Friday, October 29, 2010

November Investment Report

October was another strong month with the SP500 up over 3% and the Opportunistic Model up almost 10%. Combined with a strong September, the market has had an incredible run during what is typically the worst 2 month period in the stock markets. Whether this rise has been due to better economic news, strong earnings reports, speculations on quantitative easing, or the likelihood of Republicans retaking Congress, these events have helped lift the moods of the markets catching most experts off guard. Now these same experts provide constant analysis of how the market typically has the best 6 month period of a presidential cycle during the November to April period following the midterm election. Will they be correct this time?


Elections
With the likelihood of the Republicans retaking the House virtually certain this has had a huge impact on the bullish market performance over the last 2 months. The markets like that the new Congress will be less punitive to business. Unfortunately though, the markets might be in for a disappointment when the new House doesn't immediately produce anything substantial. So while the change is bullish the market likely expects too much short term. Now if Republicans also take control of the Senate then the market could continue the rally. Also, an upset in the House leaving the Democrats in control would surely roil the markets but both these scenarios seem unlikely.

Quantitative Easing 2
Quantitative Easing 2 or QE2 is probably one of the least kept secrets in the financial markets. The amount clearly remains in debate, but the policy will surely be implemented beginning in November. Being on the side of head honcho at PIMCO, Bill Gross, this measure seems very unnecessary and possibly damaging to the economy, but for now it'll continue to push up risk assets including commodities and stock prices with the goal of reflating the economy. See Bill's report here for more on his very interesting views or check the summary I posted on my website.

China/Copper/Coal
As discussed the last couple of months, the China/Copper/Coal play remains a focus of this model. The Shanghai Index in China had a huge run during October. Copper started out strong but has faded during the last week of the month. Likewise Freeport McMoRan Copper (FCX) and Lihua International (LIWA) started strong and faded. Coal stocks were strong as well with Massey Energy (MEE) particularly strong on speculation management would agree to buyout as the company continues to be weighed down my regulation following the April explosion at its mine. Puda Coal (PUDA) benefited as well from China demand and a return of investors to the small cap Chinese stocks as the Shanghai Index soared.


Tech Stocks
As mentioned in the September report, cloud computing stocks like Riverbed Technology (RVBD) and Terremark Worldwide (TMRK) have been a major focus of this model for awhile. In October, RVBD reported strong Q3 results that easily surpassed analyst estimates leading to another huge jump in the stock to $57 from $47. TMRK on the other hand has gone mostly sideways due to issues at competitor Equinox (EQIX) even though they appear to be mostly an EQIX issue. Both positions were trimmed in October to reduce leverage after huge runs in the stocks. The other tech stock this model owns is Apple (AAPL) and it finally broke the $300 mark leading to an all time high of $319. AAPL continues to be a strong holding with many catalysts going forward.

Trades
Recent purchase MF Global (MF) has had a nice run since purchasing the stock late September. Nothing news worthy this month, but the company is likely benefiting from competitors that continue to face more regulations. The only long position bought this month was Savient Pharma (SVNT) after it lost nearly 50% on the 25th due to news that they would not sell the company in an auction process as expected. The reaction was completely overdone as the company still has a FDA approved orphan drug desperately needed by patients with severe cases of gout. The drug Krystexxa should sell itself making this selloff extremely overdone.

On the short side, got in and out of lululemon athletica (LULU). This highflying yoga apparel maker was used as a hedge against some of the gains made in other longs. As the market continued higher, the position was covered. The only remaining hedge is a short on the Drexion Daily 3x Small Cap Bull (TNA). The market appears toppy for now so this position might be added to as November progresses.

Conclusion
Market has rallied strong but remains poised for a year end rally. The SP500 is still 40 points below the 2010 high despite the huge run off the August lows. Stock valuations are very compelling especially compared to other assets like low risk bonds yielding next to nothing. The market though has seen a 140 point gain without even a break of the 10 day EMA. This increases the chances of a short term selloff that would set up a year end rally possibly in December especially if politicians decide to extend the Bush tax cuts. The model will continue to reman fully invested on the long side while looking for opportunities to hedge the downside risk if the market turns down especially as the new Congress fails to meet unrealistic expectations.

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