Sunday, September 13, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 6

Year 3, Week 6 Major Position Changes

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

Cash: 68.4% (v 72.5% last week)
24 long bias: 16.7% (v 14.1% last week)
9 short bias: 14.9% (v 13.5% last week) *includes long term puts

33 positions (vs 31 last week)

Weekly thoughts
A short but very positive week with 3 very strong days, including a "double top" breakout on Thursday, followed by essentially no pullback on Friday. At this point it seems a market driven on technicals (the charts say to buy, so I must buy), performance anxiety by those who missed the majority of this epic move up, liquidity, and (insert your own grassy knoll theory about potential "support" by backdoor government actions). While the market is perhaps overbought on the short term, the pattern of buying on dips has worked for half a year, and will continue to work until it begins to fail on a continuous basis.

A quick look at the short term charts for S&P 500 and NASDAQ shows identical double top breakout patterns on both - where NASDAQ was the leader about 2 months ago, S&P 500 on the back of financials and industrials has taken the more recent leadership reign.

Looking on a longer term S&P 500 chart we are now near the "opposite site" of the traumatic selloff of October 2008. Eleven months ago we experienced a 20% drop in 1 week which can clearly be seen by the series of long red lines. The positive of this occurance is that resistance is nil in that area to the upside. In the near term, once S&P 1050 would be breached there would appear to be little stopping a very quick 50 extra S&P points, to make a pit stop to S&P 1100. From S&P 1100 to 1200 there are a few more impedements but nothing like what the market has blasted through the past few months.

I don't know when valuation will matter again (or if) but I am simply speaking from tea leaves in the above. Certainly the era of job cutting has continued so with costs lowered on one end, and governments spending on the other - corporations are in a bit of a sweet spot, and analysts seem to have not caught up. Can they cut themselves to prosperity? Not in the long run but the market today is "saying" as long as you beat expectations and have your CEO say something about "stabilization" (even at low levels) or "strength in Asia" it is good enough for us to drive the value of your stock up. We'll worry about valuations later and/or valuation means nothing today because the recovery of the future will make stocks look cheap on future earnings. And that's effectively where we are now.

Big picture what I see happening is continued dip buying - eventually, one of these days the dip buying will fail and the level of complacency will mean people are not positioned correctly for a meaningful pullback. But trying to position for said pullback (that has yet to appear) has at best left you with an opportunity cost situation, and at worst left you with serious losses. This phantom correction will happen - the pace we are on now is simply unsustainable. I track the market in 4 week increments so as not to focus so much on the day to day, with the last period just finishing Friday. This last period the S&P rallied 4%, which does not sound like a lot but it annualizes to a 52% gain. The period before this one the S&P rallied 7%; that annualizes to a 91% gain. The periods before that were 2.2%, 3.8%, 2.5%, 6.6%, and 11.0%. You get the picture. I believe one reader said we've had at most 9 consecutive months up in the markets before a monthly pullback; we are now working on month 7 of gains. But as I said, we will be so conditioned to buy on dips WHEN we have a meaningful correction - it will hit us from the blind side. I, for one, will be curious how the real estate data comes in once we lose seasonality and the immensely positive effects on the lower end of the market by the first time owner taxpayer handout. And how the market reacts to those "not as green" shoots.

We continue to be in a light earnings area of the calendar, with the heavy lifting beginning the 2nd week of October but a couple of interesting reports this week with Best Buy (BBY) Tuesday, Oracle (ORCL) Wednesday, Palm (PALM), fund holding Discover Financial (DFS) and FedEx (FDX) Thursday. Year over year comparisons should be very easy in the quarter to come since that was the "end of the world" period with Lehman, AIG, Fannie, Freddie, Merrill, Citi, Bank of America, TARP, et al. FedEx preannounced to the upside earlier this week and a relentless series of misses and lowering expectations - so can now enjoy the upside of setting the bar very low.

