Monday, March 23, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 33

Year 2, Week 33 Major Position Changes

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

Cash: 53.8% (vs 68.3% last week)
26 long bias: 32.5% (vs 26.9% last week)
12 short bias: 13.7% (vs 15.8% last week)

38 positions (vs 40 last week)

Weekly thoughts
While the indexes finished the week with little fanfare versus the prior week close, we had a lot of churn on the week, highlighted by the market's excitement with Uncle Ben Bernanke dropping US dollars from the heavens - yet again. This has been the solution since August 2007 with various formats, and as each money drop has failed to pump the economy Uncle has become more and more aggressive. This week he has pulled out all the stops with literal Banana Republic tactics of letting one arm of government (Treasury) create debt and another arm (you could argue that the Federal Reserve is an apolitical non government "arm" but I'd say that's laughable) buying it. I said at the time, in the middle of the high fives that our Uncle was once again ready to stand by "us" to reinflate all assets creating "prosperity", that we'd wake up within a week and look around and realize this was a move of desperation, not strength. It didn't even take that long.... most of our money this week was made betting against the market after the gleeful Kool Aid was showered upon us by "save #21,917,249" via some entity of government. Fade the save... there is no silver bullet.

That said, I'm willing to play the game from the long side and while there is no real edge here up or down, I can speak the language of bulls until we break back down below S&P 741. That doesn't mean I believe it or even anticipate it - I just say if need be, I'll sing songs of joy and recovery in 6 months too! (ok I won't say it, but I'll trade it) Despite all the hysteria of the week we began last week just under S&P 750 and ended just under S&P 760. That's what $1 trillion+ of devalued US pesos (dollars) buys you nowadays - 10 S&P points and a whole of hearts aflutter on Wall Street that maybe we won't have to take all the medicine we so deserve. While I'm skewed "long" for the time being (assuming bulls will make some defense of S&P 741) if that breaks, I'll be back to the dark side (heavy short) in a very haughty way. But between where we stand today and S&P 804 to the topside, and S&P 741 to the downside we're just the plaything of daytraders and hedge funds whose time horizon is minutes or hours. As long time readers know by now, I like to look at "ranges" - and currently I see 2 major ones within the wider range outlined above: (a) 780 to 804 and (b) 741 to 780. For example, last Friday we bounced off S&P 780 multiple times in the morning, then once that broke later in the day we swirled down the drain.

I read very little into the movements in this range, so I'll lead it to the breathless pundits to denote major significance in every little tick. I'm just sitting awaiting the HAL9000 trade - which will be to stress/press (and roll) this market if we break below S&P 741 and make peace with it over S&P 804. Everything in between is just white noise and I really have no strong conviction either way - it will depend on how much hope the next round of government announcements brings to the unwashed masses. As a bull you want to see a period of consolidation in this wide range - building a base to remount an attack on S&P 804 in the coming weeks.

On the economic front... really why do we bother? It will be bad - Monday is existing home sales so what the bulls will look for are those "2nd derivative" improvements we talked about last week... i.e. instead of home prices falling 18.7% year over year, they are "only" falling 18.2% year over year - "improvement is here", the trend (while horrific) has changed - buy stocks. Just preparing you for the Kool Aid that you will hear over and over the next 18-24 months. That said, I'd like to point out that housing is my "stealth" theme for stock market gains - we have 3 names in our housing basket and as I outlined in [Feb 11: Beginning Starter Stake in First National Financial (FNF)]

So our strategy in this area
  1. Ocwen - low volatility mortgage workouts that the government is going to be pressuring banks to do
  2. First National Financial - medium volatility title insurance; all it requires is a lot of foreclosures start changing hands
  3. (pick a homebuilder ...any name of 6-7 will do as a proxy) - high volatility; daytraders/hedgies play these like penny stocks or financials, buy dips - sell Kool Aid moments
  4. Avoid retailers dealing with home improvement because many Americans are going to be struggling to keep a roof over their head - they won't be busy redoing a kitchen. But these will rally when Kool Aid about "the 2nd half recovery" is in the air.

To the charts shall we?

Always a bull market somewhere..... now in full disclosure Ocwen Financial (OCN) completely rang away from me, and I sold my lot too soon; this was a quite large position for us in the depths of the abyss (S&P sub 700) but 2 weeks ago I was headfaked out and my 3%+ type of position was cut in half as the stock was breaking support levels. Which occured right before a big reversal back up--- and a moon shot. We are almost completely out at this point, but my greedy hands are waiting for a pullback - the volume is quite low on this so I am still trying to figure out its movements from a technical standpoint. I have failed thus far. First National Financial (FNF) on the other hand has been quite excellent for us - although you have the makings of a double top and the potential for a "short" and/or pullback stares us in the face. I hope so as I'd like to remount a larger long position I sold much of into the Fed induced money drop Wednesday [Mar 18: Bookkeeping - Selling Most of Housing Exposure] Lennar (LEN)? forgeddaboutit. Unlike the other two, just a trading vehicle - she's a mistress....

I spent the week pruning positions, cutting some longs that were smallish in nature and not partaking in the rallies... a bad sign. While this does not show up in "performance" it is something that shows up in "adverse outcomes that could happen to the portfolio but did not" - i.e. we avoided some drags on the portfolio. Some recent punts below ... and I'd like to reiterate the theory that the first step in making money is not losing money... sample cases in point:

On the "gosh darn, I should not of sold just ahead of a B52 bomb attack by Ben Bernanke" we sold James River Coal (JRCC) at an inopportune time. The position size we had was tiny so even if we had enjoyed the "Fed bounce" it would not of helped performance much but... we strike for the perfect game. Can't win 'em all

On the short side, a great many wins in Capital One Financial (COF), and the four headless horsemen of REITs - already two full round trips of 15%ish in just about a week in the latter group. Smaller wins in Wynn Resorts (WYNN).

Overall I am happy with the performance, but with 50%+ of the money stashed in cash each and every week and away from this very bipolar market which steals cookies from children, I realize the position sizes I do have need to be bigger. My win "percentage" has been solid, but the impact on portfolio is muted since I am using a moderate amount of chips. I should be up in double digits for the year if I had simply increased position sizes to compensate for the massive cash stake.

To end, we have another week in a long series of such.... of government interventions. News flow will surround Uncle Geithner and how we'll all make money as the FDIC, Federal Reserve, and Treasury combine to give hedge funds money on a 9:1 levered basis, with limited liabilities to the hedgies and most of the liability on the U.S. taxpayer. All in the name of "it's not nationalization - trust us". Par for the course. In 2 weeks we begin anew with earnings season, and the daily struggle between "horrible news" and "hey it's a bit less horrible than expected, buy all stocks".

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