Monday, April 12, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 36

Year 3, Week 36 Major Position Changes

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

Cash: 62.2% (v 70.6% last week)
19 long bias: 33.5% (v 24.6% last week) [includes 1 option position]
2 short bias: 4.3% (v 4.8% last week) [Includes 1 'long dollar' position]

21 positions (vs 21 last week)

Weekly thoughts
More of the same... US markets were up for the 6th straight week and 7th out of last 8.  Volatility was low, volume was low, and the market has not a care in the world as long as the time to raise rates is kicked out another 6 weeks every Fed meeting.  It all has a robotic feel to it, such little emotion now.  Simply buy any dip if only for minutes in length - be rewarded within 4 hours.   Further, it has really become a 3.5 day week at this point.  We noted some 5 months ago the strange pattern on Mondays (they had been up something 8 out of 9 weeks at the time) and despite the swoon in markets in mid Jan to mid Feb the pattern mostly continued.  Now it has become near religion that the market will be up Monday so traders position for it... which means the back half of Friday has now become a positive time as people pile into the "can't miss" trade.  That leaves 3.5 days for normal operations.

The Monday miracle reminds me the 3:30 PM miracle we saw through much of 2009... people always anticipated a strange upward movement that had a high degree probability of happening in the closing 30 minutes so traders kept piling in anticipating it day after day.  The patterns change but these repetitious things keep occurring in one form or another.  Rarely have things to telegraphed to the market, continued to work for so long... a bit boggling.  At this point one just has to play along realizing one day it will end badly and one will lose money when it happens.  But everyone's game plan is to try to make as much money before then, acting like Pavlov's dog.

No need to post charts at this point, they look the same as they did 5 weeks ago, 3 weeks ago, and last week.  The S&P 500 has not penetrated even the 6 day moving average on a closing basis in nearly 2 months.  Until it can even make traders sweat one bit by falling below the 10 day, there will not any flinching. The only point I will highlight is since March 2009 there have been 3 corrections, all generally 8-9%.  We are now approaching 9.5% away from the lower of the 2 major gaps on both the S&P 500/ NASDAQ charts - so with a little more upside, when this gap eventually fills it will be our first 10% correction of this rally.


The economic news front is relatively busy this week but at some level none of it matters anymore - everyone is fixated on employment and since we are going to get 400-500K+ type of job "growth" the next few months as census workers flood into the US, the rest seems irrelevant.  Certainly the market has brushed aside any worse than expected news for weeks on end.   The only reason to care at this point is sometimes the economic reports cause a 4 minute selloff which allow you to "buy buy buy" at huge discounts ...sometimes up to 0.3% off.

More important this week will be earnings reports; at the front end (first 2-4 weeks) are S&P 500 multinationals and as I've opined many times we are now in the age of the global corporation.  They can arbitrage their labor costs and governments the world over are supporting their nation's spending so it's a great time to be a corporation, the bigger the better.  The only question is how much of the earnings beats are already in prices - only when markets sell off on good news can we assume they are ready to retreat.

As for economic data:

Tuesday: Import and Export Prices... not that key to market but let us begin to watch import prices for signs of inflation.

Wednesday:  (a) Consumer Price Index - the way our government reports it, there is almost never any inflation in America, and when it appears its isolated and explained away since food and energy doesn't count.  Neither does healthcare, or tuition.  Honestly CPI could go to 20% and Ben would not care at this point. (b) Retail sales - we already know this will be 'better than expected' and should be until analysts get their head out of their behinds.  Look analysts - huge swathes of Americans no longer bother to pay their mortgages, please go and sit down and multiply 5-6M mortgages not being paid x average American mortgage payment and reverse engineer it to figure out why you are constantly shocked... it's not that hard.  At this point the WORST thing for the American economy is for foreclosures to stop - it's one of the main economic drivers now. (c) all types of Fed heads speak Wednesday (Lacker, Warsh, Fisher) - one will certainly say something empty about "caring about inflation" while the rest reassure the markets that easy money will be here for a long time.

Thursday: Industrial production and 2 lesser business surveys - Empire State & Philly fed.

Friday: (a) Housing starts - again it does not matter; the great majority of housing data has been disappointing the past 2 months and the market doesn't care much.  Plus seasonality should begin to help these figures. (b) Consumer sentiment.

I will continue to keep a close eye on any producer inflation reports... in 2008 once steel and oil broke to the upside we saw massive stress in the system [May 23, 2008: Smaller Asian Countries Begin to Buckle Under Oil] [May 17, 2008: WSJ - Fast Rising Steel Prices Set Back Big Projects] - the market ignored it for a while and then finally buckled (along with a minor thing called the worst financial crisis in our lifetime).  Obviously oil is jumping - I am getting my first questions this weekend of "why is gas near $3 when the economy is horrid" - but that seems to only be a Michigan problem, because I tell these people the economy is roaring in the rest of the US.  And iron ore and met coal prices are jumping which is going to put steel producers in quite the spot - either they eat the majority of these price gains which will destroy their margins or they try to pass along to the supply chain.   Much like early 2008 the market could care less about these issues today... it only matters when in matters.  And government data sure is not going to help us - we'll have to see what the company's who use these raw inputs say in the coming quarters.


For the portfolio, I am completely lulled into complacency as the siren's call to "buy buy buy" catches me.  Valuations in some of these sectors are reaching insane level and some stocks are up 50%+ straight but people are still being rewarded.  As is always the pattern with the human lemming everyone is confidant they will find a chair when the music stops - but for now everyone keeps dancing with DJ Bernanke pushing us through a non stop party ... an orgy of sorts.

On the long side I restarted home builder Lennar (LEN) even though truthfully I believe the housing market 'rebound' this spring will disappoint.  But a lot of this depends on rates - if mortgage rates head to 5.5%+ I think the US is especially cooked, so watch that 10 year bond... the country is addicted to easy money and can no longer even handle 6% mortgages.  Thus far, LEN has done nothing for us. I cut back half of Massey Energy (MEE) after the mine disaster struck... thus far the stock sold off sharply for 2 days before a dead cat bounce Friday.  It still sits below the 50 day so I might punt it this week and redeploy into a name without such a dark cloud overhead. I sold half of Indian bank HDFC (HDB) simply because it's had quite the run - that has not been a good reason to sell anything since stocks are now breaking out on top of old breakouts but I am hoping some of the laggard names take the baton from the big runners.  Indian stocks are up an astounding 9 weeks in a row!

I bought some SPY Index calls Friday afternoon because I am now a robotic lemming just like the rest - late Friday are up, in anticipation of Magical Mondays.  Funny how people use to pare risk going into a weekend, now no one has fears... the only things that can happen on weekends are Chinese economic data or bailouts... it's all good.  Again, as mentioned above - this one day will blow up in people's face but by historical standard it should have blown up long ago since everyone sees it.  Either way, these SPY calls could be gone Monday as the anticipation of Greece being handed a gift has now come to pass... we'll see how the day goes.

On a side note - I am also disappointed in performance of Diamond Offshore (DO) since purchase the week previous to last.  In fact, almost all the drillers really underperformed last week as HAL9000 switched into E&P names... grrr, wish I knew the algorithm.

On the short side I bought back into the exposure against US bonds, but auctions went reasonably well last year and it might be dead money again for a while.   I was stopped out of AsiaInfo Holdings (ASIA) late Friday for a loss; the stock jumped another 3.2% Friday so it saved us some skin.  I also noticed this weekend it reports Monday so all for the best as I don't like to be heavily involved with any stock about to be exposed to lemmings' over reactions.

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