As for Discover, based on anecdotal evidence (my mailbox) I have to get more and more bullish on the profitability of credit card companies. In the past 60 days I've had more massive interest rate increases on all my credit cards (save 1) than I've had in the 20 years previous. These companies are getting ahead of the new regulations coming online in 1st half of 2010 and jacking up rates; I'm now the proud owner of multiple cards with >20% interest rates (and that's with prime at near historic lows) whereas 2 years ago if I had something above 12% I'd cringe. Mid single digits was more normal when not enjoying 0% balance transfer rates (that usually lasted 18+ months). Now, this could be zip code targeting due to living in a 1 state depression (i.e. restricting credit to those who live in economically degrading zip codes) or perhaps I am just enjoying the life many others are now experiencing. Needless to say when borrowing from the Fed at nearly zilch and jacking the rates some pay on balances from "5-12%" to 23%+, profitability must be skyrocketing. At least if you are a sucker who pays back debt, rather than living large - rolling your debt into the house mortgage than crying for government relief at "unfair lending practices" - sadly I did not partake in that game. This interest rate explosion could explain the relentless rise in Capital One (COF) as well. Needless to say my remaining balances are shrinking as "Massive Profit Center for Oligarchs" is one label I never want to wear. Obviously many others might not be able to escape this new paradigm.

Economically, Tuesday is busy (remember all economic news is to be "surprised" by) - we get Producer Price Indexes, Retail Sales, and the Empire State Mfg Survey premarket. Consumer prices and Industrial Production come Wednesday with housing starts Thursday along with the normal weekly jobless claims. Money Supply and Fed Balance Sheet come out last Thursday but I suppose those two are only for econo-nerds, and not the speculative class. It's an option expiration week as well, which usually has one big down day as markets are manipul... err, the free market moves into the exact right place for a small select group of investors to make a lot of money.


Portfolio wise, we added Costco (COST) to our short book, expanded the Riverbed Technology (RVBD) short (which is at a make or break it spot as of Friday), and expunged PPG Industries (PPG) at a loss late in the week. We were pretty fortunate in buys this week, adding to positions in Skyworks Solutions (SWKS) right ahead of a pre-announcement after the bell that evening, and Blackstone Group (BX) which Goldman Sachs upgraded the next day. Skyworks is our top long position and our 2nd largest is RF Micro Devices (RFMD) which similarly surged this week on good news at a conference. This is our favorite secular growth sector, and 2 of the 3 names we own said very positive things this week; we expect nothing different from the third one. A new position in Atheros Communications (ATHR) was started (same theme as the RF semi stocks but a differrnt subsector); I am actually hoping to buy this in larger scale at lower prices so would not mind losing money on this first batch of buys. We took profits in some Chinese exposure after a 6 day straight up rally from oversold conditions.

Earlier in the week the market was approaching "test time" and at least in the near term the test was passed; we took advantage of the momentum of the moment. Thursday we made some mad money on the "double top" breakout via two 5% call option positions, one started Wednesday and one Thursday on the actual breakout. The SPY calls we bought Wednesday netted nearly a 60% one day gain and the Thursday position was a nice 24% return in a few hours. We actually did the exact same maneuver (buying off a double top breakout) with SPY calls on a breakout mid July, although back then we put a lot more money on the line (nearly 20% of the portfolio); so this pattern has worked well for us twice now. While very short term in nature and we're back in cash very quickly, it is some icing on the cake for a portfolio not well suited for the "straight up" type of rally we mostly have experienced the past half year.

Overall in regards to the markets, while I am happy to play along in this situation there are some very strange things happening such as bonds rallying (courtesy of heavy Federal Reserve interference, now driving mortgage rates back down to near 5%) at the same time gold/silver is. And the equity market is also rallying with gold/silver, which is the inverse of how things happened in 2008. While I've been losing of late on our long term SPY put options, I still like have a 3%ish allocation out there as "insurance" in case one day I wake up and the Matrix has been exposed. Until then, we smile ruefully and say "it is what it is".


While the financial world is wrapped up in some form of evolving, subsidized, interfered with, "new normal" - it is important as US citizens to find some constants in life. Thankfully this weekend, the University of Michigan did what what it traditionally does, and Notre Dame likewise returned to its traditional role. Let us rejoice that normalcy / tradition, has returned to some portions of our society. I'm sure all readers, except for a lonely few in northern Indiana - will share in this view.

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