Sunday, April 26, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 38

Year 2, Week 38 Major Position Changes

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

Cash: 42.8% (vs 55.0% last week)
27 long bias: 36.6% (vs 32.4% last week)
14 short bias: 20.6% (vs 12.6% last week)

41 positions (vs 40 last week)

Weekly thoughts
I am not going to spend much time talking about the market or economics this week, because frankly I am befuddled to some degree. At this point all news is good news and until that changes it must be respected ... I have been surprised by the duration of this rally; we called for S&P 870-875 as an ultimate target since this bounce began but we got here much quicker than I ever anticipated and bulls seem to want to go even further without relent. Unless there is a whopper of an economic recovery coming "in 6 months" the stock market has gone from "relatively fairly valued/mildly expensive" to "very expensive yet people want to bid things up ever more" in under 2 months. The bulls arguement (they always have one) is to ignore earnings for 2009 and look to 2010. So I have to look forward nearly 1.75 years to justify buying? Or my favorite - you have to normalize earnings ... i.e. ignore everything around us because it is abnormal. So, for example the financial earnings of the past half decade - constituting 40% of earnings growth in America were not abnormal... and we will soon go right back. Mmm.... I see. We said in 2008 we were expecting huge swings between hope and reality and have we ever seen both extremes already this year.

We continue into earnings season, and this week is the last big batch of S&P 500 type of companies - after this we begin moving to smaller fare. The Fed meets and Wednesday - after announcing over $1T of new initiatives 6 weeks ago and then declaring 'lo and behold' our paper printing prosperity is drowning the $13-$14T economy with "green shoots" - I am sure they will find glimmers of hope everywhere. And if you thought the market was giddy when individual companies announce business has stabilized at multi decade lows - just imagine when Uncle Ben gleefully announces to the troops even more programs and even more green shoots. I just wonder how many times can we rally off the EXACT same news. It seems infinite. And does anyone care all this is unnatural pump priming? I guess not... any prosperity, however manufactured, is better than the free market working its wonders.

I detached from the computer / TV for some much needed away time, and I come back to find swine's running the world with their flu... I am sure bulls will make this into a green shoot. In fact the speculative traders will just make this SARS 2.0 - time to run up some stocks that are somehow related to the nth degree. Why not BioCryst Pharma (BCRX)? Even if its CEO says -
  • BioCryst CEO John Stonehouse said his company does not anticipate the use of its technology in treating this episode of swine flu. "We're in clinical trials right now and not on the market," Stonehouse said.
Never let the facts get in the way of a good trade - the stock already surged 27% Friday and maybe we can run it up a good 250% from here. Don't let the CEO's comments stop you. And this goes to what this market has become in many ways; just speculative gambling. It has always been that way to some degree but some of the things I am seeing... and some of the late day action is mind numbing. Seeing the S&P move in 4-5 point increments in 45-60 second time frames is very unnerving; I have no idea why it is happening but it seems like someone is just playing a big game of craps. Even when the trade goes in your direction; that sort of volatility is unnatural - Friday in the last 30 minutes we had a massive drop of 10 S&P points at the very end of the day and then a 5 S&P gain in the closing tick. Something is going on, but asleep at the wheel SEC can't be bothered to look into it. Oh well, I am sure someone who is related to a firm that rhymes with Foldman Slacks is having fun and making money for the "right" people. The rest of us will just cheer along (everyone bet on black! everyone bet on red!) and ask the hostess for another free drink. Or Xanax.

Since economic news does not matter (we can find good in all of it) and earnings reports don't matter (green shoots even in the darkest of reports), I'll just go through some charts to fill up this space. First the S&P 500; Thursday I was thinking a head and shoulders formation might be forming - this is signaled by the 3 circles, with the middle one being the head; from this you'd expect a selloff.

