Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 35

Year 2, Week 35 Major Position Changes

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

Cash: 48.0% (vs 62.3% last week)
28 long bias: 38.8% (vs 18.3% last week)
12 short bias: 13.2% (vs 19.3% last week)

40 positions (vs 37 last week)

Weekly thoughts
Let's start off this week's summary with a quote from my summary last week [Mar 29, 2008: Bookkeeping - Weekly Changes to Fund Positions Year 2, Week 34]

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 began the week with a large dip on automotive bankruptcy wording from the Administration but as I wrote last week, I'd be a buyer on that dip. I quickly changed from a 1:1 long/short hedged exposure to 3:1 long to short. That worked wonders as we rebounded nicely later in the week but two big problems this week (a) the rally broadened into the more speculative low price fare and (b) well, see point a. So we were hurt in two ways - we don't own much of the speculative low price merchandise for obvious reasons ... basically the only sub $5 position we owned coming into the week was Excel Maritime (EXM) and we made out like bandits on that position but it was 2% of the entire portfolio. We added Gafisa (GFA) a Brazilian homebuilder [Mar 30: Restarting Gafisa as Sam Zell Continues to Increase Stake] and Blackstone (BX) a private equity firm [Mar 31, 2009: Bookkeeping - Starting Blackstone Group] which will be effectively leveraging the US tax payer for potentially super sized profits on the early week dip and those two paid immediate dividends. But as a group these 3 are not a tangible part of the portfolio.

That was the ill story on the long side; on the short side those same low priced, heavily shorted stocks for obvious fundamental reasons screamed higher as a combination of short squeezes, hedgie/daytrader fast money buying, and more short squeezes led to explosive moves higher. So despite a correct movement in the portfolio to move the exposure heavily slanted long the moderate short exposure was painful - many stocks exploded higher 20-50%+ higher. Hence, even smaller exposure led to large dollar losses in very small periods of time.

A week ago Friday in my technical analysis piece [Mar 27: Where We Stand, a Technical Look at the S&P 500] I wrote

If bulls become even more comfortable we can expect a lot more speculative action in the low price stock arena, and reports of stocks moving 40,50% in a day based on... nothing. Heck, if things really get crazy even commercial real estate stocks could begin to explode higher.

So both actions came to bear - speculative juices exploded and took low priced stocks with them, and "heck even commercial real estate stocks could begin to explode higher". Check and check - occasionally I should listen to myself to avoid pain. Now if the pattern continues (squeeze, spec buying, more squeeze) we could have the same situation we saw in commercial real estate, play out in credit cards and insurance so I am ever vigilant and will be bailing out on short exposure there on first signs of rabid foam on mouth of bulls in those groups.

Portfolio wise I lightened up on some long exposure but as I indicated, I would replace this allocation with ETFs which I can more readily move in and out of. So I did do that very late in the week. A quick look at the S&P 500, and I will be introducing a moving average we have not talked about in ages as it has suddenly become relevant again - the 100 day moving average.

From a technical point of view, there is very little to argue with in this state of the market - it continues to grind higher... all dips are being aggressively bought... and we are slicing through technical resistance areas as if they do not exist. Volume is not super but the reports from the "floor" are that mutual fund money is finally entering the market late in the week. So it's no longer just hedge funds flying in and out, along with retail traders. Further, as the first few paragraphs laid out there is a widening of breadth - many more sectors / stocks are now participating. The Financial Times reported this week that quant (hedge) funds are back in, and having their normal fun - I have noticed some of the crazy late hour jumps (S&P 500 moving 3 points in 20 seconds) that are their footprint. Oh joy.

I do believe this is a very technically driven market, and buying begets buying - selling begets selling. We've been in a student body left (must buy everything and anything) or student body right (must sell everything and anything) world since summer 2008. Applying much logic to it is a waste of breath, it's simply constant revolving of the door from fear to greed... and back. So as we peruse the chart of the S&P 500 we see each dip to the 20 day moving average since mid March is aggressively bought (which is why I was a buyer last Monday) With 3 pronged attack of (a) quantitative easing (b) Geithner PPIP taxpayer giveaway and (c) mark to model accounting reblossoming - it's been a party. On those days, where news events drives the money, trying to use squiggly lines to measure anything is useless. But each time the market looks ready to stall or at least rest, the white knights come in with their lances and drive through the shorts. So much evisceration is evident that not only have we burst through the 50 day moving average but for the first time since June 2008 we've now cleared the 100 day moving average - roughly S&P 832. Which again, was an area the buyers stepped up aggressively Friday repeatedly. So my target of S&P 870 still looks more than achievable as bulls currently feel bulletproof and performance anxiety hits those on the sidelines. Each day that goes by the market trades up, and managers sit in cash the more apt they are to commit to the market. In a deep irony people keep waiting for a deeper dip to jump in, but since so many people are seeking this dip - a quite deep one does not develop. This is the current psychology as I see it. Playing on the short side right now is akin to playing on the long side in most of Sep-Nov 08 and most of Jan-Feb 09.... you can make some bucks but you have to be fleet of foot with perfect timing or you will be road kill. Not until the move exhausts itself and rationality replaces emotion can one become more aggressive.

