Sunday, November 9, 2008

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 14

Year 2, Week 14 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 (2 positions [SHV/BIL] + cash): 44.1% (vs 54.8% last week)
32 long bias: 38.5% (vs 33.5% last week)
7 short bias: 17.4% (vs 11.7% last week)

41 positions (vs 38 last week)
Additions: SPDR Lehman 1-3 T-Bill ETF (BIL), Life Partners Holdings (LPHI), Emergent BioSolutions (EBS)
Removals: N/A

Top 10 positions = 32.2% of fund (vs 26.4% last week)
23 of the 41 positions are at least 1% of the fund's overall holdings (56%)

Major changes and weekly thoughts
As we said Friday we are in the middle of a large range between S&P 850 and S&P 970s/980s. We are sitting and will continue to sit in a large cash position, meaning we will miss some gains to the upside to protect against the downside. After failing to even break the 20 day moving average last week and hold it we now face it again - it is in the 960s again and falling verus being in the mid 970s last week. The longer we stay below key moving averages the more pessimistic one should become about any sustained move up. But... if we revert to the mean of this bear market we have to be open to a rally to the 50 day moving average - today at S&P 1050 (and falling fast) - about 13% higher from here.

The market is entering a seasonally stronger period if you believe in historical precedence. The news of the large Chinese stimulus might provide a day (or at least a few hours of upside). The Federal Reserve is running out of bullets - just think, only two more 50 basis point cuts (hello Japan) and then what will the CNBC bulls cry out for as a rallying cry to move the market up? Ah yes, we still will have Europe and the UK. But the UK cut a historical 150 basis points last week so that's 3 of our cuts all in one moment. A world of zero percent rates for everyone! Economically it's a quiet week but Congress is trotting up 5 of the most prominent hedge fund managers this week for their turn at Inquisition so that should make for some good popcorn eating.
  • Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros on Thursday are expected go before the House Committee on Oversight and Government Reform. They will have several minutes each to make opening remarks, then will field questions from lawmakers, according to a committee spokeswoman.
  • Meanwhile, the Managed Funds Association and other organizations representing hedge funds are spending record amounts lobbying, according to industry insiders. Having five of the best-known and wealthiest investment managers together publicly before Congress is unprecedented for the roughly $1.8 trillion hedge-fund industry, which has been losing assets as investors withdraw money and has seen assets shrink in value amid market turbulence.
The reality of the situation is, the economic news is bad and heading to worse - some weeks this will be brushed off, some weeks it will cause consternation. To guess which week (or day... or hour) is the good and which is the bad is a total roll of the dice. I'll continue to list the same parameters I've listed each week to get more interested in this market - less volatility, a leadership group(s) emerge(s), bad companies separate from good within a sector, "student body left" (every stock must go up!) or "student body right" (every stock must go down!) days stop happening every other day, one can make money holding a stock for more than 3 days, etc. Until then I expect our short ETFs to offset our long positions for the most part and perhaps we will not make any progress in any direction.

I was very pleased with the quality of earnings from our stocks (either that we own or on watch lists to own once the market calms down) last week - some very good reports from Luminex, Genoptix, Emergent BioSolutions, EZCORP, Fluor, etc. The problem is the huge gains they generated in most cases simply made back some huge losses they incurred the previous few weeks. So if you bought them on fundamentals and held them for more than a few weeks you are still underwater (and heavily) in most cases - not a winning formula. Until good companies, executing month after month, are rewarded consistently this is not an investors market. So for our purposes it becomes nearly impossible to invest in as the timelines for success remain too short. This is a broken record repeated since summer. With that said, I was heartened to see the companies we target doing so well - even if we are not being rewarded from a stock perspective. At least the selection criteria and homework is generating companies doing very well; I would like to return to an era where I can hold these stocks for more than 3 days without risk of losing 20% in a day.

By the way our poll showed the vast majority of readers (94%) prefer a mutual fund manager who is actually managing allocations (long v short v cash) and not just sticking to a 100% long mandate. That makes sense from the aspect of the type of readership we have plus if someone wants a long only mid cap offering there are 100s of "me too" mutual funds out there. Hopefully we have a more unique product...

The larger weekly changes (chronologically) to the fund below:
  1. We broke our normal planning and bought an overbought position in Kendle International (KNDL) last Friday heading into earnings - the stock was punished on a competitor's earnings and lost as much as said competitor - it made little sense. I was hoping for a nice 20% gain at some point... but within 1 session the stock was up 17%, so we took 1/3rd of our position off Monday in this "book profits or they disappear" atmosphere. We sold the almost all of the other 2/3rds Wednesday as the stock was up 45% from where we bought it just 4 sessions earlier - good enough.
  2. Solar stocks rallied hard into the Obama win; these stocks had been beaten with so many versions of the ugly stick the past few months, so we began liquidating a bit too early last week on the beginning uptick - but I said these stocks were setting up for a textbook "sell the news" reaction post election... and I liquidated almost all our solar exposure Tuesday. This proved to be accurate as the stocks were hammered the next 2 days, some losing 30-45% in 48 hours. Again, this example shows why this market is just useless for investors.... Sunpower (SPRWA) warning on currency was not of help but frankly a lot of the Chinese module makers will have the same warning coming in the next week or two. I thought this was "priced in" the stocks at 2-4x earnings but in this market nothing seems priced in.
  3. We let go almost all our AeroVironment (AVAV) exposure the week previous to this on the Jim Cramer mention in the $36s range. I said I'd buy it back on the inevitable pullback - Wednesday the stock had fallen 10% below where we sold it off so we began buying back a small portion of what we sold in the lower $32s; but I said there was a gap in the chart in the mid $30s and I'd wait to see that level before making a larger committment. This happened the very next day so we purchased our full position. If the stock falls to its 200 day moving average at $27s we'll add more.
  4. I cut homebuilder Lennar (LEN) Wednesday to a holding position 0.1% in the $9.50s and said this was a classic short from here and "I would if I could". We can't short individual names here, but by Friday the stock was down to the $7.50s so in 48 hours we could of had a nice 20%+ trade. Too bad. But again, this is "trading" not investing.
  5. Thursday I needed a way to stay in compliance with in terms of cash positions so I needed to add another very short term bond fund - so we added SPDR Lehman 1-3 T-Bill ETF (BIL) - I consider this "cash" and not a position because this is what its function is.
  6. We began a position in life insurance settlement company Life Partners Holdings (LPHI) - this is a thinly traded issue but the chart has been excellent for the past month. It has closed below its 50 day moving average both Thursday and Friday so that raises some alarms - we'll have to watch it.
  7. Thursday we began to rebuild some bank exposure we let go earlier - unfortunately the financials did not participate much in Friday's "rally"; I find it hard to see any sustained move up without them.
  8. After a reader mentioned Emergent BioSolutions (EBS) among a cadre of names about a month ago I've been doing homework and stalking the name - I wanted to see one more earnings report before committing and we got a doozy Thursday. Strangely the stock opened up relatively quietly considering it beat analysts expectations by nearly 100% so we began our position Friday morning. The stock rallied higher the rest of the day.
  9. I bought some more of our pawn shop EZCORP (EZPW) after a solid earnings report - the market is ignoring this name but it's cheap and should thrive in the economy we are now in and shall remain in.... not a sexy name but solid results quarter after quarter.
  10. I sold most of our Genoptix (GXDX) into a huge ramp Friday - I sold too early as the stock was just going higher all day. I thought it was a good earnings report but wow - the market loved it.
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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