Monday, August 17, 2009

Fund Performance Period 8

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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 latter 2007 and 2008 can be found on the above mentioned tab.

Under the new tracking system, our eighth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

This period was extremely bullish for markets, with 18 of the 20 sessions either up or no loss on the S&P 500 above 0.5%. In fact of the 8 four week periods in 2009, it was the 2nd best outside of the massive oversold bounce from the March 6th lows. There was some minor weakness late in week 4 and it was another period where many heavily shorted stocks flew up higher - think REITs, Las Vegas casinos and the like. Earnings season heavily influenced the action as "better than expected" versus analysts guestimates goosed markets many days. In addition "early cycle" stocks enjoyed massive rallies - think industrials, housing and to some degree retail. Technology was strong in the early part of period 8 but stalled out late, whereas anything Chinese related exploded higher. Reflation was not the trade du jour but still put in a respectable performance since the US dollar was so weak.

For the 8th "four week" period we returned +18.5%, versus the market's +7.1%, so an out performance of +11.4%. On a cumulative basis we are now +38.5%, versus the Russell 1000's +8.7%, so an out performance of +29.8% for our "year to date" if you will. (thus far 32 weeks)

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

We performed well in this period staying out of the way of major short exposure until week 3 of the period, while continuing to cull many winners (locking in profits) on the long side added to during the (ahem) correction of 7% earlier in the summer. Cash remained over 50% throughout aside from 1 day when we went long in an aggressive manner. We've now made up our underperformance period and then some. Our yearly goal of beating the index we track against by 15% has been reached again, and we're now at the highest level of outperformance versus the market since period 3. (29.8% now vs 27.6% then) Both absolute performance (making money) and relative performance (outperforming the market) were achieved in the period - which is always our favorite outcome. Frankly at this point, combining 2009 with what we achieved in 2007 and 2008, I'm sure we'd be the top ranked mutual fund in terms of performance since August 2007 when we began this journey.

*** Long/Short Discussion below

As I will continue to repeat, I believe the nature of the markets has changed. Getting the direction of the stock market correct is more than half the battle - we continue to be dominated by days where almost everything goes up (more recently) or down (rarely nowadays). Individual stock selection has taken a back seat to being in the right sector and/or having your stock owned by the flavor of the day ETF. It is a sad statement on the markets (notice almost every natural gas stock go up together regardless of individual prospects) but we can only observe and adjust to the new reality. Maybe it changes some day or maybe it continues - but this is what we have the past 2 years and it only seems to be more prevalent. Hence our constant focus on "index" directions which 3-4 years ago I could mostly care less about. Further, it seems most days all the action is in the first 20 minutes and last 30 minutes and the rest of the day is High Frequency Trading where computers bat stocks back and forth in very narrow ranges milking the system for profits before exiting by the close of the session. It's a strange new world.

In performance terms sometimes you make a lot of money in short periods of time; that was the case this period where almost all our gains were in the first 7 sessions and the last few of the period. The middle 10 days we were flat or slightly trailed the market. On the long side, MOST of our longer held positions were harvested for gains (in some cases too early) as the market continued to rally week after week - but we almost never catch the bottom or top, we try to grab most of the middle of the move. A lot of these positions were rebuilt or built up from scratch in the later June to early July period and we were able to let them go within 8 weeks at 20, 25, 30, 35% gains (in some cases these were sold just ahead of an earnings report). Some of the many examples this period: Gafisa, Perfect World, BHP Billiton, Skyworks Solutions, Allegiant Travel, Riverbed Technology, First American, Discover Financial, Wyndham Worldwide. But about half our net gain this month came on one trade of a breakout using a technique we are layering in from time to time using long SPY calls intraday. We had been looking for a double top "breakout" over the high S&P 950s as a sign to jump in aggressively long as this would be a "trigger" to technical traders everywhere... this happened July 23rd. [Mr Obvious: Looks Like It's a Breakout]

Once we broke that "double top" (early June and the past few days) we spoke about yesterday, the super computers rushed in (HAL9000) and the humans joined. I was using S&P 959 as my "breakout" point, and it appears that about 10 million other humans (and microchips) were as well.

Since the move over a double top is so powerful I actually put double the normal we've been doing "intraday" into S&P 500 (SPY) calls and that's our main weapon on the long side right now. They tend to act like firecrackers if you get the direction 'correct' and already have expanded from 16% of the portfolio to about 19%. For you option folks these are August 97 & 98s.

I am not going to be too greedy and will be back into cash by the end of the day (which to me is now 3:30 PM based on the crazy action in the last 30 minutes many days) if not sooner. On trend days I have a simple game plan, choose a moving average and don't sell until it breaks below

And by 3 PM we were out and back to cash [Bookkeeping - Getting Rid of this Morning's Calls], the market had blasted up 2% intraday from where we entered and 1/5th of our portfolio had gained in excess of 40%. Aggressive move? I don't think so... this was a trademark breakout and we said as long as the intraday trend line held we'd stick around; once it broke - we'd lock in gains. Holding that type of exposure overnight would strike me as "aggressive". So that 5 hours in that 1 trade was equivalent to the other 19 days with the rest of the portfolio. Can we do that every period? I'd love to - in fact I am hoping for one day on the downside of similar ilk in the weeks or months to come, but even if we can find 3-4 of those days a year we can help performance in a material way.

I'd like to point another thing that helped us - lesson #1 of investing: don't lost money. 2 major examples this month... we exited almost all of our Riverbed Technology with very nice profit ahead of an earnings report that the market used as an excuse to pummel the stock. We sold Ocwen Financial for very nice profit, immediately after they announced a good earnings but also a 25% dilution - which the market strangely did not react to at first. The stock plummeted shortly thereafter. We also exited our pure play Chinese exposure just ahead of when the Chinese market began to roll over (granted many US based Chinese stocks kept rallying as US investors ignored China - which is quite a feat to do when you own Chinese stocks!) So while those type of moves don't get the glory that was a few % of protected gains that we did not hand back to the market.

On the short side we were retrenched the first half of this period with 5%ish type of short exposure - waiting to see real signs of weakness or at least exhaustion before committing further. This was the lesson we learned from April and May where we gave up a ton of great performance in January and February trying to short REITs, financials, consumer discretionary in the face of a momentum based market. After the spanking we took in that episode, we did not repeat that fools errand this time. We pulled back our credit card shorts, any of the smallish short trades we tried - we had tight stops that almost immediately filled, so we took small losses. We put on some "half sized" short positions in a core group of names in the middle of this period anticipating adding to them on a further rally to average our cost. Aside from Wynn Resorts (WYNN) which was a tactical error on my part of going long or short ahead of earnings (a personal no no) this pretty much played out as expected. Our 3% exposure in put insurance bought the previous period pretty much lost all its value but that is to be expected in a period when the market doesn't even dream of correcting. But that's part and parcel of strategy - we made some very nice long gains with options and we'll occassionally take some losses. We finished the period with some unrealized losses in some short exposure balanced against a bevy of long gains we did lock in, and net short the last 6-7 days of the period.

[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]
[May 28, 2009: Fund Performance Period 5]
[Jun 21, 2009: Fund Performance Period 6]
[Jul 20, 2009: Fund Performance Period 7]

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