Thursday, May 28, 2009

Fund Performance Period 5

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Please note all data is through last Friday's closing prices....

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence we're "starting over" in terms of performance with portfolio "B" as of early 2009. Detailed history on on the first year and a quarter can be found on the above mentioned tab.

Under the new tracking system, our fifth 4 week period is now complete.

(click to enlarge)

This four week period marked the tail end of a huge run off the early March 2008 lows, and then a range bound period to end the time frame. Lower quality stocks and "dollar" type stocks were where most of the excitement was for much of the four weeks, but commodities came on strong in the latter half of the four weeks. We continued to struggle especially in the first of the four weeks as the market was surging and our short positions were obliterated and a high cash stake was a major drag. The main period of outperformance was the one week the indexes lost 5%ish and we were flat.

For the fifth "four week" period we returned -1.6%, versus the market's +2.5%, so an under performance of -4.0% during the past four weeks. On a cumulative basis we are now +5.9%, versus the Russell 1000's -4.3%, so an out performance of +10.2% for our "year to date" if you will. (thus far 20 weeks)

Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but close.

The portfolio is now behind the yearly goal of beating the S&P 500 by 15%... we still have a long time to make it up, but it was much nicer trouncing the market by miles rather than only beating it by a decent amount. More frustrating is going backwards on the relative performance... now below +6% for our year thus far after once being up over 15%. That is a most unpleasant development.

***** Long/Short Discussion below

Unlike the previous period where the entire quarter we were taking massive hits on the short side of the ledger about a week and a half into this 5th period I threw up my hands on the short side and cut back exposure severely. All our long gains were being destroyed by short exposure in period 4 and that continued through the first week of this period. We also had a bombshell out of Sequenom (SQNM) that took away a good 1% of return - you have to anticipate when you hold this many stocks you will get hit with an earnings miss and lose 30% overnight a couple of times a year in some holding, but this one was a disaster more akin to 80% losses; and completely out of the blue. The funny thing is Sequenom was the one position I had a coincident short position on along with a long, and I cut back almost the entire short the day before the bombshell since SQNM had fallen to the low end of a range it was trading in. So the first week was similar damage to period 4; some longs doing well but REIT shorts (especially) maiming us. I did fight a huge war with Capital One Financial (COF) in the middle of the period (from the short side)... the stock literally went up 80% in 1 week but eventually we were able to sell most of it $1 within our average entry price. That is a "victory" nowadays on the short side.

The other 3 weeks were ok as I finally cried uncle on short positions and basically used cash as an intermediate hedge... we outperformed by a long shot the week the market was down 5%ish (we had bought some short index ETF exposure just ahead of the correction), but what happened was some of our major long positions then took hits. Our two title insurers which will be hurt by rising mortgage rates (less people to buy homes) took big hits... the irony is MORTGAGE rates have been in the 4.7-4.8% range the whole time... it was bond yields that jumped while the Fed kept the pressure down on mortgage rates. But that didn't matter and these stocks were hit hard. (p.s. getting hit hard again today) We reduced exposure but still took a lot of damage. Our airline position despite now trading at 8-9x earnings and growing like a banshee, also took a big hit. Basically when oil goes up, people sell airlines - there is no discerning between a bad airline or a good - its how the programmed trades work. So really this was the first period of the year some major long positions took meaningful hits.

There was some fantastic % gains on the long side, but my caution had the position size too low - Excel Maritime (EXM), Blackstone Group (BX), HDFC Bank (HDB). We also cut back other positions much too early such as Baidu.com (BIDU) and Gafisa (GFA). Unlike in 2007 and early 2008 when I was confident enough to put 6-7% in our top ideas, I have been doing a lot of 1-2% type of exposure now and hence the % gains on the long side have not helped us as much as they should. We also did not have enough commodity exposure which ramped in the back half of the period, - we have Potash (POT), Mosaic (MOS), and BHP Billiton (BHP) but all together maybe 5% of the portfolio at most combined; when in the old days I'd have 7% in Mosaic alone. I know people are looking ahead to some magical times but even the head executive at Potash is saying the 2nd half will be lousy and he is a straight shooter. Stock market doesn't care - I guess it is already forecasting 2010. Last, a lot of the really big gainers for much of this period ex commodities were in the $1-$10 small cap area, including a lot of Chinese names that run when speculators decide it's time to run them up. Not really our fare.

So overall I'd classify this one as another disappointing period. While we made up a lot of lost ground from the first week of the period in the final 3 weeks, it was still a laggard period. Now a lot of ho hum mutual funds who just play in the long only side of the basket are beating us for the year. So after probably one of my best runs from November 08 to February 09 relative to the market, I'd say this has been one of the worst periods the past 60 days. The return of momentum trading has been hard to adjust to; buy what has the biggest gain and sell to the greater fool in 2-5 days or 2-5 weeks. Never worry about downside; all dips are to be bought. Rinse. Wash. Repeat. Ignore fundamentals, buy on faith of what is coming in '4-6 months'. It has been much better to live in a vacuum of information and simply "trade the tape"; it is just somewhat hard to reconcile some of the moves with my vision of what still is coming down the pike. But as I always say, perception is reality in the stock market. Just as we've had historic drops (i.e. "not since the 1930s...") we have had historic gains. It would be nice to return to non historical times. At some point the market will go down for more than 3 days in a row and we'll make up some ground but for the past 10 weeks that has only happened in 1 week.

We'll check back in four weeks with a new update.

[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]
[Apr 27, 2009: Fund Performance Period 4]

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