Tuesday, February 17, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 28

Year 2, Week 28 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 64.9% (vs 57.6% last week)
26 long bias: 28.3% (vs 21.3% last week)
8 short bias: 6.3% (vs 21.1% last week)

34 positions (vs 40 last week)

Weekly thoughts
These past two weeks have exemplified what we've been saying would be the trademark of 2009 - the battle between hope and reality. Two weeks ago the S&P rallies 5% on "hope!" - once more the government would ride in to save us from ourselves. It's not the first 312 plans that will save us, it's the 313th! Surely this will be the one. We sat there a weekend ago, and commentators were telling us with Sir Geithner (he who walks on water) ready to unveil his magic, it would be "the most important week of the year". And what did we get? A 5% drop in the S&P. So much for the most important week of the year.

It continues to be a [Feb 5: Charlie Brown Market] - each time these bulls get their excitement up, and the punditry breathlessly whispers about how we better be in, because if not we are going to miss the rally of a lifetime - Lucy pulls that ball away. And Charlie lands on his (edited for content)!! I will keep repeating the credo - only one time will it be incorrect to doubt the veracity of the "rebound" - ONLY once. Each and every other time it will be correct. Sure we might get 10% rallies here, or 15% rallies there - but only once will a true new bull market be born. Until then we just churn.

Fundamentally, the story frankly is bad and not improving - despite trillions thrown at the problem worldwide. Eventually people will come to the realization that the problem is larger than government. We've been in denial of this since August 2007 when sneaky Uncle Ben decided to smack shorts on the side of the head with a pre market "emergency" Fed rate cut. "They've" been doing the same song and dance for a year and a half now - pulling out all the stops to time things to inflict the most damage to shorts... but the market continues on its death spiral. It is ironic to be honest. I don't have much to add that I have not said for weeks on end. The market is very expensive on where earnings will be by the time we get to Dec 31, 2009 - consumers will continue to act defensively and in an economy we've transformed to live and die by the consumer; well it's not pretty. Now the government will be stealing from our grandchildren to pump consumption today - the sheer amount of money will have some effect and goose GDP to some degree in 2nd half 2009 and early 2010, but it's a heavy cost to pay. I could get behind this stimulus plan to some degree if it all went to investments the country has ignored for multi decades ("can't afford it!) but instead it's simply a free for all as our politicians continue to push our country down the hill into ruin. So our policy will be throw as much money against the wall and let's hope some of it sticks.

We've noted the range we've been in on the S&P 500 for a month now (800 to 870); it's looking more and more like December 2008 -- a sideways churn underneath resistence with an ultimate resolution downward. The only thing "saving" this market are the CNBC news breaks and D.C. announcements "perfectly" timed to squeeze shorts each time we hit a major support area. Government intervention at its finest. I'm glad they are allocating resources to important things such as how to manipulate markets from their ultimate destination. Wednesday we'll hear about the NEXT plan to save us, this time from President Midas himself (who also walks on water) and how our taxpayer money can go to subsidize those who are in trouble with their mortgages - all under the guise "you don't want the value of your home going down anymore, now do you?" Dear sir, it will go down no matter what you do - stop wasting my money trying to stop it.

The news overseas is horrific - Japan, Russia, Eastern & Western Europe. Heck, even people living in the French Caribbean are protesting in the Streets. America? We still have American Idol to keep the sheeple distracted.
  • Strikes that have nearly frozen everyday life on France's Caribbean islands burst into clashes on Monday as police battled protesters angry at high prices and resentful of a tiny white elite on lands better known for beach-side vacations. The leader of the LKP Collective that organized Guadeloupe's strike warned that deadly escalation is possible. The strike also is exposing racial and class tensions on islands where a largely white elite that makes up 1 percent of the population controls most businesses.
  • On the sister island of Martinique, 100 miles (160 kilometers) south of Guadeloupe, police said that as many as 10,000 demonstrators marched through the narrow streets of the capital to protest spiraling food prices and denounce the business elite.
As this global recession intensifies, class warfare will increase. In the U.S. the stocks of commercial real estate (we've been long time bears) are finally joining the deathbed that are retailers, Las Vegas casinos, consumer discretionary - and the like. The Federal Reserve will be stepping in to provide a place to camp the bad debt from the CRE companies, but the stocks still falter. And so we go - but hey the Baltic Dry Index is up the past month... can't be all bad.

