Monday, August 10, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 1

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Year 3, Week 1 Major Position Changes

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

Cash: 67.2% (vs 60.9% last week)
22 long bias: 17.5% (vs 17.5% last week)
11 short bias: 21.6% (vs 21.6% last week)

33 positions (vs 38 last week)

Weekly thoughts
A fourth straight strong weekly showing put the major indexes up >2%... with a large part coming on the "better than expected" labor report Friday. If you are keeping track at home we're working on the 6th straight positive month (rare), a 50% move off the March 6th bottom with no retrace (7% drop in the 1 correction we had the past half year), and now 20 straight sessions that the S&P has not fallen over 0.5%. If memory serves only 3 of those sessions were greater than -0.2%. In those 4 weeks, we've moved up 15%. If you've forgotten what it is like when the market falls, I don't blame you - it's been a month worth of trading days for even 1 iota of trepidation to cross a bull's thought process.

Technically, there is nothing bad outside of an "extended" chart which doesn't mean a thing - the market can get even more extended. All the indexes are over all key moving averages and the S&P 500 is a mere days away from joining the NASDAQ in showing a "golden cross" - i.e. the 50 day moving average crossing (from below) over the 200 day.


We have 2 gaps growing ever distant by the day - NASDAQ 1800 and S&P 906. The market is a mass psychology experiment in the near term, bouncing between greed and fear. The only solace for bears appears to be that the market never goes down anymore, and everything is aligned for the bulls. Greed is everywhere; fear is nowhere. We're looking for 2 signs as we outlined (a) stocks stop reacting well to good news or news perceived as good and (b) parabolic euphoria in junk type stocks. We are now in full throttle on point b, but we're still acting decently to "good news"; in fact I am scratching my head that every piece of news that is almost identical to the last drives the market up. For example - there are 4 main housing reports (1) existing (2) new (3) pending (4) Case Shiller. Each of them are reporting identical data - but each time they come out, even if within days of each other - we act surprised and the market gaps up or shoots up (usually around 10 AM). When will the same news not be a surprise?

Things are not quite so beautiful once you look under the hood but really who has time for that? We have stocks to buy; digging into data only slows down that pursuit. The unemployment rate "fell" for reasons we outlined in the previous post. ISM Services which is close to 90% of our economy was not so wonderful last week, unlike ISM Manufacturing which as we see now can be "assisted" via government intervention a lot easier than services. To that point a New York Times article here disputing the cash for clunkers thesis that "hey it might be stealing from our grandkids but it saves the environment!" And Friday afternoon - lost in the green shoots of euphoria - came the Fed report showing US consumer debt fell by an annualized 4.9%; and the 5th straight down month. Depending on your time horizon this could be construed as good or bad. If you believe in the long run Americans should spend within their means and pay down debt, this news is great. If however, you are running a consumption led economy that relies on Americans to take money they don't have (either via their house or nowadays via the government) to add more debt to their P&L, then it's not so good. Both revolving and non revolving debt dropped by $5 Billion.
  • Outstanding U.S. consumer debt fell by $10.3 billion, or 4.9 percent at an annual rate, to $2.5 trillion, the Federal Reserve said. That's a much steeper cut than the $4.7 billion analysts expected, according to Thomson Reuters.
  • Revolving debt, such as credit cards, fell by $5.25 billion in June, a record 10th straight drop, according to the Fed’s statistics. Non-revolving debt, including auto loans and mobile- home loans, declined by $5.04 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
  • The five straight monthly declines in consumer credit mark the longest stretch of pullbacks since consumer borrowing fell for seven consecutive months from June through December 1991.
This touched on the paradox of thrift (savings) we've discussed a few times - what is good for an individual is not necessarily good for the country as a whole. Especially when that country relies on "shopping" as its primary driver. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] [Jan 11, 2009: WSJ - Hard Hit Families Finally Start Saving, Aggravating Nation's Economic Woes]

The paradox of thrift (or Paradox of Saving) is a paradox of economics propounded by John Maynard Keynes. The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population. One can argue that if everyone saves, then there is a decrease in consumption which leads to a fall in aggregate demand and thus leads to a fall in economic growth.

