" between the 50 and 200 day moving averages - and the gap is huge due to the enormous selloff we have had.

On the economic front I expect many reports to degrade meaningfully now as we enter the meat of the recession - but it shouldn't come as quite as a surprise as the last batches have. Not a surprise to us, but apparently many on the Street. So as always we have to answer how much of this is already priced into the market? You never know except with a rearview mirror after the fact. This Friday's labor report should provide a good proxy. The other new question of this age is how much more do the hedge funds have to liquidate. My thesis a few months ago was we'd have hot and heavy selling through Dec 31st as many funds simply "quit" because it is going to take 1-2 years just to break even with this year's performance and it's not worth it for them with their performance fee structure; but as with everything in this day and age - things happen in lightning speed and what I assumed would take 4-5 months seems to have happened (is happening) in the span of weeks or a month or two.
We still have the back third of earnings season (smaller to medium companies) mostly with us, but in "student body left" trading, individual companies have not mattered too much - that said, when I see misses nowadays I see individual stocks blowing up to the tune of 20-35% drops even after already selling off by massive amounts in the bear. Which means holding individual stocks still carries a great deal of risk. Hence as our portfolio shows we're focusing more on ETFs and we sold a lot of stock into this rally as we edged to the top of "range 1" - if we can hold here and build into "range 2" over the coming weeks, we'll happily buy back some exposure higher. We're seeing some fantastic fundamental performance by such varied companies as Sohu.com (SOHU) and Flowserve (FLS), but we need to see gains hold and not completely sell off within a week or two. To make any stand we need to get back people who hold stock for more than 1 day or 3 days at most.

As for sentiment I'm torn here - I'm seeing a lot of permabears turn bullish and a lot of people drinking Kool Aid when a week ago we were limit lock down on the S&P 500 and everyone was tossing stock to the market gods. But on the other hand I'm reading a lot of people expecting that we've had our bounce and its time to falter. So we really have no advantage to sentiment here - and hence why I'm Switzerland right now (neutral). I can make a case either way - personally in most markets I don't care which way the market goes as long as individual companies are rewarded on their own merit, but with almost every stock trading in tune with the market; the market has become everything.

So we'll see if this was indeed the "Volkswagen bottom" or the market is just teasing us.


The larger weekly changes (chronologically) to the fund below:
  1. Monday, we closed Thoratech (THOR) on what seemed to be incredibly dire news Friday after hours. The stock was down as much as 50% after hours Friday but only was down about 12% when we sold Monday AM. Later in the week the company reported stellar earnings, which is why we bought it in the first place, and actually ended the week exactly where it was a week ago Friday. Based on "the world is ending" as it appeared 7 days ago - I'd consider that a major victory. I still like the idea here, but there is too much uncertainty for me right now - especially in a market teeming with cheap stocks that have no overhang. But one day - if the current issue is deemed to be manageable - it might be seen as a great buying opportunity. For now, we'll stay on the sidelines.
  2. To replace that long exposure we added to our Luminex (LMNX) position which was down 50% in 30 days - down to the mid $14s - the next day it fell to the mid $12s! By Wednesday though it was back to the mid $17s. All that in 48 hours - welcome to the biggest casino on Earth where fundamentals mean nothing. We took profits in the $17s and later in the week as it approached $19. You see similar trading in many names - all dice throws.
  3. Wednesday in "student body right" the commodities were making a huge move up; we have 3 positions remaining in this space (2 fertilizer, 1 coal) and with this market not discerning among specific subsectors consider this "1 position" - it entered the week at 12%; we took it down to 6% Wednesday and then liquidated more as the week went on. Many names still remain dirt cheap and oversold so could conceivably rally further but there has been a good move thus far and not taking advantage in this market where gains are erased in hours would be foolish.
  4. We also closed ShengdaTech (SDTH) even if it's very cheap. So many small cap Chinese names are treated now as if China is entering a black hole - the reality is even when the market rallies it favors liquid large cap names that institutions can get in - and more importantly - get out of - quickly. If animal spirits return for a sustained period of time - many of these names could go up 50-100% and still be "cheap". That could happen tomorrow, in 2 weeks, in 2 months, or 2 years. We don't know - but in the "current" market - this is not the favored merchandise.
  5. Thursday, we took another round of profits - quite a bit of solar was let go as these stocks have high capital requirements and are trading on sentiment more than anything. If sentiment returns to "companies can get credit" these stocks should soar - maybe Obama will help. First Solar (FSLR) had a good earnings report and the rest of the Chinese solars report in the coming 2-3 weeks.
  6. We took profits on AeroVironment (AVAV) after the stock popped up on a Cramer mention earlier in the week. Would like to get back into this one at a lower price if it pulls back - one of the very few charts looking healthy.
  7. Friday, we took profits in Sequenom (SQNM) after a strong push post earnings. Not sure why exactly the stock took off since the earnings report was modest but the stock has been very oversold.
  8. We began a new position in PIMCO Strategic Global Government Fund (RCS) as there appears an opportunity to derive a nice yield while the closed end fund is at the low end of its 52 week range.
  9. We added to two contract research organizations, Kendle International (KNDL) and Life Sciences Research (LSR) as this group has been extremely hard hit in the past 7-10 days and has lagged the recovery of other stocks.

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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