September was an incredible month with a historic rise in a typically negative stock market. The best September since 1939 in fact. Most investors were caught off guard but this model was well positioned for an upturn in the market after a rough August by being very leveraged. While remaining bullish heading into October, market participants have to remain careful considering the normal weakness of this month.
The future of cloud computing is something this portfolio has invested since the start of this model back in February. During September the fruits of those investments paid off with a huge gain in Terremark Worldwide (TMRK) which focuses on data center and cloud computing services. Riverbed Technology (RVBD) is another big gainer that benefited from a move into cloud computing and the need to optimize networks because of the rise in the use of mission critical data via online sources such as cloud computing. The mdoel actually trimmed a third of the RVBD position due to the space getting to very frothy levels. RVBD trades at roughly 37x 2011 earnings making it much more of a momentum play then common in this model not to mention it became overweighted in the model. The other tech stocks, Apple (AAPL) and Teradyne (TER) also had great months.
Intrade.com continues to show that the Republicans will gain control of the House and reduce the Democrats control in the Senate. Such a scenario will push stock prices higher over the next couple of years. The real question is whether the September rally continues in October or if the market gets spooked on the pending election. For now it appears that the rally continues, but this market could turn on a dime if the Democrats gather any momentum towards November.
After huge gains in select stocks during September, the decision was made to sell the ICICI Bank (IBN) position entirely and trim a third of the Riverbed Technology (RVBD) position that had run up to 15% of the model. In addition to selling these long positions, a couple of negative bets were made to further reduce the leveraged exposure as September came to an end. lululemon Athletica (LULU) was shorted to hedge some of the gains made in other high flying stocks allowing the big gains to be held without requiring selling those positions and recording capital caps that would be short term at this point. Also, the model attempted to use the Drexion 3x Small Cap Bull/Bear (TNA/TZA) to further hedge the position. Note that even with these moves the portfolio was still more then 1x long. At the end of the month, MF Global (MF) was bought to rotate back into financials that underperformed during the last quarter. MF is aggressively moving into investment banking and has drastically improved margins since hiring John Corzine the former Governor of New Jersey and more importantly Chairman of Goldman Sachs. This trade is more a pick that his influence and background will allow MF to take market share from the bigger banks currently under stricter regulation.
The market is likely to be volatile during October possibly requiring this model to use more hedging moves. Regardless though, the market will soon enter the best 6 month period of an presidential election cycle being November thru April after the mid term election. Whether the market is weak in October or not, the prospects are very strong for a much higher market come April 2011.
*** This investment letter is tailored towards the Opportunistic Model offered via Covestor.com. The general discussion applies to all models, but the trades are specific to the Opportunistic Model.