Sunday, December 14, 2008

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 19

Year 2, Week 19 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): 35.5% (vs 45.6% last week)
32 long bias: 58.1% (vs 49.9% last week)
7 short bias: 6.4% (vs 4.5% last week)

41 positions (vs 40 last week)
Additions: Jacobs Engineering Group (JEC), iShares Xinhau China 25 (FXI)

Removals: BB&T (BBT)

Top 10 positions = 32.0% of fund (vs 28.2% last week)
30 of the 41 positions are at least 1% of the fund's overall holdings (73%)

Major changes and weekly thoughts
While the overall indexes did not change much from their close a week ago, a major sea change occurred underneath the surface; mostly a stampede to "Obama"/global growth stocks that had been beaten like a pulp. Now a quick word about Mr. Obama since my sarcasm occassionally touches nerves - it is not focused at Obama; it is focused at the stampede who believes one man's policies will fix some deep rooted structural problems. I actually think if the man had been elected a decade ago we would probably be in much greater shape but unfortunately he is facing mountains of problems that are now built up over a few decades, and now unraveling. One hopes he comes through on everything he wishes, so that the pain is far less than we currently appear to be on course for. But in respect to my comments, they are focused more on the investing populace - no different than the same hordes who told us "housing is only 4.5% of GDP - what's the big deal?" 18 months ago, "what recession?" 12 months ago, "buy financials because the smart money in the Middle East is putting their money in play" 12 months ago, "buy technology stocks because they are immune" this past summer and "the economy will recover in the 2nd half of 2008 so it's time to buy early cycle stocks - housing, financial, retail" 9 months ago. That same crowd finds an inane theme, screams about it, and tells us to just believe. Thesis over reality. I am attacking the mind set that seems to pervade; currently that revolves around Obama and hence I use him as the proxy for the mind set....

So on to our list that we will revisit each week which will turn us from "traders" 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%
Once more the main area I see with vast improvement was item 7. This has been happening the past few weeks but really this week was amazing - Tribune goes Chapter 11, the greatest Ponzi scheme ever is revealed on Wall Street, bailout talk incessant, the governor of one of our largest states showcases (allegedly) why our political system is a backwater of deceit and cronyism, warnings from quite a few major economic proxies (i.e. FedEx), job cuts galore along with the largest weekly jobless claims I can ever remember, JPMorgan CEO saying 2008 stinks and so will 2009, economic numbers continue to degrade, short term government bonds reached a NEGATIVE rate of return briefly for the first time since the 1940s - I can go on, you get the drift. While the market showed a series of lower highs through the week, it is simply remarkable we ended the week essentially where we ended last week. As we stated a few weeks ago, we will ping pong from hope phases to reality phases - we certainly are in a hope phase. We encountered quite a few through 2008, and each led to further downside. I expect this one, in due time, to do the same. But, based on NOTHING other than "stocks refuse to go on anything you throw at them" I threw some more brush onto the bull fire Friday and we're in a similar positioning to where we ended last week - which is as most "exposed" to the long side as we will be in terms of allocations until we exit the bear market. As we have seen, when hope fades and reality returns there is very little time or room to exit - thousands of NYC computers seem to want to go through the same narrow exit at the same time and stock prices drop like a rock. So we won't have to time to flee - hence we want to offset our "bullish" tilt with high cash at all times, when not owning a high short exposure.

Technically, we again return to S&P 840 & 870 as our supports. What was most impressive Friday was we did not even retest S&P 840 on a bevy of bad news. On the negative side we spent the week (after popping Monday) making a series of lower highs on the S&P so I'd like to see that change. Aside from those levels - these are key levels I see: (a) S&P 820 - these are the lows we tested repeatedly two weeks ago - almost every single day; this would be the "last lifeline" if we break S&P 840 (b) S&P 950 (and falling) which is the 50 day moving average which currently faces us as resistance and if that is cleared (c) the early November highs of S&P 1000. We are range bound for now on the index but as stated above, there was a major rotation into the most beaten down sectors - very much how there were rotations into housing, retail, and homebuilders last spring and summer after those were the most hated sectors. Now it's been global growth/commodities instead. Same thesis of rotation; just different groups. For all the great "reactions" by the market to incessant bad news, we simply sit right at the 20 day moving average after peaking our head over last week - not much different than early November.

