Today the broad market fund was up about 75 basis points, which isn’t that amazing. Leading the parade were Cemex, Fresh Del Monte (that has been on a tear), SABESP, and Lyondell Chemical. Bringing up the rear were… wait, none of my stocks were down more than a percent yesterday. That’s a pretty broad based rally.

In general, the markets feel like the majority of players are concluding that they don’t have to worry about systemic risk for the nonce. Swap spreads, bond spreads, implied volatility, and other variables show a continued willingness to take risk. I wouldn’t want to say that I like being a short term bull; there are many worries in the present environment. But at present, the willingness to take risk and finance risk taking persists. That may change, but until then, the bull market continues. I will combat risk through my ordinary risk control mechanisms, as described in my eight rules.

I’m going to have to defer on my industry models for one more day because of time constraints.  Apologies.

Full disclosure: Long CX FDP SBS LYO

Up about 1/4% today, against a lousy market. Giving extra help today were Valero Energy (though I sold a little), Helmerich & Payne, and ConocoPhillips. Hurting the cause were Royal Bank of Scotland and Lithia Automotive.

Is the recent panic over? Yes and no. No, because you can never tell what additional macroeconomic problems will crop up. Yes because CDOs [Collateralized Debt Obligations] are still getting funded. I have a saying that bubbles only pop when cash flow is insufficient to finance them. Well, the riskiest part of the debt markets, CDO equity, still has willing participants. That indicates that it is not bubble-pop time yet, and that has positive implications for the junk debt and equity markets. Party on!

Industry models tomorrow.


Full Disclosure: Long HP VLO COP RBSPF LAD

Though it is something that will grow, the major article list section of this blog is now up-to-date. It is a complete index of my long-term writings at RealMoney (primarily).

The one thing that would make it better would be to index my long term Columnist Conversation posts. It is my favorite part of RealMoney, and that is why I have concentrated there, even though I don’t get paid for cc posts. (sad that) What would be interesting would be to scour my cc posts for long term value, though I have over 1500 cc posts. I’m not doing that anytime soon. 80% of my cc posts are ephemeral, and I’m not sure it is worth the effort to get the other 20%.

I can’t remember the last time that all of my stocks were up. 28 of them were up by more than 1%. If anyone would like to track the performance of my broad market portfolio, I have it listed at Stockpickr.com. Two notes though, at present I am running with 8% cash, and Allstate and the Japan Smaller Capitalization fund are roughly 1.5x the size of the largely equal-weighted portfolio. Today, the portfolio continued to beat the S&P 500, returning roughly 1.9%. Leading the charge were Fresh Del Monte (what a move over the last month), Barclays plc, Royal Bank of Scotland, SABESP (wish it had gone down more, would have bought a bunch), and Deerfield Triarc. Deerfield Triarc pointed out that as a mortgage REIT, they had minimal exposure to subprime mortgages. No surprise to me, but in this environment, everyone is suspect. Nice yield of around 10%.


As for my project of the week, I have all of my tickers contending to be in my portfolio, and I will share them with you here:

ABY ACI ADM AGU AIMC AL AMGN AMK APPB AVT AXL AYI BBV BEZ BG BGG BLX BP BPOP BRL BRNC BTU CAJ CAKE CALM CAR CAT CHK CMI CMP CNQ COO DB DF DGX DSW DT DUK EAC EAT ECA EMN ENI EPD ESV EVEP FCL FINL FL FSTR GGC GI GIL GMK GMR GPI GRC GSF HAL HES HSOA HTCH HTZ ICO IDCC INSP IOM JRCC KBR KOMG KONG KPN LABL LAD LCUT LINE LMC LNG LNX LRW LSCO MCHX MEE MEG MOT MU MUR MWE NAT NBR NCOC NEM NFX NGPC NOV NTE NXG NXY NZT OCR OPMR PCA PD PDS PHG PMTC POT PSO R RAD RDC RIG RIO RSG RSH RTP SCM SKX SNSA SON SPC STX STZ SUG SVU SWFT TAP THE TJX TK TKR TMA TMO TNP TOT TSCO TSN TSO TUES UNT URI VLI WDC WERN WIRE WPI WTI YRCW YZC

The next two tasks are calculating the industry ranks from two different models, and setting up the spreadsheet so that I can compare companies against one another. That’s for tomorrow and Thursday.

