Monday, August 23, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 3

Year 4, Week 3 Major Position Changes

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

Cash: 80.2% (v 72.7% last week)
19 long bias: 17.7% (v 23.2% last week)
1 short bias: 2.1% (v 4.1% last week)

20 positions (vs 23 last week)

Weekly thoughts
Last week was a period of volatility but the market really did not go anywhere.  We had our typical Monday morning surge, this time due to a hostile takeover bid of Potash (POT) by BHP Billiton (BHP) taking the market off a freefall cliff at S&P 1070.  There was an unresolved gap to the upside at S&P 1088.50 hence I was thinking there would be some rally but it went about 12 points farther than I thought.  The rally Tue/Wed led to S&P 1100 where the bulls were rejected.  A horrible weekly jobless claims and negative Philly Fed report packed a 1-2 punch to the gut Thursday, taking the market right back to said support at 1070.  Friday, many (hand raised) were head faked by the break of this technical level... only to see an 'urgent buyer' show up out of the blue to rally the market late in the day.  So to end the week we sat right at the cliff edge of 1070 .... and lo and behold this morning we had (wait for it) our typical Monday morning surge.  But today it has been sold off thus far.

This chart conditions warrants caution.  While a bounce of 15-20 S&P points can happen (as we saw last week) it means nothing in the bigger picture.  It simply makes difficult for bears and bulls alike.  No serious intermediate moves can be made until we break out of this range but things look bearish on an intermediate basis.  But as stated a few sentences ago, the market never makes it easy and hectic rallies out of the blue make the bear position hurtful at times.

In terms of supporting markets - China & copper (and indeed many emerging markets) remain "ok"; this decoupling 2.0 theory i.e. the new emerging world power's can trade amongst themselves even with the largest economies being weak (Europe, U.S., Japan).  That was a theory in early 2008 as well until it imploded.   Semiconductors had their dead cat bounce as anticipated last week as seen in SMH ETGF, and again are rolling over, the financial ETF (XLF) looks 'Lost in Space', and bonds continued to shower up with yields fast approaching the lows of 2009.  With too much liquidity offered by central banks in a delevering economy with slack demand, much of the money that was gushing into equity markets last year has gone into bonds of all type in 2010, especially since April - emerging market debt, U.S. debt, German debt, Japanese debt.  I suppose that is one way to keep a Ponzi going...


Last week was a quiet one for economic reports; this week it picks up a bit but with housing completely lost despite being 'high season' and unemployment claims jumping substantially higher the past 3 weeks, there is not much to look forward to.

Tuesday: Existing Home Sales - this makes up 90% of transactions; unlike a year ago when the pundits were crying "housing recovery!" the data has been pathetic this summer, as we've attempted to repeat the ploy of 2004-2007, that is give almost anyone with a heartbeat a mortgage.  This time we've eliminated the middle man and simply made FHA our national subprime lender. (can you believe these guys do not even have a minimum credit score?)  Main hope for bulls is the number is awful but less awful than expected.

Wednesday: New Home Sales (less important than existing but we'll get the same knee jerk reaction), and the always volatile Durable Goods.

Thursday: Weekly Jobless Claims which have not attracted much more attention than they used to.

Friday: Q2 GDP revision and Consumer Sentiment.   First pass on this number was 2.4% but like almost all government reports in this era, it will be revised down after the fact (once we rally the stock market on the initial false data).  This number has a lot of issues with it to start but let's be clear, if even the government with all its massaging cannot make 3%+ GDP figures appear out of thin air we're in trouble.  Based on all the weak economic data the past month or two, analysts have moved down expectations from the original 2.4% to 1.3-1.5%.  So I guess we can rally on the "better than expected" 1.7% because that's the game we're playing.

The main thing the bulls have to hope for each week now is that the news is bad, but not as bad as expectation -that's a pretty pathetic investment thesis but it worked for much of early to mid 2009.  The main difference is the economy was being flooded with historic stimulus and moving off an obliteration from the Lehman/Fannie/Freddie/AIG era.  We are still being flooded with steroids but the patient has now become less responsive to the drugs as even 4.4% mortgage rates cannot drive a housing market, due to lack of savings in the country and inability to put even 3.5% down for many Americans.  Since there has been no serious post recession bounce (i.e. based on how awful GDP was in 2008-early 2009, we should have seen 5-7% type of GDP for at least a year even without massive stimulus), we are starting this next 'leg' down from a much lower level of economic activity hence I don't expect huge implosions - simply a long period of struggle.



I continued to 'de-risk' this week but the action remains difficult.  The market looked poised to break down Monday - but instead we got a rally.  That rally took the S&P 500 back over the 50 day simple moving average... but was rejected at 1100.  The the index imploded Thursday on 2 bad news reports.  Friday the market broke support but instead... rallied!  It has been a difficult, range bound market for many weeks now and remains so.  Rather than pressing trades its best to tread water, trade lightly on the edge, and wait for a more lasting move where making money will be much easier.   The two big movers for the week for the portfolio were Potash (POT) and (CRM).

Specific actions:

On the long side:

  • Monday morning we were greeted with good news - BHP Billiton (BHP) made an unsolicited bid for fund holding Potash (POT).  While I thought Potash could run more over time, the big surge was enough for me and I closed out the position securing a nice gain but wishing of course our position size was larger. 
  • Nextflix (NFLX) continued an intense run so after taking some profits on it last week, I sold almost all shares Monday in the upper $130s as the stock was immensely overbought.  Within 48 hours I was able to buy back our shares (plus some) for a 9% discount as NFLX fell to the 10 day moving average - despite two days of rallying in the broader market. 
  • Riverbed Technology (RVBD) was bought on a limit order the previous Thursday; it had rallied close to 10% in just a few sessions so I took half off the table simply to lock in gains since the overall market was in weak position and the bounce had come so fast in this name. 
  • Thursday, I cut (CRM) by 2/3rds ahead of earnings.  The report was good, but the market reaction was unusual to me - the stock skyrocketed Friday, at which point I sold almost all remaining shares.  I believe this had to be a short squeeze since the results were not "super". 
  • Friday, I closed Cirrus Logic (CRUS) as the stock had been acting weak and broke a key support, took a 12% loss. 

On the short side:
  • Tuesday as the market ran towards 1100, I was stopped out of a short of Gentiva Health Services (GTIV) for a 3% loss.  I replaced the name with Henry Schein (HSIC) - however that was stopped out the next day for a 1.5% loss. 
  • As the S&P 500 ran into resistance near 1100 I put on a modest 2% short on TNA ETF. I closed this out Thursday morning for a quit profit after poor weekly jobless claims figures, as the S&P 500 fell back to the support/resistance of the 50 day simple moving average near 1088.
  • After the Philly Fed report hit later Thursday morning, I put the TNA short back on plus some BGU (still modest sizes at 2%+2% = 4%) under S&P 1080, hoping to see 1070 or lower.  The market did fall to 1070 but I was torn on whether this would be the break or we'd bounce yet again.  Of course the index bounced and I took profits as the market was rebounding so the gains were small.
  • Friday, I tried the same trade as Thursday as the S&P 500 broke key support at S&P 1070 - shorting with both BGU and TNA - instead the market did a U turn and rallied right back for no apparent reason, and I covered for losses. 

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