Now the truly sick thing is now that Americans are action rationale in comes the government repeating ALL the SAME things that got us here in the first place - with perverse incentive plans for us to get back in even more debt. Honestly I just sit here in awe that we are repeating the same steps Greenspan did but many times bigger and the exact same worship we gave to Greenspan (until the emperor was shown to have no clothes) is now bestowed on Bernanke. For the exact same policies. So we deserve what is to come of us in the future - we do not learn. Mark my words - sometime in the middle of this next decade, Bernanke will be looked upon just as Greenspan is now... soiled. Especially when he bows to political pressure and keeps rates too low for too long (election year 2010 folks!) stoking many bad things that will crumble in 4-6 years. And we'll ask again - how we got here? When the answer is obvious...

As to the market, anything that makes things happier in the short run is a good thing. Pull in October 2009-January 2010 car sales into July-August 2009? Green shoots. We'll worry about the implications of what we wrought another day... or just keep doing spending incentive plans until Americans are devoid of every last penny of savings. Anecdotally, in the auto industry people are being put back to work temporarily as inventories were cut very lean and ironically some car dealerships are devoid of inventory in hot selling models. But judging from the consumer credit and employment numbers what we face after the sugar high of the next 6-8 weeks is going to be not only the "new normal" but the new normal ex-a lot of consumers who would of bought cars in the following 6 months. Oh well, we live for today and tomorrow is for another guy to worry about.

(p.s. you might not know this but Chrylser is running $3500-$4500 rebates that have nothing to do with Cash for Clunkers. i.e. if you combine C.F.C. with the Chysler rebates you could be handed $7000-$9000. How you ask? With the magical pot of money called your tax dollars - Chrysler exists at your whim - as does the financing arm doing much of its deals [GMAC], and somehow a bankrupt company has money trees growing inside their mfg plants to offer such fantastic terms. Thankfully these companies don't actually have to be run for profit but simply as a subsidization scheme to give Americans new cars that they deserve on 36 month cycles)

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Anyhow a quick look ahead to the week; we are essentially done with the big name S&P 500 type companies in earnings season - some smaller names report along with more foreign companies and domestic based. Speaking of the Fed, we have meetings Tuesday and Wednesday which means Wed at 2:15 PM we all have to act like lemmings as the stock market jerks one way or the other based on words in a statement. On the economic front are some secondary reports like the trade report (remember when imports implode its good for GDP, I am not kidding), retail sales (please exclude gasoline prices before you shout green shoots), and the woefully measured CPI (consumer inflation).

In the last week, we basically went nowhere with our hedged exposure - our shorts essentially offset our longs. My plan continues to play for the intermediate term and get net short going into S&P 1050 (if and when) and/or into football season. While we have liquidated a monster amount of long exposure the past 3 weeks, we have tried to get some back but seem to be getting stopped out of "quality names" near moving averages - almost at a 80% clip. I am not sure what that says. In the meantime we've locked in some intraday trading gains on indexes while biding our time and helping to offset some losses on the short side.

The more I think things through 2010, the more pensive I become. China's first half 2009 loan growth made their entire 2008 figure look like child's play. That won't continue in 2010 - in fact I am worried about the damage these loans in this 6 month period will do to the banking system in 2011-2012; it's that egregious. If you are a regular reader of Fund My Mutual Fund, we've been warning of the potential for this blowing up since February. I saw a story in the New York Times this weekend that literally could of been ripped off the pages of the blog, verbatim: China Faces Delicate Task of Reining in Bank Lending. We're usually early around these parts....

Aside from China, US housing loses its seasonality benefits within a month and such easy month over month comparisons will face headwinds rather than tailwinds. I believe back to school and Christmas spending will again be poor - keep watching Target's (TGT) data each month as the "mainstream America" spending proxy; despite very easy year over year comparisons they reported sales down 6.5% last month. Unemployment in the private economy (ex government and healthcare) will continue to suffer. While consumers will gladly take government handouts, excluding that ...I believe they will continue to retrench and rebuild. And right now those 2 axis (a) US consumer and (b) China - are what drives a great portion of the world economy. And let us not forget the state budget issues that have been tossed to the side, that will arise - even larger - next fiscal year. So if I am correct, and the stock market is the great Oracle like entity, so prescient in looking out 6 months (which I don't believe it is for 1 moment) we should start discounting these headwinds in 1st half 2010 sometime this fall.

Whatever the case - just know Goldman Sachs will make money 97% of the days, and please don't question why Hank Paulson (ex CEO of Goldman and former Treasury Secretary) was on the phone with the current Goldman's CEO 24 times in the week of the AIG Bailout - where Goldman received $13 billion of your money. That's for Hank to know, and for you to never find out. But please buy his book that will be coming out next year.

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