Full Disclosure: Long ALL FDP BCS RBSPF SBS DFR JOF

I have a technique that I call “portfolio reshaping,” to go along with my better known practice of “portfolio rebalancing.” (Better known to those who read me, of course.  Rebalancings happen often, but reshapings are relatively new to me, and have been slowly developed over the last three years.)

Four times a year, I sit down to make major portfolio changes.  Typically, I swap out names that have appreciated versus their fundamentals and trade for names that are cheap versus their fundamentals.  The idea is to compare the entire portfolio versus all of the replacement candidates all at once to make the best shift in aggregate.  This takes the emotion out of the decision for two reasons.  Number one, there are a lot of candidates vying to get in.  Two, I forget who recommended the idea to me, so I don’t rely on authority, but on my own analytical ability.

The process starts with a 1-2″ stack of papers acquired since the last reshaping.  I enter each ticker into a spreadsheet.  Typically that takes an hour or so.  This is the beginning of the process.  As the week progresses, I will show you more of the process as it unfolds.  This will end up being an article for RealMoney.com when it is done, but in a simpler and condensed form.

Family responsibilities have kept me from posting. As a father of eight (five adopted), I found the WSJ article on how much children cost fascinating. Fascinating, and hooey. It doesn’t take that much to raise children properly. In a large family, particularly, one of the benefits is that the children like having so many siblings (even as the parents go nuts). It restricts the number of extra activities that any child can take on, particularly as older children must help to make the family work.

It is very easy to be too indulgent with children. Children respect and love strict parents, if the parents are rational and communicate why they are that way.

But I digress. Last week was tough. I did 60 bp better than the S&P 500, and considerably better than small cap indexes. That’s cold comfort when you’re losing money.

Last week, some oddball names helped me. I sold some Fresh Del Monte Produce to rebalance my positions, because it had run so much. I will do the same with Grupo Casa Saba if it runs another 5%. Much as I think the stock is undervalued, on any stock I own I still take a modest amount of profits after every run of 20%.

Anyone looking at my broad market portfolio would see a decent amount of economic sensitivity in the names there. I am not trying to overdo it; I am aiming at cheap names in sectors that I like. That’s how I invest. I let industry selection and cheapness limit my risks, rather than exiting the equity market altogether.

More to come next week as I look at my indicators, and see how the market responds after the weekend. Personally, I would be neutral-to-positive over the next week.


Long SAB FDP

It’s been a weird three days as far as portfolio management goes. Each day I outperformed the S&P 500 by 10-20 basis points. It’s been too regular, and it has to shift, but which way?

Cement names hurt me today, including Cemex and Lafarge SA. Barclays plc also hurt. On the plus side were SABESP and Grupo Casa Saba. On net, the results were nearly breakeven to me.

There may be other exogenous discontinuous events ready to smack the market around, but after early panic yesterday, the market became very rational in aggregate. The panic is over. Time to adopt a normal posture of moderate bullishness.

Moderate bullishness should be the posture of most investors because absent famine, plague, war on your home soil, and aggressive socialism, markets tend to appreciate over the intermediate term.

As I have pointed out at RealMoney, it is important to avoid non-prime lenders and homebuilders for now. Short them?! Well, that is for gamblers, not investors.
long SBS SAB CX LR BCS

I was a little ahead of the market yesterday, say 10-15 basis points ahead of the S&P. Leading the charge were Fresh Del Monte (my current largest loser), and Grupo Casa Saba (what a great undiscovered stock). Fresh Del Monte was upgraded from underperform to neutral after their less bad earnings. Grupo Casa Saba reported excellent earnings. They run drugstores in Mexico, an excellent industry for a country with a growing middle class. For my balanced mandates, I kicked out the QQQQs that I bought yesterday. The rally wasn’t as big as the reduction in short term risk implied by the VIX.
At RealMoney.com, I had a post late in the day called, “What I Have Learned Over the Past 36 Hours.” It attempted to put forth a dozen things that have been revealed since the recent crisis hit. Here’s an explanation:

  1. China sneezes; the world catches cold. If we needed any proof that America no longer solely dominates the global scene we saw it on Tuesday.
  2. Systemic risk may or may not be a problem now, but a lot of people acted like it was a problem. Thus the rallies in the currencies used to finance the carry trades. The Yen and the Swiss Francs are good hedges here. I am more dubious about long Treasuries, though not long TIPS. (It was neat to see the rallies in the yen and swiss francs. Thne long bond fell more today than the carry trade currencies did.)