For the fund, the weekly allocation looks a lot more bullish than it appears. Into the dread that was last Tuesday I cut some good portion of short exposure - and as the week rolled on I expected "news leaks" to save the market each time it got near S&P 800. Lo and behold, my government did not disappoint me. We're just marking time to an eventuality in my book unless we believe it is going to be worth it to pay 25x earnings on the S&P during the 2nd worst crisis of the past 100 years. So I'm underinvested on the short side and hoping for YET ANOTHER hope rally as Obama speaks Wednesday... not counting on it; but hoping for it so I can buy short exposure at higher prices. To reiterate - below S&P 800 we're bears, above S&P 880 we're "bulls" (only on price action) and in between we're just trading while keeping large parts of our capital away from this nonsense market.

As to specific positions, it has been a funny two weeks - we actually lost money the week the market was up 5% because (a) lots of our money is sidelined (b) our short positions went against us (c) our largest position, Sequenom (SQNM), took a big hit (d) our type of stocks were leadership stocks that have been abandonded while people chased into China/Tech/commodities and (d) we did not own much of China/Tech/commodities. This week, as the market fell 5%, we were up a tad... despite a hammer being applied to Life Partners Holdings (LPHI) which was one of our few 2%+ positions. Thankfully we escaped before Jim Cramer jumped in during Mad Money to dance on the grave and pushed the stock down an additional 21% Friday. At this point, I am tempted to get back in since an already cheap stock has now been cut in half in two weeks - maybe not for the long run but certainly a trade is forming.

We did see some rotation back INTO the January leaders as people rotated AWAY from commodities/China (to some degree)... but wow, this market still loves technology no matter what amount of bad news you throw at it. Other than large cash hordes I am not buying any of the reasoning for the tech trade - they rely on either the (a) consumer or (b) the corporation... both of which are pulling back. Looking at our holdings, I did add "some" exposure to the China/commodity trade just to have skin in the game over and above the 1 coal/1 fertilizer name we already had - we added BHP Billiton (BHP) and Mosaic (MOS) late in the week - these are all trades as far as I'm concerned. I like what I saw in Emergent BioSolutions (EBS) late in the week - it finally broke out of a $20-$24 range ... however let me repeat buying "breakouts" in this market has led to failure 90% of the time

American Science & Engineering (ASEI) after taking a hit from a Motley Fool Story rebounded nicely and is back just over support after falling below - if it begins to break out I'll get more constructive.

Thoratec (THOR) north of $28 interests me....

I added a bit to a starter position in First National Financial (FNF) [title insurance] after it bounced off support nicely

And Quality Systems (QSII) seems to be showing signs of life

AeroVironment (AVAV) has been very good to us - I let some go Friday as "$40ish" has been the ceiling of late but then it went to $41 and I thought I might of missed the next leg up. But this one is now VERY rich on a valuation basis.

Again this market seems strange to me - it is almost as if there is not enough money to push up multiple sectors at once... either the leadership stocks of January can do well, or everyone has to run into China/commodities. Weird. On the short side we have a conundrum - the stocks we dislike the most from a fundamental standpoint are in complete free fall. Just as in bull markets you sit with jaw open watching how far things can go up - even I, as a bear on some of these groups, watch in fascination at how badly the sectors we've been targetting have fallen. I keep waiting for some counter trend rally to put shorts on against these names - but they have no life to them. So the conundrum is whether to chase them "down here" knowing a "squeeze" can happen at any moment (and these beaten down stocks move 30%+ on squeezes) or bide our time and instead chase stocks we dislike more from chart formation and try to scalp a few bucks here or there.

So those are my thoughts for the week... it is a very frustrating market and has been for any and all of those with a timeframe greater than 2-3 days (or hours). Buy and hold long ago died, and now even trend trading has been disallowed. It's all about daytrading and front running government announcements... obviously not an environment for a mutual fund to thrive. But, with all that said - I'm happy with performance the past 6 weeks, even if it takes every trick in the book just to stay afloat.

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