I continue to expect horrible economic numbers for the foreseeable future; bulls can hope that (a) they are ignored on hopes for the future and (b) at some point things just can't worse and we'll get "less horrible than the previous reading" which will set off champagne corks as the rallying cry of "it's getting less worse" invades financial news media - I expect a lot of the latter in 2009. For now, as a cynic, I'll say the hedge funds (who control a small amount of assets in a relative sense but dominate day to day trading on a % basis) have a vested interest in running this market up until the year end to pump up their performance metrics, so Obama-willing they will attempt to. We have our Kool Aid in hand cheering in not so blind optimism, while affixing a parachute to our backside ready to run for the hills either below S&P 820 or 840. Otherwise we'll trade around positions as we were able to last week, selling stocks in the first 3 days of the week, and able to buy many back at 12-15% discounts by Friday. It's not "investing" but as we stated above, these are not conditions that agree with investing.

Gold, the dollar, and bonds remain key metrics in these eyes. The first two made some significant moves [Dollar vs Gold - Can we Trust the Change?] - however we are unready to trust them yet as significant; long term moves will last for months so missing the first part of a sea change is not that important. Bonds remain very troubling - although the suspicion for why they are yielding nothing on the short end is banks have taken our tax dollars and parked them in short term Treasuries instead of lending. It really does not matter - what we saw over and over in latter 2007 and 2008 is the "smart money" (bond market) signaling very bad things while the "easily excitable and thesis driven money" (equity market) run up stocks in abject ignorance of the economic carnage to come. This could be just another of those episodes and until that changes you do not want to have a heavy short exposure as it can be punishing. We know, because while we rightly called most major economic issues that the equity market was missing, we took some multi month hits on the short ETF exposure in the past as the stock market whistled past both the bond market, and the graveyard. So this time around we want to hang around with one hand on the rip chord. Right now we are roughly 60% (long)/35% (cash)/5% (short) for again - no reason other than "stocks are holding up in an avalanche of bad news" - when that stops happening, the parachute deploys and we'll be more along the positioning we've held much of the fall and early winter - 35-40% (long)/40-50% (cash)/20-30% (short).

For the fund, due to lack of leadership (item 6 above) I have a hard time being focused into any 1 sector - outside of medical devices there is no place I'm "heavy" into. Some days hedge funds run up Lennar, some days they run up the banks, some days they run up oil stocks, some days they run up dry bulk stocks, some days they run up Macy's - it makes little sense. One group is early cycle recovery, one group is late cycle - it doesn't matter - they get run up within 48 hours of each other. Hence this all looks like institutional gamesmanship rather than any true investing. So we have our hands in different pockets and when the hedgies run up that sector we take profits and wait for them to abandon the sector (which usually happens shortly) - then rebuy. It's sort of a pathetic chase your tail game.

Charts we're digging and have been buying on pullbacks look like this - once more to buy this chart you have to be ready to abandon ship at first sign of danger (a break below the 50 day or 20 day moving average) as "thesis" will turn to "reality" - once broken, the potential for a large downside move returning is great. Many many many of last week's favorites now look like this - we can just as easily break out as break down. So we've bought the "first test" (pullback) Friday assuming some more upside but cutting back if not.

Witching time approaches for stocks like this - we need to see a break out (reclaim resistance areas) soon or the bear encroaches.

And lost in the morass and potentially on our "to be cut" list are names like this - one of two things are happening here: (1) a long base is being built from which a large move up happens after lagging or (2) the large move is down and the inherent weakness despite market strength is signaling more bad ahead. Usually you'd place bets on the latter, the danger right now is the week after this one is similar to Thanksgiving week with crazy moves as retail traders invade and a thin market is played by the institutions. So once could miss a large move very easily. But if these stocks fail to react in a tape that would continue to theoretically hold up - that would signal it's time to cut bait.

Once more, I'd like to stress I enjoy investigating companies and buying/owning them on their fundamentals with technicals only as a supporting measure to help when to time entries or exits. However, this market has for many months made investing on fundamentals moot. We live in a world of "sentiment" "theme" "government announcements" and "charts". So we're living in that part of our tool box, until one day buying a stock on fundamentals returns as a viable option. That could be in a few weeks, months, or years - I cannot hazard a guess. One day, I'd like to buy a Panera Bread (PNRA) after a confirmation of a breakout in the low $50s and not see the entire gain wiped out within a session or two. One day I'd like to own Panera for months on end, riding a "trend" in a stock with relative strength that is not at risk of disappearing based on "breaking news" on a TV channel I don't see during the day. One day.

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