Monday, April 20, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 37

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Year 2, Week 37 Major Position Changes

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

Cash: 55.0% (vs 56.4% last week)
26 long bias: 32.4% (vs 29.2% last week)
14 short bias: 12.6% (vs 14.4% last week)

40 positions (vs 36 last week)

Weekly thoughts
Week 6 of the little rally that could continued apace - increasing exasperation by the shorts and growing smugness by bulls. Where have I heard that but in completely opposite variation? Try mid February. As the market continued lower day after day, week after week - even the negative among us (hand raised) said "where does this end?" We kept posting how far away from the 200 day moving average the indexes were, and yet we continued down. We overshot to the downside, and if one were just a few days too early on their bottom call - a lot of lost money was the result. Now we seem to be doing the same on the rebound.

From this perch on an anecdotal basis this is the first weekend that people who are not very involved in the market began asking me if they should get back in. Yellow flag number one. I'm starting to get email from bears doubting themselves. Yellow flag number two. CNBC is touting Dow 10,000 - a historic moment indeed! Wait... just had a flashback to late 90s. Nevermind.

So was that the bottom? I really don't care - we have many opportunities to both make and lose money every day and every week. Some will be good weeks, some will be bad. Those who have enjoyed the past 6 weeks the most are (mostly) the same folk who were crying in anguish the previous 8 weeks; those of a "long only, fully invested" bent. Just as I said 2 months ago that believe it or not, the market does go up from time to time; I'll say the opposite today. And this group that's been smoking cigars will go back to a more normalized stance. I continue to look for a very wide range as we ping pong between hope and reality. We had many weeks of reality (or lack of hope) and now many weeks of the opposite. What is abnormal about this market, and has been since last summer was how long the streaks are in one direction or another (more down than up of course) - the moves are without relent. Very few 2 days up, 2 days down, 3 days up, 1 day down, 2 days up, 4 days down action anymore.

As each week goes by the quality of stocks running are either (a) far more speculative or (b) requiring extremely high levels of faith to justify moves or indeed combinations of (a) and (b). That doesn't mean it cannot continue but some of the merchandise running of late borders on silly. Perhaps more than any real green shoot recovery what the market is coming to believe is - there is no end to the financial system and the Fed has saved us. Full scale nationalizations won't need to be done (only de facto ones) and that is a far cry from the perception 2 months ago. So all that leaves us is with the worst recession since the late 70s/early 80s or indeed earlier (in my opinion).

Lost in the hubbub about the "miracle" that are banks was a host of quite rotten earnings reports from companies in the real economy. But since we were able to drive analysts expectations so low into the ground, companies were able to "beat". Now as I predicted 3 months ago - company after company is pulling guidance - and that shall continue this quarter. They (i.e. those who run companies) have no visibility - only the green shootists do.
  • These days, it's not what companies say about the past as much as what they say about the future that matters most to investors. Increasingly, though, companies are dialing back what they're willing to forecast.
  • A third of the 600 companies responding to a recent survey by the National Investor Relations Institute said their policies about financial guidance had changed. Most eliminated or limited the amount of guidance they provide about earnings and revenue.
  • "If you don't know what the future holds and you can't accurately predict it, you don't want to be out there telling somebody something you don't have confidence in," said the Institute's Chief Executive Jeff Morgan.
Some other data points glossed over - and again, I much prefer listening to companies than government reports, often revised - and "positively skewed" over the years by those who don't believe we can't handle the truth.
  1. Walmart (WMT) same store sales fell below 2% in March. (Bulls point to lack of Easter holiday as it fell in April this year - we'll see next month) The CEO of the company that does 10% of all retail sales in US on Today Show saying no hopes for V shaped recovery and he is seeing real behavior changes.
  2. Burger King (BKC) fell 18% as same store sales in US/Canada markets fell to sub 2% in the last quarter, with Germany and Mexico apparently falling off a cliff. Bulls will say McDonalds (MCD) taking share.
  3. Global trade continues to collapse and stay down, ex - what China is buying. Bulls will say "copper" and "Baltic Dry Index is up a few days after falling nearly 3 weeks straight" (remember they only pull out Baltic Dry when it is up)
  4. Common sense - yo! look around, the largest state by GDP in the nation - California (which alone would be the 7th largest economy on Earth) has unemployment that is quickly catching up to Michigan. Even places like North Carolina are now in double digits.
  5. Foreclosure holidays which held down rate of increase for quite a few months, now are over and foreclosure activing is jumping again. This does not include the many houses sitting out on the marketplace that banks don't want to take back onto their precarious balance sheets.
  6. Natural gas market is comatose. Unlike oil, nat gas is still mostly "local" - so a comatose US market, means a comatose US economy. Except for the green shoots.
Now I could make some bull points as well, but poor bears needed some help this week so I thought I'd help them out. Now as I've been stating for over a month - I expect the P cubed economy (that is Paper Printing Prosperity) to show enough "better" data to get the bulls revved up on hopes for a quick recovery. Then either late in 09 or early 10 we'll see the same thing that happened after the mini P cubed economy of the Bush rebate check exhausted.

