Monthly Performance: June 08 ~ market folly

Wednesday, July 2, 2008

Monthly Performance: June 08

Paul Kedrosky posted up this lovely breakdown of the worst "June" returns on the Dow in History. And, although the month indeed was bad, it didn't necessarily feel that way. We never saw true panic, we never saw capitulation. Instead, we saw stocks slowly bleed it out. And, that led us to a month where the S&P500 was -8.60%. And, halfway through the year, the S&P sits at -12.5% YTD. But, for those of us with some sense and a solid gameplan, the month wasn't so bad. Why, might you ask? Well, because we saw this coming a mile away. We know the U.S. is still in a recession, we know the housing sector is accelerating to the downside, we know oil is setting record highs, and we know that the financials are still sorting through the rubble of the credit crisis. We are by no means out of the woods yet and my portfolio has been based on that for quite some time. I figured I would start posting up my monthly performance here, to stick with my theme of complete transparency. (Well that and the fact that I had a pretty damn good month and this seemed like an ideal time to brag, er I mean start logging my results on the blog haha). For the month of June, MarketFolly's portfolio was up 5.56%. And, year to date, the portfolio is up 10.5%.

Since I've now turned to focusing on absolute return rather than relative return, I'll leave you to do the math in terms of outperformance. And, as a matter of fact, after having some discussions with numerous absolute return portfolio managers, I've come to the conclusion that people still pay attention to the indexes no matter what. Even if absolute return technically has no metric for comparison, you still want to be outperforming the next best alternative (ie: stocks, bonds, cash, or other alternatives). And, the next best alternative could very well be the indexes on certain months, you never know. In the end, its all about semantics and just depends on the portfolio managers absolute return goals. There will always be people who will want to compare results to the indexes just because that is what has been ingrained in everyone's mind to begin with. As long as I know my goals in running an absolute return portfolio, then relevant return is meaningless and is just a moot talking point. I'm very happy with my results thus far, but I can merely attribute it to creating a gameplan and sticking with it. I didn't panic and I stayed disciplined. That is one of the most valuable lessons you can learn when dealing with financial markets.

The macro themes we've seen have continued to play out. Housing sucks, financials suck, the dollar sucks, the economy sucks, and commodities are roaring. Many of the gains for me this month are attributed to taking a strong round of profits in my Natural Gas (UNG, CHK) and Coal (ACI, MEE) names. Additionally, I locked in profits in the fertilizer plays at the new highs (POT, MOS) and then am starting to buy them back here down at these levels. Additionally, I have been shorting the market itself through SDS, which is the etf for Ultrashorting the S&P500. It seeks twice the inverse performance of the S&P. So, if the index goes down 1%, SDS should theoretically go up 2%. I usually use this (and a few other etf's) as a 'hedge' in my portfolio, layering in and out when the market makes drastic moves one way or the other. For instance, in the bear market rally we saw leading up to this recent decline, I was adding heavily to the SDS, seeing as I knew we were still in a bear markets and the charts showed this clear as daylight. And, I posted this chart a few weeks back reminding everyone we were still in a downtrend here :
And, if we pulled up that same chart now, you would see we have fallen another 50 points on the S&P. The green circle below shows what happened to the S&P in the few weeks after I posted the original chart above. Here's what things look like currently:
In the end, everything played out like we anticipated and locked in some nice gains. I have now been taking profits in SDS as I feel we are due for an oversold bounce (and apparently everyone else feels this way too, which is concerning.... but that's a whole different conversation).

The rest of the gains this month were due to some shorter term moves I had made, most notably with Capital One (COF). I have been in and out of this name on the short side, as I feel they truly have the most exposure to the 'next leg' of problems in the financials: increasing credit card receivables/rising delinquincies & bad auto loans. COF has exposure to both and is having problems. This name has been a major component of the short side of my portfolio, to ensure I'm truly hedged. And, what better way to reap the gains than to short a financial, right? My thoughts exactly. (Note: I've covered the last of my position last week and I am no longer short this name, but I will be looking to re-short on any major pops). I didn't actually blog post about this name in my portfolio, but I did 'tweet' about it numerous times on twitter (here's an example and here's another). So, this just goes to show why you should be following me on twitter! Or at the very least, reading the twitter posts that stream as I post them on the upper right hand corner of my blog. Here's a chart outlining my entry and exit from this name:So, as you can see, all I did was stick to the gameplan and watch the charts for excellent entry/exit points in terms of risk/reward. I realize that these plays could have easily gone against me and continued to rally. But, if they did, I would have been stopped out right above the moving averages, and no harm done. It's all about knowing your risk/reward before even entering a position. For me, this month can be summed up by patience. The whole rally in the indexes from the middle of March until May was simply a rally in the midst of a bear market. I waited patiently until it found resistance, and then entered some short positions in financials (COF) and the market in general (through SDS). I continued to hold my fertilizer, coal, natural gas, and resource plays as they continued to benefit while the overall market struggled. Now, having taken profits in these names, I'll be waiting for pullbacks to re-enter the strong sectors of the market.

Next up: July. Will we see an oversold bounce? Will we continue to bleed it out slowly? Who knows. All I know is I'll be monitoring things closely, waiting patiently to set up my next move based on what happens at this test of support/the March lows on the indexes.