Sunday, March 1, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 30

Year 2, Week 30 Major Position Changes

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

Cash: 55.5% (vs 52.8% last week)
30 long bias: 32.7% (vs 25.0% last week)
9 short bias: 11.8% (vs 22.2% last week)

39 positions (vs 40 last week)

Weekly thoughts
Yet another horrible week in the markets with the S&P 500 down -4.5%. While we have outlined how flawed the Dow Jones Industrial Index is [Reuters: Is it time to Overhaul the Dow?] it is the oldest index at 113 years old, so these data points are staggering. We just came off the worst (by %) January in history; and followed it up by the second worst (by %) February in history. Back to back. Thrown on top of horrific Sept, Oct and most of November. This 6 month stretch is debilitating if your sitting in a fully invested long only account - you can almost hear the 401k withdrawals and mutual fund closings in the wind....

If you have been reading the blog longer than a few months you now see how silly the cheerleading of "it's a new year! therefore it must be better" OR "2008 was so bad, surely we will rebound in 2009" OR "the first 5 days of the year clearly identify how the year will go" - all Kool Aid handed out by the sirens of punditry. We said the market was still way overpriced (and in fact - sadly - still is) and that 2009 will ping pong between hope and reality. We started the year off with hope and have been facing a relentless onslaught of reality since. Now let's be clear - hope will come back at some point... and just like the action 8 weeks ago did not "signal the economy is improving" (as the talking heads screamed) the same will be said for the "coming rebound". Desperate people cling to any ray of hope so they'll try to explain a rebound as "the light at the end of the tunnel". So remember that the next time Lucy puts down the ball and urges Charlie to kick it... I will repeat what I've been saying over and over - ONLY ONCE will it be correct to drink Kool Aid (when we turn from a bear market to a bull market). Every time other than that ONCE will be false starts and *magic* spun by the punditry - the same punditry who has been wrong the entire way down. But that does not mean we won't have tradeable rallies along the way. Just don't get your heart a flutter over what it "signals" - just as the Baltic Dry Index "surging" a few weeks ago meant zilch, so will the next rebound. Nothing goes straight down - although we're taking a nice stab at it.

Off to the charts...

Let it be clear we are on the edge of the cliff - S&P 741 was the intraday November 2008 low and we said during the Kool Aid of December and euphoria running up to Tim Geithner's "speech to save us" we would eventually retest those lows. Eventually did not take long. Frankly when the market rebounded Friday morning on a slew of bad news I thought we might be able to catch at least some oversold bounce - but it didn't last long. By mid afternoon the bulls had shot their load and we reversed down. I had somehow ingested melamine infested Kool Aid and actually tried to buy some extra long exposure and cut back on short exposure guessing we could have *some* bounce... nothing. I don't know what exactly was holding the market up most of the day Friday ("invisible hand") but it gave out at the end of the day. Remember, at its worst in history the S&P 500 traded 37% below the 200 day moving average (Nov 2008) 25% used to be considered "extreme". Where are we today? Roughly 1080 on the 200 day moving average, so S&P 735 is 32% off. The rubber band is being pulled farther... and farther... and farther - eventually it will be released and we'll "snap" back upwards. If you are curious - to get to a 37% distance from the 200 day moving average we'd have to get to S&P 680. So yes Dorothy - it can get worse from here.

Our exposure is a bit deceiving as it was changed relatively sharply Friday from how we were set up most of the week. We said in last week's summary there were 4 flies in the ointments of a "bounce": (1) the economic news flow is horrific and getting worse (2) it just seemed "too perfect" to bounce off S&P 741 and return to a bull market move - perfect just never works in the stock market (3) there still were places to hide in the stock market - what we call the generals: healthcare, technology and China related stocks (4) no true panic, no "throw up" moments

Now, MUST those conditions occur for a tradeable bottom to fall into place? Certainly not - but they would make me more trusting a "toss up hands in the air" moment is occurring - the type that exhausts sellers. Healthcare was finally blasted last week as people came to realize that Obama is actually going to promote competition to some degree (lower profits) in the healthcare system; some pockets of technology weakened during part of the week (although held up Friday) and China was China. Still no panic - just more of a "disgust" feel... apathy perhaps? Panic will be when almost every stock starts taking 8-12% hits ... (just think back to periods in summer 2007, January 2008, spring 2008 and fall 2008) If this "waterfall" type of selloff happens I am not sure where exactly we'd be heading on the S&P - I envision S&P 700 since the market loves big round numbers but you just never know in a stampede. On the plus side the sharper we fall, the more pronounced the following rebound will be (small comfort) - timing that turn is very difficult and if November 2008 is any indication if you are 2 hours late you missed half the rebound.

In a normal period I'd be talking about sectors, individual stocks, trends, fundamentals. All we have to cling to nowadays are government interventions, news breaks from CNBC to squeeze shorts, and technicals. The more I'm reading out of Europe the more I am shuddering - they are in the same situation the U.S. is in, but unlike the U.S. there is not a rush to buy their governments' debts hence allowing them to constantly raise money for bailouts. So the potential fallout is quite frightful out that way. As for the U.S. I think the ultimate bottom comes when people drop the denial and realize the problem is bigger than the government. That should cause the final breakdown - from which we could build anew. But for now that stubborn faith just gives us water torture selloffs; one after the other - the slow pulling off of the Band Aid. Coming full circle with sentences at the top of the post - as dark as it is now, we will have a "hope" rally sooner or later... let's try to catch some of that, while protecting capital in the interim - realizing we will miss part of the move by protecting our capital. And when that rally comes it will be nothing other than a market that is extremely oversold bouncing.

On the docket this week are some more earnings releases but we are close to finishing out the "season", more government plans, more bailouts, more rescues, more hope of Timmy Geithner saving us from ourselves, and a slew of economic reports (ISM, and ISM Services will be focus of market)..... and the Friday monthly employment report. Since we've added a lot of readers of late - I will be doing a full "why this report is a lot worse than the government wants you to know" entry Friday once the data is out as it's been about 4 months since I've done one. We know the employment report will be awful; what matters is how the market responds to it - and where the market is by Thursday night. So in summary - from a pure technical standpoint we look to be in serious trouble here as November 2008's lows are "broken" and barring an inflow of buying the more probable outcome in the near term is down. The last move down in an down move is usually the sharpest (and scariest). But the rubber band is getting very stretched so it's going to be dangerous for both long and short players the lower we go from here.

To put a cherry on top of this "cheery" overview, an interesting posting at this link - effectively it shows that inflation adjusted the market is up 10% since the 1966 peak (42 years). No, that is not 10% a year - that's 10% total aka 0.24% a year. Buy and hold anyone? (note - it is easy to pick the peak in 66 and make the numbers look quite bad but even if you picked a trough the news is not much better) Since the 1929 peak? (80 years) 55% total return inflation adjusted or 0.7% a year. Again that was a peak reading and if you were so lucky as to have any cash left after the 90% drop during the Great Depression you obviously would of done better ;)

2009 - the year of 98% gloom (reality) and 2% cheer (panda bears and other happy things)

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