Thursday, June 18, 2009

Top Position Reviews

Trouble on the horizon. We sit on the precipice of turning negative in performance for the year; a most disheartening development. We moved to a new tracking system for performance early in January 2009 so we did not start on Jan 1st (hence we missed the sharp gains of week 1 of the year) but from where we started we now back down to only a 0.5% gain for the year. On the plus side we have not been negative the entire year despite horrific performance of the markets in Jan - first week of March. On the negative side the way things are going that distinction might only last a few more hours.

Even more strange is I got "here" in the exact opposite manner of 99.9% of managers - most were down badly for the year through early March, and then rebounded with the market to get back to black in recent weeks. We, on the other hand were up 15% through the end of March and since then have been giving pieces of it away week after week - mostly through shorts gone awry in April through mid May but lately some bad long positions. Even this week with 60% cash we've been losing ground - not good.

I think we only briefly turned "negative" life to date since we began in August 2007, but since we changed our 3rd party tracking system in between it is hard to tell how things would work out. In my performance / portfolio tab, I have a longer explanation but essentially we were running half our strategy for most of the first 15 months - just having long exposure and only being able to use those 2x inverse ETFs as our shorts rather than the countless individual names we called out in the blog (many of which fell 80%+, some which were erased into effective nationalization or bankruptcy - i.e. Washington Mutual, Freddie Mac) Even with that handicap and losing money on almost all our Ultrashorts due to their awful performance as a long term hedge (which is how we were forced to use them) we were up about 10% versus the markets -14% in our "year 1" (Aug 07 - July 08) [Aug 2, 2008: 'Rising Tide' Performance Year 1] This actually would of ranked us as the #1 mid cap mutual fund in America (out of 1860 peers) for that time frame (most of our holdings are of that size) as we outlined here [Aug 21: 'Rising Tide' Performance v Peers] Out of all 6000+ equity funds we would of been in the top 10.

Growing increasingly frustrated having an arm tied behind our back while the market swooned in September and October 2008, we abandonded our old tracking system at and sat with "nothing" for November and December - basically I was just calling out individual trades (most working very nicely). Then we restarted with (which allowed shorting) to run the full strategy. It is very unfortunate we did not have the entire record all in 1 spot, and the ability to short correctly for the first 18 months of this expedition. I'm still amazed I bet against China, emerging markets, and commercial real estate at their peaks in fall 2007 and lost money in all those Ultrashorts despite each index dropping 50% [Dec 28, 2008: More ProShares Ultrashorts Tomfoolery]... talk about flawed products.

I don't have massive losses to make up from 2008 that most of the equity mutual fund world has so in the big picture it's more a case of "blah" than anything else, but we know how it goes - that was then, this is now and "how have you done for me lately?" is the world we live in. "2008 was so last year" (literally). I suppose 0% for 2009 is middle of the pack versus peers but this is the first time I can remember falling behind the S&P 500 performance for any period of time. Hence, I am not happy right now - a lot of bad decisions and trades strung together for weeks at a time.


I am going to have to be a lot more strict on positions until this ship is turned around in the right direction - I've been lax in placing stop orders and taking on some water on positions. The past week I've been more firm on that, but I want to go through the major positions and show via chart where I am going to cut the chord (cut back sharply). Of course placing stops exposes you to being shaken out of a position on a volatile day and then missing out on a rebound, but at this point I need to be conservative.

In order of size in the portfolio, I am going to go over everything with at least a 1.4% exposure (I have a flush of names around 1-1.2% exposure so this is why I am limiting the blog entry to 1.4%). Most of these stops will be on the order of 2/3rds to 3/4ths of the position size.

#1 OCN 4.0% of portfolio

This name has held the 50 day moving average for over 3 months; the first test in a while came Tuesday and it bounced. Not a volatile name but after its post earnings surge it has slowly sold off week after week; if it breaks the 50 day I'll be cutting back - I'll place a stop at $11.80 which is the cost basis of the position I have left.

#2 YGE 3.1%

We just added this position late yesterday and I already outlined an exit strategy - below yesterday's low of $12.49 and we are out... stop is $12.45, cost is just above $13.00

#3 QSII 3.0%

Another name we just added to in a significant way yesterday on a "potential" breakout. Placing a stop here is more tricky since the stock has been violating the 50 day moving average (about $50.50) but not breaking down. I will take off half the position if it breaks below $50, and then we see intraday lows of $48 earlier in the month, so $47.75 would be a place to exit the majority of the position if and when we got there. (cost $52.44)

#4 ATW 2.7%

Part of the "commodity/reflation" trade this is a prisoner to oil prices even though many of its contracts (sea drilling) on very long in duration. Everything in this trade is volatile since so many hedge funds are dominant in their ownership list. While it broke the 200 day yesterday intraday it was 'saved' exactly at the 50 day ($24.00) I'll place a stop below that 50 day so $23.70 to give me some leeway. (cost $25.50)

