Sunday, October 25, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 12

Year 3, Week 12 Major Position Changes

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

Cash: 86.5% (v 81.0% last week)
20 long bias: 10.5% (v 13.0% last week)
3 short bias: 3.5% (v 6.0% last week)

23 positions (vs 27 last week)

Weekly thoughts
"Call me Cash.... James Cash."

Our cash pile only continues to grow; I thought last week was extreme but we continue to be forced out of positions both long and short.   Plus we've taken some profits when offered.  In a fortnight we've gone from 31 positions to 23 - I can't recall being slimmer or having more cash since we began in summer 2007.  I've been screening for some new long positions and while I can find the charts, I have to avert small children's eyes when it comes to valuation.  Even assuming analysts are wrong in 2010 in their estimates by a factor of 30%.  The reality is, the same as I've seen the past few years in American markets - there is just a dearth of great growth companies this country is spawning, at least in the public sector.

At heart I love secular growth - unfortunately I have to focus overseas to get it.  While mutual fund managers have been running up "early cycle" recovery stocks, at what point is enough?  I see company after company who in good times grows the typical 8-12% being valued at 30, 40, 50x+ on the "earnings will rebound strongly" theme... and I'm not talking backwards earnings during the recession (which is now "over").  I am more than happy to assume analysts have no clue and will be wrong by a large factor in 2010 but cmon now, how many restaurants, retailers, paint, or widget companies can I value at 38x earnings without snickering.  While it's true that as long as Ben Bernanke is happy to flood the world with US dollars we could theoretically value a shrinking retailer at 100, 200x earnings - it will not at all be anchored to any form of reality.  Just a complete mismatch between earnings growth, and valuations due to too much paper currency chasing a fixed amount of stock certificates.  So I as I search the country for the next growth story - I just keep coming back to all the same old stories... boring.  And since there is such little secular growth in this country the companies that provide it are being bid to the stratosphere.  Meanwhile you can throw a dart at the Chinese ADRs and find 30%+ year over year revenue growth.

Let's review where we stand in the market - while we have to have some caution here, each time we've reached a similar situation a flood of buy orders have come from the heavens to save us, so we'll see if the same situation arises.  I've posted some notations on a S&P 500 chart below to show you my roadmap ....

... in text rather than photos, much as we would in a solitary equity we have the S&P 500 pulling back to first support, the 20 day moving average.  Currently it is 1073ish... ironic in that 1075 was the gap to be filled last week.  A reader asked in comments if I'd be buying 1075 the second time around and I replied no, because it will not mean much as the "gap" in the chart already filled, but since we have a moving average coinciding at that point, it's a different wrinkle.  So as the green arrows show I would consider being a buyer on the pullback to the 20 day but if that support does not hold, we'll be out very quickly (at the purple arrow) - with potential to short the market lower.  And we have the same situation with an even stronger support at the 50 day moving average... currently 1045 but certainly it will be higher by the time (if!) we get there. We'll buy above it, assuming a bounce, and then flee if that support does not hold.

We still remain in these two big boxes - box A being low 1070s to 1100 and that box is contained within a bigger box B with the 50 day moving average at the bottom and the same 1100 at the top.  I have no strong conviction as we go back and forth inside these boxes... I want to press the advantage either (a) on a breakout over S&P 1100 or (b) a breakdown below the 50 day moving average.  Looking even further out the bear case will be cemented on a faltering below S&P 1020.... that would signal the first new "lower low" since last winter.  So those are my guideposts for now.  We can expect to churn a lot until we get out of this range with market observers trying to read into this, that or the other but it's all white noise in the interim until we start going somewhere.   The bulls can still build a positive case if we simply churn sideways, consolidating a massive move the past few months, before making a year end push to new highs.  We're open to any probability and will adjust once the market shows more cards.

