Portfolio Shift

Over the past few weeks, I have been buying the semiconductors, particularly semiconductor equipment companies but also some of the chip names.  The group did not get as cheap as I usually like, but with the cycles becoming muted compared to prior years, growth slowing and more capital discipline, I do not think valuations will get as low as they have in the past.  Also technically, they appear to be bottoming.

To fund the purchase, I have liquidated my Canada short, my emerging markets short, and my energy and coal longs.  I believe the market wants to move higher, regardless of the economic problems we are facing.  The trade most likely to frustrate most investors - which is the modus operandi of the market - at the moment is an upward move, I believe. 

I also believe that we are in a very wide trading range, and this is not the start of a new bull market.  I believe the next few years will see a great deal of gyration but little forward progress as the problems in the economy take time to sort themselves out.  This means that when expectations are low and the data shows that the economy is not on the verge of collapse - like today - the market will rally.  However, when investors think its clear skies ahead, the economic weakness will reveal itself as being prolonged, disappointing investors and causing violent sell-offs.  Thus, at some point, I will get aggressively short again.

I also think the commodity bull market is in the latter-stages.  However, many commodities will not see their prior normalized levels.  For example, I would be shocked to see oil at $40 again.  But oil at $70 is very possible.  I remain long some commodities that are a long ways from their inflation-adjusted highs.  Oil is not one of them.

The market action this month has been, to some extent, nonsensical, in that groups that should not move together have been moving together.  Today, both the price of crude and airline stocks went up.  One explanation I saw for the strange move today was that a swap was being unwound, with corresponding anecdotal evidence to support this assertion.  I have no idea if it is true, but schizophrenic action makes the most sense in a liquidity driven market.

Comments

[psychodave]

"schizophrenic action makes the most sense in a liquidity driven market."

We need a page on your blog where we can post our nominees for your top twenty aphorisms.

As a value investor, I'll dodge buying your eventual book as long as I can, and such a (free) page on your blogsite would fit nicely with my capital allocation style.

[kerry]

Well, right now everyone thinks that we're going to bounce off the spx's 50 dma. Do we finally fail? Probably.

The credit contagion will spread.

I dunno. I'm sitting here with a huge short position trying to figure out if I take some (more) profits.

[Toro]

Thanks Dave!

I want to clarify that I have some exposure to the Emerging Markets short, and began increasing that exposure again today. Technically, it looks like Emerging Markets may be rolling over again.

It seemed that outside of China, investors were ignoring the fundamental economic problems in the emerging markets and bidding the stocks higher on the perception of an improving US economy. That no longer appears to be the case, so I'm buying the EEV back at a couple points higher than from my sale point.

T.

[kerry]

Hmm. Didn't realize that EEV was so low. Yeah, emerging markets and then commodities are probably going to be the next to go.

Personally, closed my short end of day, think the US bounces a bit near term inverse to oil. I could be wrong. I'd bet the credit contagion hits emerging markets, small to mids, eventually commodities...???

[kerry]

oh yeah, short canada is probably very smart at some point in the near term.

I think you're right that the US doesn't crash near term. Just looks too obvious based on the charts. Fundamentals are still questionable and financials are getting closer to fair value.

You should listen to me. I'm up 20% in 3 weeks... (played the ups then the downs then ups then downs, small profits each time, very lucky.) Actually not too sure what is going to happen now, why I am much flatter, a bit long. This kind of luck can't continue, but they're the only plays that I feel comfortable making right now with the market. Near term idiot bounces within a quasi-range...