#5 ALGT 2.5%

Oye! Here is case in point; I cut out a smallish portion (1/6th of the position) Monday as the stock broke the 200 day moving average. The stock went into freefall Tuesday - I had been averaging down on this name as it is dirt cheap and this airline made money at $145 oil, yet it gets looped in with its weak peers in the legacy business (remember, program trades dominate this era and baby with the bathwater trades are everywhere). This is a crossroads type of situation, even if I think selling at anything below $45 is ridiculous, until I see it clearly back over the 200 day moving average this turns into a short not a long fromo a technical basis. If indeed the reflation trade goes AWRY in the coming weeks/month this type of stock will recover as airlines are almost an inverse trade to oil. Very tough one. For now I will cut back 1/2 the position if it gets to $38 - this lessens my exposure in case it just fails there and has a path down. Of course if it rallies from that point, I locked in bad losses. The lows of the year were at $32 and there is no moving average below the current price point so placing a stop loss is also difficult. I am going to watch this one this morning and make a determination...again for a value manager with a long time horizon this is "cheap" - unfortunately cheap means nothing to a chart. Another strategy is to hedge the long exposure with a short if the name can bounce a bit more (i.e. $38) (cost $48.35)

#6 Longtop Financial 2.0%

I had never owned this one before a week ago, but the volatily intraday is among the wildest of anything I've owned. You can be +/- 10% within 2 hours, and I have been already twice in 4 days of ownership. It filled a gap it needed to fill just under $24 yesterday morning and then bounced nicely and ended green. This is exactly the type of name that a stop loss would "sell you out" out of at the wrong time - yesterday would of been the day. I would love to see it get back over the 20 day moving average (upper $26s) to feel comfortable about its intermediate prospects. Since it did fill a needed gap yesterday, I am going to be tighter on my stop than I would of been 48 hours ago and place it at $24.50 which gives it a much needed wide berth (50 cents) below its 50 day moving average of $25ish. (cost $26.16)

#7 MOS 1.6%

Part and parcel with the reflation/commodity trade - yesterday it was hit by the potash production cut at its peer. This is the type of chart that has been giving me a lot of trouble the past 2 months - about 2 weeks ago it broke the 200 day moving average. I cut back worried it had downside. The VERY next session it broke back above the 200 day (I am sure on a "dollar is weak, buy any commodity" program trade day) So I waited a day to make sure I was not head fakes twice in as many days, and then the stock continued up ... so I "chased" into it around $55 after selling down the position near $51 two sessions earlier. Lo and behold two days ago it fell from $54 to $51 and then yesterday really delivered a knock out punch. This is one example, but I've had many trades turn out like this the past 6-7 weeks. So now we have a broken chart which is still hostage to oil. If oil surges 10% the chart will mean nothing as traders rush back in; and vice versa. Placing a stop becomes difficult - the last range Mosaic broke out of was $44-$47, so at this point I'll place the stop below the bottom of that range. If the stock jumps back to the "top of the gap" I'd lighten up near $49 until I see how it acts. So thats both a stop loss and a limit sell. For all we know this is back in mid $50s in 2 weeks... as long as oil cooperates. (cost $53.46)

#8 JRCC 1.5%

Cancel what I said about Longtop Financial above... James River Coal is just as bipolar intraday. Because as we all know the prospects of a company normally change 10-15% on a daily basis. Only in the casino NYC. Just another stock hostage to oil and the traders who react like lemmings to every tick in the dollar versus oil. The chart went from flawless 2 weeks ago to fine 1 week ago to troubled within a few days. That's how quickly things change when program trading is your dominant investor. (HAL9000 as I like to call him) This was a big gainer for us two weeks ago, and quickly transformed to sizeable loser. From experience trading JRCC I see the stock below both the 50 and 200 daywhich screams get out of the stock... but this is a name that trades without regard to technical analysis. Mechanically I should stop out here -- but knowing the stock it would then reverse and be back at $23 within a few days. This is another name I'd feel far more comfortable if it sat over its 20 day moving average but by the time it gets there 80% of the move (from here) is already over. I will also watch this one first thing in the morning; if the program traders are selling commodities at all costs I will jettison part of it immediately - otherwise I want to see how it acts around $19 if and when it gets there. My general game plan is to sell a good proportion of the position as it hits such a resistance and then if it has the strength to bust through just buy it back once it gets over. (cost $21.47)

#9 BHP 1.4%

See everything said above for JRCC, MOS, ATW - same idea different stock. It is technically in better shape than the others so I'll keep it simple with a stop loss below the 50 day, say $52.75. We have some nice recent wins in this one on trades the past few weeks but for our current batch the cost is $58.01

#10 STAR 1.4%

Strong chart - bent but did not break thus far; however another case where a reasonable stop loss would of had you out of the stock yesterday. With a cost of $21.33, I'm going to place a stop below yesterday's intraday low of $21 - and be taken out around $20.85. This will turn what was once a nice gain into a loss of course. There is a gap waiting at just below $20 which also happens to be the 50 day moving average - when and if that fills, we'll see how she reacts.

#11 RVBD 1.4%

Unstoppable. If they only all acted like this; I actually was stopped out on this one a month ago and never got back in when it reversed up so I've had to chase it. RVDB reports next week and I'll be out of most of the position going into it, but judging from the stock alone it appears they have good things to say. This one is so strong the chart I am showing has the 10 day moving average ... which is where buyers show up each dip for a month straight. I'll be out of most of the position ahead of earnings or a break below $22 (to preserve my gains) (cost $20.17)

The remaining positions are smaller in scale. While the above is a more mechanical approach, until I get my game back it appears to be a necessity.

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