To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.
Cash: 56.4% (vs 48.0% last week)
25 long bias: 29.2% (vs 38.8% last week)
11 short bias: 14.4% (vs 13.2% last week)
36 positions (vs 40 last week)
Weekly thoughts
The green shoot economy has now sprouted saplings in all directions. As it had in latter 2007 when the equity market raced to all time highs while the bond market signaled distress, or multiple times in 2008 when the equity market bounded higher forecasting a recovery only it could see - we are back at it again. 5 weeks ago investors felt the market had no bottom, and the drops would be ceaseless - despair was high. 5 weeks later investors feel the market has no top, and the gains will be ceaseless - euphoria is high. The truth lies somewhere in the middle.
Two weeks ago I wrote in my technical analysis piece [Mar 27: Where We Stand, a Technical Look at the S&P 500]
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.
In last week's weekly summary I wrote [Apr 5: Bookkeeping - Weekly Changes to Fund Positions, Week 35]
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.
Every so often I should listen to the guy who writes this blog. The government came in and took care of the insurance problem - more bailouts. And commercial real estate took off for... well, highly shorted positions.
At we head to our prediction of S&P 870 (just one easy 1.6% move away) it has become quite an interesting situation (really, when is it not interesting lately?) It is nearly impossible to short things because those names are heavily shorted by others and as any "green shoot" emerges, shorts panic and very narrow doors are filled with many bodies, causing explosive moves up. Despite entering last week with a nearly 4:1 long/short ratio of exposure (which proved correct) we lost money because the names short exploded higher while most of the long exposure we had was rotated away from and into more speculative fare. Further, any "paired trades" are not working because the stock shorted against is moving so rapidly up that it destroys any "offset" gains on the long side. After American Express (AXP) turned positive on the charts last week, but Capital One Financial (COF) lagged below a key technical level; I briefly considered a pair of AXP long and COF short. In a normal market that would be an interesting trade - in this market, the student body all moves left or right together so these trades become unfruitful. (p.s. a quite compelling piece in this week's Barrons on AXP). Last, technical analysis on individual stocks has become moot because news events combined with the above mentioned short covering are causing stocks to explode higher, rendering resistance areas on charts harmless. So without the safety of charts, creating new short positions or adding to is like running in the dark with scissors.
With that said, while we drink to green shoots - ultimately stocks are a reflection of earnings. As I've facetiously said with so much money being poured into this market by powers that be, perhaps we have a recessionary stock market with P/Es of 30, 40x. At this point, for example - after these run ups I see retailers with FORWARD P/Es of 20+ in a CONSUMER led recession. These are valuations that were seen when credit was loose and house ATMs were the calling card of America. Even if one DOES believe in such recoveries and "forward earnings are understated" (which is one seriously optimistic view), valuations are still extreme in many sectors. But that's logic, and logic does not apply at this point - neither do charts. All that matters are green shoots. To that point I loved this quote
PNC Chief Investment Strategist E. William Stone said in a note this week. "Some economic data ... have turned less negative, which is certainly welcome, but some portion of this so-called 'recovery' is due to the fact that numerically it was difficult for the data to get much worse.
So as just 5 weeks ago it seemed all was lost and this market could never rebound, so has the pendulum swung - so quickly - in the opposite direction. This was the swing between hope and reality we discussed would be the hallmark of 2009. For now we have endless rallies on nothing more than "we have seen flattening or small upticks from worst ever readings on economic data" or "banks handed the tax payer dollars, along with cost of capital approaching zero can indeed find a way to make money - just don't talk about their balance sheets. Or stress tests." More signs of green shoots are emerging - just this weekend I have heard of the return of 0% financing on autos for 72 months. Excellent! We're learning greatly from our excesses of 2004-2007.
Just as the pessimism was at extremes just 5 weeks ago, now we are getting extremes on the other end. And just as we were shocked (even as economically leaning bears) that the market could fall so much, so quickly, and so far away from the 200 day moving average - without relent, so we have to be prepared for the opposite side. But in the end there has to be some reconnect with earnings - the market is indeed, a price discounting mechanism over the long run on said income streams. And that's the arena we enter now as we hit the meat of earnings season. In a strange twist of irony, the government supported banks given a yield curve of ungoldy proportion by Uncle Ben and his team of mad bomber economists could create (and I use that word purposely) "better than expected" earnings in the financial arena, while those stocks that still face that lowly area called "Main Street" could disappoint. And the further we go up - with so many charts without any meaningful support - the larger the air pockets we create so when any signs of weakness (reality) are acknowledged as something more than "backwards looking"; well you know how that turns out. But as always, the timing is everything.
I continue to stand by my shifting basis to a more of a double dip recession, which is really one big recession interspersed with government intervention of an order of degree never imagined. We now are in the phase where that order is both recognized and anticipated - as we have stated countless times, economic figures will become meaningless on many levels over the coming 9-12 months as a tsunami of dollars is showered from the powers that be. Then we'll hit the steady state of the new normal - the refinances at 4.50%... 4.25%? 3.75%? will be complete, the unemployment figures will still be well over 10%, the commercial office and retail space will still sit empty, the "replacement of inventory" orders will have been completed and Wall Street denizens will require more than "it's not getting worse than all time historically low data" to create rallies. But between now and then I'll expect at least 212,972,481 sightings of the words "green shoots" - the new Kool Aid.
As for strategy, right now it is a very difficult environment - the past two weeks especially hard. The market is gapping up or down in significant manner almost every day on news releases which is impossible to game. Charts on individual stocks have become unreliable. And trying to guess which bad earnings reports will be viewed as "a reality check" vs "needless information since we're looking ahead" will provide even more confusion. So while - at this pace - we can expect a moderate sized decline in due time as the bullish become more soaked in a lather; when it happens we don't know & how much money can be lost by "valuation means nothing to me" buying (and short covering) while we await that point - is large. Until the charts begin to behave in a more rational manner we're going to stay smaller in position size - without guideposts that work, it does not make much sense to continue to make sizable bets. We'll continue to hold solid companies on the long side, take some profits on big runs and try to buy some portion of the positions back on pullbacks. On the short side while we have some placeholders - as chart after chart turns back to "good" we are quickly running out of candidates from a technical perspective at least. On a fundamental basis many remain - but those are buffeted by "just wait 6 months from now when the story improves - even if the CEOs don't say that, we believe it". So shorting on fundamentals at this point is a fool's game until the pendulum swings back.
On that end, 5 weeks ago I could find almost no charts or groups that were holding up (for example stocks above 20, 50, and 200 day moving averages) i.e. potential long candidates from a "technical perspective" - most of the few winners were in such areas as drug makers, adult education, and supermarkets. Now, I can find very few charts where stocks are below all 3 key moving averages - and indeed the ones that are our mostly found in .... you guessed it: drug makers, adult education, and supermarkets. The shift is that profound. So to win at that juncture you had to short "good charts" and go long "bad" - i.e. signposts meant nothing.
If I were a betting man I'd say the indexes shall return - on a quite sizeable pullback - to S&P 810ish or so sometime in the next two weeks, but at this point this dip must be bought as we green shoot our way to dollar papered prosperity.