  3. The current equity market infrastructure is marginal to handle the volume of the last two days. Given the nature of modern finance, major errors are not acceptable. I got off a couple of good trades as a result of the accident, but those trades were accidental as well.
  4. The lack of human intermediaries with balance sheets leaves markets more volatile than before. It genuinely helps to have someone who can stop the market at certain volatile points, and then restart with an auction so that a fair level can be determined after news gets disseminated. Also, liquidity providers show their value in a crisis.
  5. Algorithmic trading and quantitative money management is making stock price changes more correlated with one another than they used to be. Markets behave differently in normal times, and under stress. The methods that make money when the market is calm exacerbate volatility when market stress appears

  6. Panic rarely pays.
  7. Patience usually pays.
  8. Diversification pays.
  9. In a crisis, strong balance sheets and free cash flow are golden. During times of stress, these four bits of wisdom pay off. They protect an investor from his own worst temptations.
  10. People want the Fed to loosen more than the FOMC itself does. The FOMC doesn’t care about weak GDP if labor employment is robust. The FOMC certainly doesnot care about te stok market unless i affects the banking system, which is unlikely.
  11. The oscillator is not oversold, yet. Sad, but true. We have a decent number of days in the rear-view mirror that aren’t so bad. The intermediate-term panic level is not high.
  12. What do you know? Cyclicals are cyclical. I’m just glad I didn’t get kicked worse yesterday. That’s the danger in playing cyclical names. I take my risk therethough, rather than in growth that might not materialize.

All this said, I feel well positioned for the next few trading sessions. I am working on my quarterly portfolio reshaping, which will take out a few companies, and replace them with cheaper companies in industries with more potential. Once I complete that analysis, you will hear about it on RealMoney and here.
Long SAB FDP

I don’t think my troubles are here to stay, either. I was down a little more than 3.3%, better than the S&P 500, but not by much. So what whacked me? Generally, cyclical companies: Cemex, Conoco, Barclays, Sappi, Jones Apparel, Sanamento [SBS], Lafarge, Magna International, Lyondell, Deerfield Triarc, Patterson-UTI Energy, Japan Smaller Capitalization Fund, and Lithia Automotive.
For the most part, these are companies with strong balance sheets where they will do well in the intermediate term, in my opinion.

As for my balanced mandates, I don’t have solid numbers yet, but I suspect I was down a little more than 1%. Not bad, but I hate to lose, period. I take some comfort, but not much, that I am still up a little less than 2% so far this year on the broad market portfolio. Let’s see if we can do better in the next trading session.
long CX, COP, BCS, SPP, JNY, SBS, LR, MGA, LYO, DFR, PTEN, JOF, LAD

This will be kind of stream-of-consciousness as I go through my indicators. I have a lot of them so bear with me.

Gold, Copper, Oil, Gasoline, Heating Oil, and Natural Gas were all down. The yen and Swiss franc were up big, 2% and 1% respectively. (Nice hedges for me, I added them in the last month as a hedge for systemic risk. British pound flat. Canadian dollar lower. Yuan still appreciating… controlled appreciation there.

Shift at the tails of the of the distribution of stock returns, even if the mean has only moved 3%+. More new lows than highs, but still more stocks over the 200-day MA than under it.

Investment grade credit spreads in CDS gapped out 4.5 bp on the IBOXX 7 deal. 10 year swap spreads moved out 2 basis points, which is more notable when they usually tighten when yields fall, due to mortgage hedging. Bond volatility measures gapped out, but not severely.

The Merger Fund dropped 31 basis points — a very good indicator on how the arbs are doing. My oscillator, which is a knockoff of a famous one that Cramer refers to, had the worst single day that I have ever seen, but the 10-day MA indicates that we are not oversold yet.
Anticipated inflation during the 2012-2017 period fell like a stone to a 52-week low. The inversion at the short end of the curve deepened, while the long end lost some inversion. The TED spread jumped 7 bp. The VIX jumped more than it should have, given its ordinary relationship to returns on the S&P.
Okay, now. Putting it all together, yesterday was an expression of :

  • Decreased global demand from China.
  • Increased perception of systemic risk.
  • Increased likelihood of Fed loosening.

So what does this mean for today? Asian markets are down today, but Shanghai is holding its ground as I write. I would expect to see European markets flattish, and the US market to have a small volatile rally today. Treasury notes (excluding effects from the GDP report) should sell off.


We’ll see how it all works out by 4PM. I’ll have more for you later.