Sunday, December 7, 2008

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 18

Year 2, Week 18 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): 45.6% (vs 38.0% last week)
32 long bias: 49.9% (vs 53.1% last week)
7 short bias: 4.5% (vs 8.9% last week)

40 positions (vs 41 last week)
Additions: N/A

Removals: Mastercard (MA)

Top 10 positions = 28.2% of fund (vs 31.6% last week)
30 of the 40 positions are at least 1% of the fund's overall holdings (65%)

Major changes and weekly thoughts
Please note on a technical note - the closing prices from Friday are not registering in and with the large moves in the last few hours there is a severe difference in some positions in terms of size and value versus what they should be. Since I have no other alternative I am using the position weightings as listed currently, although they are incorrect based on incorrect pricing of ETFs and equities. I am not sure what prices is using since it is not Thursday's close, apparently some moment in time Friday (which doesn't narrow it down much considering the huge intraday swing)

We'll begin this weekly summary with our list of conditions to change to "investors"
  1. reduction in volatility
  2. separation of "benign" sectors from "poor" sectors
  3. separation of "solid" companies from not so solid within a sector
  4. the end of "student body left" (sell everything!) and "student body right" (buy everything!) trading
  5. the ability to invest in 98% of stocks with more than a 2-48 hour time frame
  6. the emergence of any sort of sustained leadership
  7. stocks that go up on bad news (bad news priced in) .... or at least stocks that respond to good news!
  8. individual company metrics mean more than government announcements
  9. a 20 second comment on CNBC doesn't move the stock market 5%
Item 7 remains the primary change from the past few months; this past week not only did the market shake off bad news the vast majority of the time but a lot of individual companies that warned shook off the bad news and traded if not up, then at least sideways. One could make a case that condition 5 is improving but that's still up for debate. The monolithic trading (buy everything or sell everything) continues as does the rampant volatility. The last hour moves which seem to be an "Ultra" (long or short) of the rest of the day continues. Hope of government saving us all continues with even more announcements this week including plans to move the mortgage rate to 4.5%.

Our allocations are understated to the long side due to the previously stated malfunction in pricing in our tracking system at We are (for now) going with the flow and ignoring the bad news, although we believe it will last far longer than the "consensus". Even during a bear market rally we will still hold high cash and our bullishness will be expressed by a lower than average short exposure - until the market improves for a multi-month period we won't be drawing down the cash exposure by a huge amount. A real bull market will last years, not 3 months - so missing 5 weeks won't mean much in the really big picture. And within a bear, you can see the downside moves are hefty and quick - we don't want to be exposed so heavily to a market that can take away a month of gains in 2 days, even if we miss some upside during Kool Aid times. The technical picture will tell us when to get back to a real bullish posture and we are not even within a remote zip code of that address.

I believe much of the next 7-9 months will be a continuation of this pattern - the ping pong between "hope" and "reality". We will constantly "hope" that we should be buying today because "it can't get worse" and "the bottom is here within 4-6 months". And then reality will strike. On weeks hopes dominate we will trend up, on weeks reality strikes we will trend down. This will define the market for the better part of the next year. How do I know that? Because that's all we've been doing for over a year. Remember some of these? "Bernanke has cut the discount rate! The Federal Reserve is here to save us! Don't fight the Fed! The playbook says so!" "Abu Dhabi is putting $7.5 Billion into Citigroup! The smart money is in, buy financials! follow smart money! the bottom is in!" "Paulson is coming up with a Super SIV to save the banks and put all their bad assets into an off balance sheet entity! buy financials! the government is here! the bottom is in!" "HopeNOW is going to save the homeowner! We can stave off foreclosures and homes are the source of all our ills! the government will save us - the bottom is in!" Folks, that is all fall 2007 and early winter 2007 Kool Aid. I won't even bother to list the 2008 Kool Aid. Just know 90% of it revolves around the government saving us which is where we are again. I find it ironic that a populace that complains about how incompetent the government is, is more than willing to put faith that they are the ones to save us....

Since this ping pong between "hope/news events" and "reality" is nothing more than a sentiment change, it makes for tricky positioning because the change in sentiment is a lot different to measure than changes in business operations. Don't believe the hype about the market as a discount mechanism and that the "strength" is telling us the economy will be just fine in 4-6 months. Maybe 30 years ago - but not in this system where huge money can move markets like they can now. When a pundit tells you that, ask the pundit what exactly the market was discounting "4-6 months out" in October 2007 as it went to all time highs? Or what oil at $147 was telling us about demand 6 months out?