But, on the other hand - each pullback to the rising 20 day moving average has been bought - and this happened yet again; the 20 day is down in the S&P 830s and rising. Then Friday, for reasons I am not very clear on - apparently Microsoft (MSFT) with a ho hum report (ho hum is the new black) - we surged higher and made a threat for the "head" (S&P 875). We didn't quite get there but don't you worry swine flu is a good thing and should get us over. If not the swine flu, then whatever gun... bazooka... or ballistic missile B52 Bomber Ben Bernanke has waiting for us Wednesday. It's almost a well orchestrated song now - one week Treasury, one week Obama, one week Federal Reserve, rinse, wash, repeat. Keep rotating "good news" and "green shoots" and "signs of stabilization" one after the other and next thing you know, a forward PE of 30 is yours. Then we'll look back in 5 months at 10%+ unemployment and say "see, told ya - the green shoots came true." S&P 875 is an all important number and every HAL9000 throughout the country will be hair triggered to be a buyer above. And since this casino always knee jerks herky jerky to a Fed announcement as if 180 words changes the world outlook, if we are anywhere near that level Wed 2:00 PM I expect a push through on one of the 3-4 headfakes that always accompy this magic announcement. If the swine flu does not get us there first. At this point on the next pullback to the 20 day moving average I have to change tactics since I've lost too much trying to bet against the swine flue green shoots, and cut back on short exposure until we make a clear break back below the 50 day moving average. My gains on the long side of the portfolio - even when I am 4:1 long v short are simply being destroyed by the shorts. Of course, as you individual investors know - the minute you relent like this; the market begins a swan dive. But we have a pretty clear set up - a wedge, triangle - however you call it... the 20 day moving average as the floor and S&P 875 as the ceiling. We will resolve one way or the other and it should happen with the next 3-10 sessions. Until then making outsized bets either way is only costing us previously hard earned gains.

Let's look at Doctor Copper which has shown the first signs of reversing/rolling over (or) resting - too early to tell. To me this chart says "China is done accumulating for now" [Apr 6, 2009: Analysts Estimate Copper Prices Could Fall 21% in Q2] - now we have to figure out the next commodity they stockpile that bulls can point to as the next "sign of global recovery" - we've used up oil, iron ore, and now copper. Perhaps its time for grains!

I want to use (not so much) Doctor Natural Gas as a sign of two things... #1 just how weak the US economy is; natural gas is not portable (or difficult to move) unlike crude - so it's movements should tell us something about the US economy as electric and industrial (chemical) usage is correlated highly. But it is being ignored - wouldn't it be turning up in anticipation of the "2nd half recovery"?

But since it doesn't fit the tale of green shoots, it's conveniently ignored and instead we talk about commodities that China is impacting with its relentless stockpiling actions. #2 I want to talk about nat gas because this market has gotten so out of whack, that natural gas STOCKS are now moving upward (remember, traders are running out of ideas) even as the commodity itself is in a death spiral.

Sure why not - everything else is disassociating from underlying fundamentals - so why can't we take the natural gas complex up as the commodity itself melts. What does the commodity know anyhow?

Gold as we mentioned this weekend, shows sign of a double bottom and that could be bullish. Now can gold and equities rally together? Yes. It just hasn't happened for prolonged periods of times in a long while. And if it did it would mark the fact the Federal Reserve is succeeding. At pushing us into 1970s stagflation.

I'd like to talk about bonds but this market is completely out of the hands of supply /demand - the Federal Reserve has made this their plaything. But the market has started to make the Fed unhappy and prices are faltering, causing yields to begin to rise. The all important 3% on the long bond is the line in the sand - each time we get there Bazooka Ben says no more! We can't have mortgage rates go to "unnatural" levels like say ... 5.4%. So I'd expect trench warfare to be announced Wednesday to get this to "bend" to the will of the Federal Reserve. Because that is how central planning works. Personally, I would love to see (and one day it will happen) this market spin out of the control of central command. Can you imagine the steam that would come out of Ben's head? There is actually some great irony here and 2 forces running into each other - on 1 hand as people are pushed out of "riskless" assets the long term bonds should weaken (pushing yields up) but on the other hand, that hurts Ben's plan to have the whole nation refinance at unnatural rates so they can go do the American thing.... shop. An interesting battle brewing for geeks like me to watch.

Looking at our holdings, I've cut back some names last week as their charts have started to stagnate. After all, all they have are solid businesses and are cheap - who wants to buy that sort of stuff? That's not the type of thing you want to buy in this market. You are best served by finding the most in debt, money losing operations (preferably in the $15 or less category, even better below $5) and pray the CEO knows how to say the worst "stabilization" on the conference call and then wait for the 30% move up as hedge funds are forced to cover. "Investing" as we call it.

Bottom line - you learn early in this game to check common sense at the door. In the near term it's all about sentiment and it never matters what is real, it only matters what the herd wants to believe is real. The herd is in a lather anticipating the 4th (or is it 5th) recovery of the past 15 months. Perception is reality in the stock market - the other 4 (or 5) were proven wrong in due time and if you did not exit the game of musical chairs at the right time, you were pole axed. But until then... dance my friend, dance.

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