Some other food for thought - many Americans are receiving tax return money back to provide 1x spurt of income; other Americans are rekindling the house ATM one last (joyous time) this could provide anywhere from $150-$250 Billion of "stimulus" to the economy; and I was postulating the other day how much "stimulus" must be created by the millions of Americans in delinquent (on the way to foreclosed) homes - they are making no payment and living rent free. That money goes back into the economy elsewhere ... once they are forced to begin renting again and actually paying for roof over the head, that 'stimulus' will lessen.

As I mentioned last week, I have noticed a non confirmation in the Chinese large cap stocks - first time in a long time they are not leading the charge upward. So either they are resting before a new leg up (possible) or this bull is getting tired and this is the first warning shot (possible). I'll be keeping an eye out on this group. The other thing that caught my eye was the weakness in long term bonds Friday.

Now this could just be a 1 day head fake so let's not make too much of it yet. If you are not familiar with bonds there is an inverse relationship between price and yield - price goes down; yield goes up. If not for the Federal Reserve supporting prices by buying (creating fake demand), yields would be much higher. Problem. Big problem. Why? Because our whole P cubed economy is based on cheap and easy money. And that's the irony with the growing return to speculative investments, and away from low yielding US debt. The less demand for Treasuries - the more yield that will be required to attract investors. In a NORMAL market. We don't have normal markets anymore because Big Brother is involved. But let it be known, the Federal Reserve will not like it if yields begin to rise (and prices drop). As we look at the chart we see prices dropping to the lower end of their range - if TLT (which is an ETF for 20+ year bonds) drops below 100 I will be interested to see the "official" response. By official I mean Big Ben... and not his words, but his actions. It's such a perverse situation - the Fed cannot hope for people to move out of bonds "too quickly" because then their whole campaign of P cubed (Paper Printing Prosperity) starts to take hits. All the "great things" created from 4.7% mortgages is erased at 6.0% mortgages. But as the "perception" of safety in speculation grows, people will naturally be moving away from this market, leaving the Fed increasingly as a lone buyer. Keep an eye out on this space.

As for the S&P, a much too obvious resistance level here in the S&P 870-875 range is shown below. While many are calling it a double top, indeed it is a triple top - late Jan, early Feb and now. But nowadays all it takes is one good government intervention, a rule change, a new Fed program, a new Obama smile - to get this market breaking through resistance so we'll see how things go.

I don't expect any massive correction based on the chart alone - we are making a series of higher lows and the trend is quite positive. But I would not be surprised to see a decent sized, sharp pullback to scare the bulls and have them rethink their newfound joy. If however S&P 875 is broken upward with conviction, HAL9000 and friends will rush in.

We'll have many more companies reporting from the front line of the 'real economy' in the current and coming weeks rather than 'protected by all evil by Big Brother' economy. No longer will "better than expected" be a surprise and the higher we go, the higher the bar gets. If anyone is "surprised" by the "good bank" earnings (avert your eyes from the balance sheet) at this point, they've been asleep for 2 weeks. For the fund, I am not overtly bullish but after 2+ weeks of taking whippings by short exposure I am getting stopped out of position after position - so we're either closing down stakes completely or cutting back severely - simply as a function of discipline. By doing so we were able to make up some ground by end of the week, that we lost early in the week - although en whole the past 3 weeks have not been full of good cheer. I can tell you why this market is so backwards - and has been for so long. Just about every stock I own in the long column is up, and vice versa in the short column... this is a condition of the "student body left" trading environment. In a normal portfolio I should have a mix of red and green in both the short and long sides of the book; it should not be a 90%/10% skew. So right now "any" long is genius just as 8 weeks ago "any" short is genius. Which brings us full circle to things we've been saying since last summer - individual stock picking has really meant nothing for a long time since we don't trade in a vacuum. It's been more about picking market direction than any rigor or research into individual stories.

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