For the portfolio our major moves consisted of: (1)  being stopped out of a Moody's (MCO) short early in the week, (2) adding some Atheros Communications (ATHR) once the "coast was clear" post earnings, (3) adding some Gafisa (GFA) after Brazilian stocks were hammered on a tax to foreign investors, (4) completely exiting all 3 of our RF semiconductor stock positions after TriQuint Semi (TQNT) crushed the group with its earnings report [a massive overreaction in my book] (5) selling half of Chinese insurance firm CNinsure (CSIG) after a nice surge took it into a potential double top and (6) completing a great 24 hour long side play once the S&P 1075 gap was filled, with both a levered ETF and some call options - in Thursday morning, out Friday morning as we outlined in detail.  As always these items are listed in the right margin in our archive so you can go back and review any you wish.

Aside from valuation the other reason I am having a hard time buying (or shorting) is I don't want to front run earnings and being caught up in the lemmings jumping over a cliff (and taking our money with them).  So effectively we are limited to companies that have already reported - further reducing are already arid environment for new names. The last point of potential concern - although let's not read too much into it yet since every time it's happened in the past 7 months, it has quickly reversed - is some "sell the news" reactions; change of character or anomoly?  Too early to tell, but something to monitor.

As for the greater market - nothing new to add to last week..  we're in the heaviest part of earnings season and that will dominate the thought process.  Economic reports continue but for now we continue to believe government can spend us to prosperity so aside from some short term knee jerk reactions intraday they get ignored.  Does ANYONE remember the bad monthly jobs report of 3 weeks ago?   I thought so.   Existing home sales were last Friday and while "positive" they reflected a mad rush of buyers to take advantage of the "last" of the $8000 handout - silly folks actually believe government largess will end there.  This week
  • Tuesday we have Case Shiller for home prices and a consumer confidence survey
  • Wednesday the very volatile durable goods report and the far less important new home sales (existing home sales make up 90%+ of the market)
  • Thursday comes GDP - we'll celebrate a 2-3% figure fully bought and paid for by your grandchildren, our weekly jobless claims that we ignore (lagging indicator) 
  • Friday, personal income and outlays - which we'll be interesting to me; last month we saw the return of the good ole American consumer... he who spends far more than she takes in.... good times. Chicago PMI and yet another consumer sentiment report.  

Any time the market is weak and needs to rally, all one must do is attack the US dollar and every asset priced in dollars rises, including stocks and equities.  It is fun to watch speculators cheer in glee at the annihilation of our currency - anything for a profit.  I am starting to get my first questions by "non investor" folks in the real world about why prices are going up... boy, if I only had time to give them the whole story.  On the positive side, Walmart (WMT) is cutting prices on 1000+ items ahead of the holiday season ... ahem, another sign of consumer weakness strength!   If these politicians had any heart, Cash for Christmas gift certificates will be sent to us by Thanksgiving. We deserve it!  Outside of that, we bide our time awaiting more and more handouts by government - I said the minute the last stimulus plan was passed we would have another and my prediction is looking better by the day.  Although the 'smart' politicians appear to believe if they don't call it a stimulus plan, then it won't get people peeved off about massive deficits upset (wink wink).  It will have a cool name like "the magic pot of gold of job creation pot plan" (wait I thought the last stimulus was supposed to save or create 3.5-4M jobs?  oh ok, if you fail ... try try again).   Just as last year much of this "stimulus" (don't you dare call it that!) will go as a thinly disguised handout to the states so they don't have to truly balance their budget and can continue to allow public workers to retire at age 54 with the type of pensions most of you in the private economy can only dream of.  But remember, it's not a stimulus... or a handout to states ... it's a "job creation pot of gold plan".

And that's pretty much all there is to report from the United States of Ponzi Scheme... just remember, we can take, borrow, beg, and steal from others (and future generations) to give to todays, and no bad comes from it.  We are the chosen people. Let us celebrate another week of being able to circumvent all laws of nature and / or economics. At some point the stimulus / handout gravy train ends, and baby - this country better be able to run on something more than 0.25% interest rates or the real fun begins.

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