Monday, January 18, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 24

Year 3, Week 24 Major Position Changes

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

Cash: 48.3% (v 34.9% last week)
26 long bias: 50.4% (v 64.5% last week)  [Includes 1 option position]
2 short bias: 1.3% (v 0.6% last week) 

28 positions (vs 31 last week)

Weekly thoughts
After a rip roaring first week of 2010, the second week was not quite so well received with the S&P shedding 0.8% and the NASDAQ 1.3%.  Let us start with the only thing that seems to matter to the institutional money base nowadays - the charts. 

For the S&P 500 after breaking out of a long base, the index still remains in an uptrend.  Through Monday of last week we had been up every single session of 2010 so some pullback was in order.  Both Tuesday and Friday gave us sharp selloffs, essentially falling to the same spot - lower 1130s.  But as the chart shows, we have not even penetrated the 20 day moving average yet - which at least would give the bulls something to think about.  

As we noted early in the week S&P 1150 was the near term pivot point to the top of the range - and it proved to be true as the week progressed.  Quite a few comments from readers in the last week, especially Tuesday on what would get me to change my near term stance of "drinking Kool Aid in high quantities".   If we fall back into the box - i.e. falling back below S&P 1120 it would raise concerns.  That would not mean we sell off necessarily because for 10 months, whenever this market looked on the edge of breaking apart, miraculous orders come from some "urgent buyer" who is happy to buy SPY contracts at very bad prices, all at once - as long as his purchases strive to lead the algorithms ever higher like the ultimate Pied Piper.  But in normal times, when it was not of utmost national interest to create a massive "wealth effect", it certainly would cause concern.  Also please note the 2 green circles - one just over S&P 1110 and the other at 1070 - these are 2 tiny gaps in the S&P 500 chart which ultimately will need to be filled.  If that is in 2 weeks, 2 months, or 2 years I don't know but generally index gaps get filled much sooner than individual stock gaps (which at times never get filled).

For all the talk of "rotations" and the "NASDAQ" (tech stocks especially) lagging in the new year, I don't see much difference in this chart vs the S&P 500.  

And in our "rising tide lifts all boats world" the broader Russell 2000 also looks identical.  It's a "dart throwing" time - remember, we are all geniuses right now. 

As for the news - economic news has mostly been ignored as most days we see very little reaction to economic reports.  The Bernanke Put is in, and good news means good news while bad news = more easy money from the Fed.  The complacency of this is extremely troubling and it will eventually end badly.  But complacency can go on for a long time, especially with a man at the helm of the country's finances who believes in his mission and will not relent. 

With that said, we enter the heart of earnings season and (going with the theme of complacency) we all know the game of US analysts and our corporations.  Almost any company worth it's grain in salt is able to lead analysts to some lowball number, which they can then smash and claim "better than expected".  For all the hubbub about Intel (INTC) for example - which smashed the estimates - revenue and EPS figures are now the same as they were mid decade.  In other words, all we are celebrating is Intel "growing" back to where it was in 2005/2006.  Oh joy.  Many companies are in similar situations - with much of the "growth" coming from slashing and burning the work force - but this has been the mother's milk for 3 quarters now... how much longer we can continue rallying on the same theme, without a return to real growth is the open question.  And I don't mean growth from the utter devastation that was fourth quarter 2008 but something viable and long term.  Easy comparisons will be over in about 2 quarters and with few employees left standing it will be interesting to see what corporations come up with next... especially if revenue growth doesn't start jumping as the "economic recovery" textbooks say should be happening.

I do believe this is the era of the multinational corporation who can use wage arbitrage to lower its cost of capital - and these type of companies report in the next 2 weeks especially.  IBM is a great example - great "American company" right?  Well 70% of revenue and labor is now overseas; and more is leaving by the year.  The story won't be quite so bullish for the smaller, domestic focused companies - but most of those report towards the end of the month and early next.   Key earnings this week:

Tuesday:  Citigroup (C), CSX Corporation (CSX), International Business Machines (IBM), 
Wednesday: Bank of America (BAC), Wells Fargo (WFC)
Thursday: American Express (AXP), Burlington Northern (BNI), Capital One Financial (COF), Freeport McMoran Copper & Gold (FCX), Goldman Sachs (GS), Google (GOOG), 
Friday: [larger regional banks] BB&T (BBT), Suntrust (STI), Harley Davidson (HOG), McDonalds (MCD), Schlumberger (SLB)

While the cheerleaders on financial infotainment TV along with the retail crowd will focus on the Google's, Citigroup's of the world - I will be more interested in the railroad along with some industrial companies (i.e. PPG) not shown on the list above to get an idea of what is happening in the real economy.  I won't care if these companies are "beating estimates" - I want to know what the business is like versus last year, versus 3 years ago, or 5.   Because almost all of this "green shootery" thus far has simply been a rebound versus desolate abyss levels.  If Harley Davidson tells me Americans, flush with cash from no longer making payments on their homes via strategic default, are crowding their dealerships and living it up circa house ATM (2006) era, then we take one stance.  If however, HOG has done nothing more than cut thousands of jobs to "make the number" along with their normal financing tricks - than this quarter is no different than any of the last 8-9.  

On the economic front - a relatively quiet week.  Wednesday brings housing starts (we should hope the answer = 0, since we have 18 million empty homes), and the Producer Price Index.  Thursday brings leading indicators - and that's about it. This week will be about earnings, especially of the financial kind.  Was Friday's selloff to good news a warning flare or just a day the PPT took vacation?  We'll see.

For the portfolio, we are a bit more defensive than last week but still skewed bullish as long as the index charts hold up - some of our lower long exposure was due to a few individual stocks breaking down on their charts causing us to exit or take stop losses.  We did close quite a few positions of laggards last week - Gafisa (GFA) [weak chart], Myriad Genetics (MYGN) [analyst ruined the chart with a downgrade], Humane Genome Sciences (HGSI) ]broke some support but nothing game changing - might return to this stock soon]  We traded around some positions - covering our short of our bond ETF early in the week, and then beginning to rebuild it later in the week.  A limit order to buy for DragonWave (DRWI) at a "gap" was filled early in the week, which we were able to sell (half) later in the week for a 11% gain in 2 sessions.  After locking in a 21% gain on Telestone Technologies (TSTC) at the beginning of 2010, we rebuilt our position throughout the week.  Almost all TriQuint Semiconductor (TQNT) was sold on an increase in guidance - however we wanted to see the stock break out of its range to keep or add to the position; it was unable to do so this week; maybe next week.   Assured Guaranty (AGO) position size was increased on a potential (slow motion) breakout.  A stop loss on SourceFire (FIRE) was triggered - it is yet to be determined if we were head faked out of the majority of our position or not. 

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