On an anecdotal note I was watching Fox Business "Happy Hour" and saw a segment where two professional money managers (NOT traders) but "investor"/"strategist" types were talking their books and the whole conversation centered about what double or triple ETF's they were playing that day. This really showcases to me, what I've been suspecting for a long while here - how everyone is turning into a daytrader and the lack of need of exposure to individual names since the ETF trading dominates. It really has simply turned into a casino when professional money managers leave you with lines like "I decided to go long triple long the market around 1 PM when the market went back to neutral after a lousy jobs report" and "how much lower can oil go? I went long double oil as we hit the low $40s" etc. What will be interesting to look back on in 2-4 years is if this is a complete character change of the market, or a symptom of a batty thinly traded market where individual company metrics have meant nothing for so long. But what used to be a very short term oriented market, has turned even more so by many degrees the past few months. We probably won't know if it's a character change until the next bull market arrives. I can only hope it once again has some semblance of reflection on underlying business prospects. To whit, may I quote from Barron's this weekend

Mike O'Rourke at the institutional broker BTIG: "These nearly 5% intraday moves are becoming ridiculous. The ridiculous aspect is that they occur in roughly half-hour time spans, and bids instantly disappear."

Watch the tape, and the dominant impression is of machines -- cybertrading funds using algorithms -- arguing among themselves.

That last one could be my favorite quote of the year.

Technically we actually have an almost identical set up to this point a week ago, in which the markets put on an impressive reversal, we were sitting above both our key support levels (S&P 840 and 870) and technical conditions would point to a continued move higher. We were then treated to a 9% loss on Monday, so it's hard to cling to any evidence as useful nowadays. One condition we've displayed is the inability to break over even the 20 day moving average on the S&P 500 in any material way for 3 months. Each time we tease it, the market gets our hopes us and then bludgeons the longs. The 20 day moving average should not be such a strong resistance level, but the fact it has been has shown the inherent weakness in the market. Frankly, for all the "ignoring of bad news" we've been doing, all it's gotten us thus far is back to the 20 day moving average. As we mention often, if the market breaks over its 20 day moving average the next level is the 50 day moving average - which is just about S&P 950 and falling fast. We haven't been meaningfully over this level since early June. (half a year) - that is 8.5% higher which in this day and age is one good afternoon in Ceasers New York City. To show how far we've fallen the 200 day moving average is up near S&P 1200... that's 37% higher from here and would still have us in a primary bear market until we break back above.

So is there upside? Certainly. Downside? Certainly. You'll hear excuses and explanations each day (down days = hedge fund selling, tax loss selling blah blah; up days = Obama effect, front running the January small cap effect, seasonally strong part of year, blah blah) It's all nonsense to fill up a lot of hours for financial media. This "efficient market" has turned into a random action machine and we'll go where we'll go; finding explanations just comforts us as to believe there is some rhyme to it. Market participants are confused and have been using the wrong playbook all year - continuously believing first no recession and then the corporate led recessions of early 90s and early 00s. We've said all along this will be the first consumer led recession since the early 80s. That has proven to be true. Now those people who live off the "playbook" will buy "early cycle recovery" names because that's all these guys know - the playbook. They did this 3-4x already this year, woefully early. And will keep doing the "playbook" each time we rally over the next 8-9 months because that's all they know - buy the financials, homebuilders, appliance makers, retail, et al. Why? Because I need to be in front of all the other guys buying the same names ahead of the recovery coming in "4-6 months". They did this last winter, they did this last spring, they did this last summer (they did not do it this fall because no one was buying anything) and they'll keep doing it. So each time these rally and you are told by pundits "it must mean something! It must mean recovery!" once more ask what it meant last winter, last spring, and last summer. Here is what it meant - small concentrations of big money can move subsectors in big ways and when they choose to play a thesis, stocks run. And it means nothing. It will be the wrong turn, over and over and over - until one day it is actually correct. But it doesn't need to be "right" - it just needs to be gamed. And that's your stock market of the new century. So for now we'll stay exposed to the "hope sectors" and hey we might even dive back into an infrastructure stock because the Obama thesis means every infrastructure stock is now blessed as well. Thesis is everything; perception is reality.

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