Fundamentals? Earnings? Economic reports? Nonsense - who follows that stuff? We have government - that's all we need. As always it is not the news, but the reaction to the news we watch. Friday's employment report was summarily dismissed as backwards looking and away we go to rally. We've been celebrating "silver linings" in a host of very bad economic reports - many are skewering from "worst ever on record" to "2nd or 3rd worst ever" but that's good enough for today's brand of bulls. Bad news? We don't mention it. The Baltic Dry Index (a worldwide shipping rate) which was used as a crutch for bulls for months as it rebounded from levels not seen in years, had a period of 13 days down in a row. Not a peep. Friday, after the employment report came the ISM report (one of the few important reports to keep an eye on) for services. Services happen to be 70% of our economy. It was "worse than expected" - but that seemed to disappear quickly. So this is simply the mood and one must respect it or get skewered - bad news is twisted into good or "better than expected"... and worse news is ignored. Until that changes we have to suspend belief or cognizance of any economic reality and go with the flow.

Two last points to finish off the week - there are so many long term negatives we are creating by yet another kick the can policy. Indeed, this is the biggest one on record, but in a country fixated on the tree in front of us, we will worry about the long term implications at a later time. That served us well as we cheered the 2003-2006 bubble, didn't it? I was bemused on one of the Sunday talk shows today hearing a litany of bad news but then the host saying "but despite all that the market is rallying, telling us there is hope in the near term future" (I paraphrase). Despite getting a good chuckle, I see nothing will really ever change in the country... which was my suspicion. We are already back to the "market as scoreboard" ideology. Despite robbing us of national treasure like no episode in human history, the arbitrators on Wall Street are already the ones we need to look at to see if national policy is "correct". Let me tell you - if I could leverage the taxpayer for my bailouts... for my future investments (both as backstop and partner) offloading 90%+ of the risk to the peon class - well let me tell you I'd be bidding this stock market up in wild euphoria as well. Ah yes - Wall Street is Main Street. Keep singing it kids.

Finally, to the kicking the can situation - let me tell you in the broadest term what we (and some other nations) are doing. If you are an accounting folk, think of a T account - with a debit and credit account. If you are just a normal American who understands a balance sheet (even your own personal balance sheet) simply break it down into assets and liabilities. Each program the Treasury (in minor form) and Federal Reserve (in massive form) is creating and putting into the US economy increases our assets.... while simultaneously increasing our liabilities. Most assets are shorter lived ... and more easy to observe to the common man's eyes. Home prices. Stock prices. Hence this "false prosperity" is celebrated since it is immediate and the pain is just increased costs that 'someone' has to pay 'someday'. It was the same ethos in the "magical economy" that Alan Greenspan created for us. We cheered, we flipped NASDAQ stocks... then later houses. We did not bother to save - why should we? This is prosperity of the efficient nearly free money economy. This was our asset prosperity - and that was only from 1% Greenspan interest rates. But we didn't talk about liabilities - those are long term issues and we don't think about the long term in America. If it is longer than 1 election cycle its dirty and for "academics" to debate.

Now let me assure you what Ben Bernanke is doing (if you cheer him or not, or believe it is "necessary" or not) is multitudes of levels of what Alan Greenspan ever did. It would be like comparing a solar system versus a galaxy. You might argue "it must be done Mark!!!!" or "What else would you have him do! We simply cannot take the pain!" I would argue there is no cost free situation. As each asset is printed and tossed into the system, a liability is built on the other side of the national (and in turn each citizen's) balance sheet. Day after day we create new money to buoy assets (this make people happy, giddy, and jovial) - these are our obvious near term stock appreciations, our subsidization's of the monied elite, and eventually even a few bones for home prices. That's on the surface. Beneath? Day after day we create long term liabilities.... 1 for 1. Both sides of the balance sheet are increasing exponentially - but the liabilities are to be answered to another day, another quarter, another year, another decade. We don't know when but "we'll cross that bridge when we get there." Right Alan G? But the easily distracted masses mostly can only focus on the near term benefit and they can mentally remove the liability side of the equation. Or simply be ignorant of its existance. Let me break it down in Joe SixPack talk - it would be like you buying assets with your credit card - but only recognizing what you've bought on your personal balance sheet. This is the point we've reached as a country. We will be told it must be done. We will be told we'll rev up the economic engine to the point that we'll be able to wipe out the liabilities "some day". We'll be lying - the US is not headed for 8-12% economic growth over a decade's time which is the level we'll be needing for the level of liabilities we have created and will continue to create. The great irony is risk is shifted each and every day from "the market" (remember Main Street is Wall Street) to "the taxpayer" (trust me, at that point Wall Street will not be found anywhere near Main Street). So yes Sunday news talk morning host - the market is clapping its hands at glee. Just as it did as Greenspan made money nearly free, and profits were to be made left, right, and upside down off Main Street ... get it while the going is good. The long term damage to the peasants shall only grow by the day... thankfully they can be taught to only focus on one side of the ledger.

Honestly, it is a very sad thing to see play out - but I suppose I'll change to "ignorance is bliss" model, because it is too depressing to think about not only what we're doing - but the absolute cheer by many that we've taken this path. It's the "easiest" way. Kick the can America. Kick it far.