Sunday, March 29, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 34

Year 2, Week 34 Major Position Changes

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

Cash: 62.3% (vs 53.8% last week)
24 long bias: 18.3% (vs 32.5% last week)
13 short bias: 19.3% (vs 13.7% last week)

37 positions (vs 38 last week)

Weekly thoughts
Yet another government filled week dominated our "free markets".... Monday was explosive with rampant celebration from the taxpayer handout... err, subsidized price discovery mechanism.... err, fair to all Geithner plan aka win/win/win for all (per PIMCO's Gross). After the 7% move Monday the rest of the week was listless but in a narrow range and considering the huge move we've made in three weeks, that is a victory for bulls. Personally, I have no idea what prices mean anymore as so much money is being thrown into the system and so many markets are now government supported, I have no real signposts to use - hence I am simply adopting a very short term technical view and taking it day by day. In [Mar 27: Where We Stand, a Technical View of the S&P 500] I laid out the roadmap I am using from 40,000 foot point of view....

... and we'll go with that. For now after a period of abject despair in latter January and all of February we've returned to the same variant we've seen multiple times throughout late 2007 and all of 2008 - the government will fix it. The ping pong between hope and reality we said would play out in 2009 is alive and well. You could not give stocks away a month ago, and now people are climbing over each other's backs to get to them.

We continue in an atmosphere of herd trading or what I called student body trading - everyone wants in, or everyone wants out. Really it is quite remarkable that since summer 2008, we've had these constant mad rushes all in 1 direction (or the other) continuously except for one period of calm in December 2008. It is really hard to focus on individual stocks, because it has all become a tad meaningless since no matter what sector you are in during the bull rushes it all goes up, and during bear periods almost everything goes down. Hence individual stock selection, fundamental analysis, relative valuation among stocks in sectors has really lost almost all value. A very difficult situation for someone like me who enjoys those endeavors. Most every day is about guessing which way the market will move 2-4%; abnormal. But this is the market we are now stuck in.

As you can see, I've cut back my long exposure after this 7% Monday move, and 20%+ three week burst. I'm neither bullish or bearish here; while I do believe bulls have the momentum for now, we've come so far so quickly I believe even the bulls would concede a 5%ish pullback with some sideways consolidation would be healthy before a new leg up. If indeed that happens it would take us to the S&P 780ish level. More than anything I am simply hoping for another period like December where we thrived... a time when stocks were not slaves to the indexes, and good stocks went up, and bad stocks down - benefiting a strategy such as ours. We seriously lagged the market Monday as a high cash, and relatively hedged portfolio (we were 3:1 long to short going into the week) will always do, but in the chop/sideways action the rest of the week provided we made up our gap. Money has been moving into all the "we are going to be fine in 6 months" groups, which caused us some pain percentage wise in some shorts we had on the consumer side but since I kept position sizes smaller thinking the bulls could have more strength in them, the dollar losses were manageable. I am going to keep a somewhat bullish inclination although my weightings would not indicate that - I've simply let go on overextended charts [Bookkeeping: Selling Some Overextended Charts] hoping to "buy on dips" and get better prices in long positions. I will give the bulls the benefit of the doubt, as long as we fall to S&P 780ish and hold that sort of area... further, if we forget about resting and make another rocket shot north of S&P 825, we'll have to reconsider upping some long exposure as well.

We are coming into another round of interesting economic reports - and earnings season fast approaches. As always we say what matters is not the news, but the reaction to the news. We now accept at face value when Citigroup CEO says, when the government lets us borrow money at nearly zero, and we lend it out at something more than nearly zero - we make profit. We took that as a great sign, although I believe most 2nd graders could accomplish this feat. As long as you ignore all the toxic assets - these are wonderfully profitable companies. We now accept that home unit sales grew month over month (February over January) which happens every year - even though year over year sales declined. (which is how it is supposed to be measured) So despite the government interventions of historic proportions, driving mortgage rates to lows never seen - despite home prices falling 15-20+% year over year in many markets - despite foreclosures being half the sales... we still saw lower unit sales than a year ago. But the market chose to ignore that and instead cheer that unit sales are higher than January - what the media terms an "upside surprise". [with that said, this is exactly why we own housing related stocks; just imagine the market reaction if a real positive surprise ever developed] We chose to celebrate a very volatile durable goods order; the most volatile economic report we have - while ignoring the previous month's downside revision. A month from now when the February report is also revised downward, it will be long forgotten. Time to pile into refrigerator stocks, home improvement stocks, et al - the consumer is back. Best Buy (BBY) despite seeing the liquidation of its largest competitor, still had nearly -5% same store sales versus a year ago... but that's ok, it was "better than expected". Many more data points - but you get the picture. The news is quite irrelevent to the stock market - the key is the reaction. For now, all news is good news. If you don't respect that you will get run over.

This Friday is the employment report - one of our favorites. An extremely flawed report, that people overreact to - but we'll see how the market wants to spin it; that is all that matters in the near term. What is interesting is the last few reports we've entered the data point in a state of dismay and horror. This one (barring a collapse in the next 4 days) we will be entering in a drug like euphoria. Therefore, the reaction to whatever is spit out of government will be quite interesting and telling for the intermediate term. Remember, the bulls will spin things the best way they can to create a nice story: (a) when unemployment was holding up a year ago they said "the data does not imply a recession, just look at how solid employment is"... (b) now they will turn 180 degrees and say "employment is a lagging indicator; the market will turn up before your silly employment reports will show you things are recovering". It is funny how this report, which is so watched, can mean nothing in either case - not if it ruins the bull's thesis. It's either "holding up quite well" or "just a rear view indicator". They truly can have it both ways. As for earnings report, now that we are a few weeks ahead of the meat of earnings we should start hearing the first spate of warnings by companies that actually live in the parallel universe called 'the real world'. Again, how this is spun is all that matters - if you see constant "yes that's the past quarter, in 6 months from now when everything is ok things will be better" than you have to keep a bullish bent. If, on the other hand, you start hearing "ok maybe this was just a short covering mirage combined with window dressing - gosh darn these earnings are putrid and why do none of these companies have visibility if in 6 months everything will be fine?" than you start to turn back to a bearish bent. As I said 3 months ago - I expect company after company to withdraw full year guidance as visibility is awful - that came to be true. In spades. I continue to expect more of that but we'll start to hear in some cases "while not getting better our business is about as awful as last quarter" - again the bulls will take that one by the reigns (second derivative time) and say "not getting worse! that's a sign to buy!" etc. So I expect much Kool Aid and misdirection.

It's really going to be a very tough year ahead to gauge things - after seeing what levels the government is willing to go to, to kick the can down the road by flooding the world with a tsunami of US dollars - all assets at some point will be inflated above and beyond where they should be. A fixed amount of supply of stock transposed with wave after wave of US dollars thrown at it, are no exception. So perhaps with the actions taken by Big Brother we can enjoy the first P/E multiple of 30+ at trough of recession. That would be "success". Abnormal... but "success". Basically what Greenspan did for the US housing market, Bernanke has done for all assets. We cheered Greenspan at first too, because nearly free money is always a fantastic near term illusionary prosperity - the inflation in housing assets was "awesome dude" until it all broke apart. And "we" now similarly cheer Bernanke today for following the same path - but in much larger swathe. Until a similar time of reckoning occurs; humans are apparently not ones to learn from history very easily. But for now... the cheer phase... in fact - glee, the government has saved us. Again.

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