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

Year 3, Week 4 Major Position Changes

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

Cash: 65.8% (vs 58.6% last week)
22 long bias: 12.2% (vs 17.4% last week)
10 short bias: 22.0% (vs 24.0% last week) *includes long term puts

32 positions (vs 36 last week)

Weekly thoughts
The market ended up slightly for the week but aside from the immensely speculative action in government sponsored financial firms, it was mostly a week of "blah" unless you are a daytrader. The greater market - and positions we held - gained one day, fell the next, gained one day, fell the next... but mostly made little progress in any direction; either long or short. We found very little to do... in the portfolio of names we hold or follow, almost nothing has been making consistent moves the past 2 weeks or so; but alas we failed to see the excellent values in Fannie, Freddie or AIG a month or so ago. There are times to attack and times to hold back and until we see something other than range bound activity we are content to hold steady awaiting a direction.

Looking at the 2 major indexes, I substituted the SPY (S&P 500 ETF) for this week's look at the S&P 500 technicals since there is a gap in the SPY that is not there in the S&P 500 chart that I'd expect to be filled shortly. It is just under 102; once again that will be the "easy short" just as we had an "easy short" to fill the gap at 98 that was created in late July. [Easy Short Trade Has been Made] That gap took 3 weeks to fill. Not displayed on the SPY chart but visible in the S&P 500 chart is a gap on the S&P 500 chart at 906 (roughly 90.6 on the SPY). I thought that would be filled within a few weeks of creation but that did not happen - so now it will be a homing beacon for some day in the future.

NASDAQ, after being a long time leader has turned into a laggard the past 3-4 weeks as government sponsored entities and banks, REITs, auto companies - anything subsidized by the government enjoy a rally while the tech heavy NASDAQ does not receive such a level of handout. On Thursday's "good news" by Dell (DELL) along with Intel's (INTC) pre-announcement of an increase in revenue guidance - the NASDAQ made its first leadership move in a while, but closed nearer to the lows of the day rather than highs.

Considering this now 7 week rally was borne on the back of a Goldman Sachs / Intel earnings surge in mid July, there would be some irony to see it close out on Intel good news - circle of life. Despite a mountain of warning signals: speculative fever at a code red level, short interest at very low levels, insider selling at highest levels in many quarters, valuations rich, China market falling substantially, Baltic Dry Index returning back to May's levels, natural gas prices (a true proxy for US industrial "recovery") at multi year lows despite being inside hurricane season... the market remains stubborn - corrections have been measured in hours most of the time. Bears have been completely decimated and the hope they had a few weeks ago when the 20 day moving averages on the S&P 500, and NASDAQ were broken only to be met with an onslaught of buying out of the blue - has been dashed. It feels as tough to be short now as it was trying to be long in late February 09.

If this market acted like it used to, with all the warning signals flashing - I'd be in a much more heavily short exposed crouch. But with constant support from "somewhere" at any period the markets look ready to roll over, it is like betting against the immovable object. In the old market, I'd say S&P 950s would be a very probable first level objective with gap fills on S&P 906 and NASDAQ 1800 the obvious secondary objectives. In the new subsidized market, I don't know which rules still work so we'll play it by ear.

I mentioned about a month ago, I was looking for this rally to peter out in weeks 6-7 and I'd get more bearish as we enter football season. September is the market's worth month, even though October is when many of its dramatic crashes have happened. Unfortunately since then I've been reading a lot of "September is the worst month" and some very high profile voices have been calling for corrections (Prechter, Kass) - which I wish had not happened. But right now I have no feel for where sentiment is... it feels like many people are bearish in mind set but unwilling to put money behind those calls. I do believe MANY people are only buying because momentum is on that side of the ledger, and momentum begets momentum. Which means when a true selling episode happens the potential is there for it to mothball because many of the buyers are weak hands - they are only buying because it's fashionable and they missed a large part of the rally and need to make up performance.

Now what does the market have going for it? #1 momentum #2 no one cares about valuation because either it does not matter to them or the argument is you can't value stocks on abnormal 2009 estimates and you can even throw out 2010 estimates because they will be smashed once we move to a normalized economy #3 year over year comparisons are about to get very easy. On the last point, we are about to enter a period where a year ago the world was frozen as Fannie, Freddie went into US ownership.. Lehman Brothers went under (but hey its up 200% Friday alone), Merrill Lynch could of went under if not for a shotgun marriage, and TARP was brought to us as the only way to save the world. So many companies have VERY easy comparisons year over year versus that period. If indeed valuations continue to mean nothing and we are willing to bid companies up based on this period versus a year ago, we can in theory continue this game for many more quarters to go. If all that matters is comparing "now" to "the end of the financial system as we know it" periods, we can find green shoots everywhere - very easy ones in fact. But I thought the market was a forward looking indicator? I will continue to say the seasonality of housing begins to waver in the months to come and just as housing "rebounded" to some degree summer 2008, it has again summer 2009. Without the $8000 handout to first time home buyers things would look far worse in housing than they appear now.

The week ahead will be dominated by Friday's monthly employment report; estimates are for losses of "low 200K" in jobs for the month of August. While a very faulty report - it moves the markets and that's why one must keep an eye on it. Aside from that we'll clap on auto sales Tuesday as we see handing money to people gets them to buy cars - while ignoring the near empty lots coming in the next 2 months. Tuesday also brings the very volatile ISM manufacturing number which I say at this point should be ignored since so little of our economy has to do with it but since auto mfg assuredly saw an uptick this number might "surprise" to the upside. We can also be "surprised" (for the 15th week straight) by existing home sales, which again is dominated by first time home buyers on the low end using 5.1% mortgages, 3.5% down FHA loans in which many states allow the $8000 handout to be used as down payment / closing cost. Incredibly, we find that people will buy homes when you cover the entire cost of getting them into a home - in fact it has become easier for the first time buyer to buy a home in many states than rent. With renting one actually has to come up with a deposit that does not derive from his fellow tax payer.

Overall I expect the story to be the same the next 2-5 months as we look at the much bigger picture. The market has effectively discounted a worldwide government and central bank tsunami of money - some well respected names are calling it the sugar high. The Keynesian belief is this flooding of money will lead to improved economic activity that will raise economic spirits and get people back to normal activity. In the US this means people with no savings will once again spend; and if they don't the government will send them money to shop with. If everything plays out so neatly as that, I say the government should double the amount of money each and every year they spend since then we can all sit at home and shop on Amazon.com - why bother with jobs anymore? They only hurt profitability at companies... let the Asians do the work, and we'll hit the malls. If the playbook works out and we're back to "normal" by middle of 2010 then the market should only gain from here as the market discounts that. If instead the US consumer (the driver of world consumption for 2 decades) is still impaired and will only return to his ways by yearly government handouts, then this should become apparent in the stock market in the coming months as it "discounts" the "new normal" we'll see in 2010.

That is if you believe the market is effective at discounting much at all... if you do, I ask what was the market discounting in October 2007... or February 2000.

p.s. will the "sell in May and go away?" strategists please come back on financial infotainment TeeVee and apologize?