Sunday, March 8, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 31

Year 2, Week 31 Major Position Changes

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

Cash: xx.x% (vs 55.5% last week)
32 long bias: xx.x% (vs 32.7% last week)
11 short bias: xx.x% (vs 11.8% last week)

43 positions (vs 39 last week)

Weekly thoughts
First a technical note - there is no updated position sheet this week. Without a lengthy explanation, the one bug that has surfaced on (my tracking system) is late day orders - everything is done with a 20 minute delay so for whatever reason orders placed in the latter part of the day don't seem to register. They will sit as open orders and hit the next trading session; so this week in particular I closed out an Apple short along with about a 10% reduction in my short exposure as the market ramped up in the last 30 minutes. The tracking system did not execute any of those trades so my current account value and position sheet is misrepresented. This is an ongoing issue but only becomes apparent to reader on Fridays since I use Friday's closing values for the weekly updates. The technical team has had to go in and make manual adjustments for any late day trades so until they get to it Monday, the account and position values will be incorrect for positions I adjusted late Friday. The number of positions is accurate as are the long versus short # of positions but I do not know the exact weightings - hence this has been skipped for this week.

I will keep the market analysis relatively short - it was another ugly week, the S&P was down 7%. We are now down 25% year to date making those who pronounced that 2009 could not be as bad as 2008 a bit silly. But that's what pundits do. It is very clear we are very oversold, even from my perch (and I've been quite the negative nelly). I've said countless times that 2009 would be a ping pong motion between hope and reality and we've had reality wash over us. When denial gives way it is a very harsh change. It's soon time for relief - we are very overdue for a bounce. The S&P 500 is now as far below the 200 day moving average as the worst of November 2008 (which was the peak of a multi month downturn similar to what we are seeing now). That doesn't mean we necessarily bounce Monday or Tuesday but the rubber band is pulled back severely and when it turns I expect it to be violent.

I have not talked about individual stocks much of late because it's been a waste of time; a very frustrating fact for those of us who enjoy stock selection based on fundamentals. Most of the past week I was not bothering much with individual stocks - much of it was putting hedges on (sector and index ETFs both long and short) on... and then off.... and then back on... and then back off. Trying not to get caught to either the downside or a violent reversal back upward. While the money has been made on the short side it has become too easy to be a short - wake up every morning, shoot against the market, get a victory 9 out of 10 days. I listed a series of conditions 2 weeks ago I wanted to see to feel comfortable we are near an intermediate bottom - the last two would be (a) for true panic to erupt (wholesale selling of positions down 8 to 10%ish a day) and (b) the shooting of generals (market leaders).

Friday we saw the shooting of leaders especially of the large cap technology type - that was the last real holdout. I don't know if we've seen panic - this has been a slow motion crash instead; in fact it has been striking in how orderly it has been. The day I want to see is a very bad open, wholesale selling even in names that people have been hiding out in, and then a reversal late in the day on very large volume. That day has eluded us. We had a wimpy reversal in the last 30 minutes of the week which looked from this perch nothing more shorts covering. Now, it doesn't have to play out this way for the market to rally - it just would be a "trademark" signal that market veterans would prefer to see as a signpost.

I do believe as I travel the internets that more and more are moving from denial to acceptance of reality. Instead of living in their utopia of "2nd half recoveries" and "it's ok, we're America!" I am finally seeing some form of fright and discomfort that it really might be different this time - as I have been saying this is not a cyclical downturn; this is structural. So now as I read blog after blog, and financial website after website sound like we were sounding a year+ ago, I feel more comfort in that. People are throwing in the towel and coming to our side. Acceptance is importance to the healing process. It is dawning on them that there is no 2nd half 2009 recovery and in fact there will be no 1st half 2010 recovery. But that doesn't mean we cannot have strong rallies in the stock market from time to time - I love betting against crowded trades and quite soon the "end of the world" trade will snap people's necks. Those who drank the Kool Aid of their own making will have very little money left to partake in said rallies.

There is one last denial out there - and that is the shape of the recovery. This too shall surprise people to the downside and I laid out the case here in late 2008 [Dec 15, 2008: The "Recovery"] Government throwing massive amounts of money at the system will create false prosperity in the government statistics late in 2009 and in early 2010, but the truth will be far uglier. The same people who first denied we would go into a recession and then relied on old playbooks (corporate led recession, rather than consumer led recession) shall miss the boat on this one as well. The scale and shape of the recovery we are going to endure will be disappointing to the serial Kool Aid drinkers. But we won't come to acceptance of that until sometime in 2010 - probably around the time Obama & Co tell us we need another $750 Billion to $1 Trillion stimulus plan. (get China on the line - we're coming back for more dough within 12 months)

The mood is awful and rightfully so - that is what happens when banking on the facade of hope is ripped away. The problems are huge, historic, and have been decades in the making. Those who told us of 2nd half 2008 recoveries continue to get face time with their 2nd half 2009 recoveries... they have been discredited to anyone who has any rigor. Epic problems like this are going to take years to cleanse. And many more tax dollars. Outside of an investing perspective, the solutions we are creating to fix the problems in the near term are going to cause many issues for our country in the long term. But that's a fire to deal with at another time. For now, let's expect some sort of quite strong rally to work off some of this oversold condition sometime "soon". And when those who have been wrong the whole time down tell you "this rally" is clearly a "sign" that the "economy will improve in 6 months" because "that's what the market does, it tells us about the future" - ignore them.... again.

For the fund I am going to try to catch the "turn" by moving from one side of the sector/index ETFs to the other - shorting these Ultrashort ETFs when they turn is a great way to create profits if you can catch the turn. Otherwise it is painful. I tried to catch a turn on the late day reversal Wednesday and got caught - in 1 day we lost more than the entire year to date. We'll make this up when a real bounce occurs but until then we have to stay hedged even though it is getting extremely long in the tooth on the short side... there is always a chance an oversold situation can get even worse. Since it takes too much time to do a bevy of orders in individual stocks when the turn comes I'll be sticking mostly with the ETFs for now. In a less hectic market we'd be focused on individual stocks rather than ETFs - but clearly this market is the definition of hectic.

I'll leave you with this quote which a reader sent to me via a BusinessWeek article by Joel West - it really sums up our current era of leadership versus the Washingtons, Lincolns, Jacksons, Hamiltons

Our country is ruled by a caste of lawyers who are almost to a man (or woman) economically illiterate. They know how to write laws to redistribute wealth but don’t understand how that wealth is produced. They also write laws that make it easier for lawyers to extort money from productive members of society, and centralizing power to lawyer-politicians who use that power to stay in power.

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