50% GAINS PORTFOLIO – SEPTEMBER 30
KEY RATIOS:
TECH – 18%
NON-TECH – 78%
CASH - 4%
OPTIONS - .5%
BONDS – 6.5%
IN: IDCO (12.65), BRMIX (11.20), CVC-short (10.09), NVR-short (309), KLAC-short (29.60), BRCD-short (7.8), BRCM-short (11.25)
OUT: KSWS, EXPE-short
TOP TEN: MAXF, WM, BFCFB, NXTL bonds, NFI, BRMIX, FMT_p, WMB_pi IRL, ET. **Percentage of total portfolio: 60%. Top five holdings: 42%. Total portfolio: 37 companies (stocks, options, bonds and shorts).
CURRENT SHORTS AND PUTS: BRCD-short (7.8), BRCM-short (11.25), CVC-short (10.09), KLAC-short (29.60), MCCC-short (5.85), NVR-short (309), ZIXI Nov 5 puts (2.15)
SECTORS: Finance 48%, Energy 8%, Transportation 7%, Bonds 6.5%, Business Services 5%, Real Estate 4%, Broadcasting 4%, Europe Fund 3.5%, Other Fund 3.5%, Defense 3%, Communications Services 2%, Communications Infrastructure 1%, Internet .5%, Cash 4%.
**Quicken 2002 calculates sector %’s as a total of all investments, including margin. Total Sectors plus/minus Cash will equal 100%.
HOLDINGS:
CATEGORY - STOCK (COST BASIS updated periodically to reflect averaging into positions)
FINANCE - ACGL (18.31), ACGL OCT 35 calls (.9), BBX Nov 12.5 calls (.4), BFCFB (7.55), ET (3.33), FMT_p (18.25), HTHR (27), MAXF (3.48), QBEIF (3.35), WM (33.5), WTM (300)
ENERGY – DUK (24.35), PGO (1.75), PGO Nov 5 calls (2.2), WMB_pi (8.15)
TRANSPORTATION - FLYR (9.9), KZL (23.4), SKYW (18.3)
BONDS - NXTL Sep 2007 bonds (76.50), TWTC 2011 bonds (50.75)
BUSINESS SERVICES – COGI (2), IDCO (12.65)
REAL ESTATE - NFI (22), NVR-short (309)
BROADCASTING - CVC-short (10.09), DIS (17.3), L (8.61), L Jan 10 calls (1.10), MCCC-short (5.85)
EUROPE FUND - IRL (9)
OTHER FUND - BRMIX (11.20)
DEFENSE - RTN (32.84)
COMMUNICATIONS SERVICES - SBC (30.3), TWTC (1.18)
COMMUNICATIONS INFRASTRUCTURE - OCPI (1.18), RSTN (.91)
INTERNET - ZIXI Nov 5 puts (2.15)
HARDWARE - BRCD-short (7.8), BRCM-short (11.25), KLAC-short (29.60)
**Monthly update on YTD performance: August 31, 2002: -4% YTD.
Dow -14% YTD, SP500 -20% YTD, NASDAQ -33% YTD.
COMMENT– It’s easy to sum up August’s market action – no rebound yet. An apparent attempt at a summer rally fizzled late in the month, leaving the indexes down slightly overall.
Why? The market (i.e. the thousands of institutions and millions of individual investors) has not reached a consensus on where their national economies are headed, and hence where stocks should be priced. On one hand, the market lacks confidence in recent large-company earnings reports, accounting integrity and international political stability. A steady diet of mediocre to bad news kept most investors on the sidelines. Those who did ride the small August rally took profits quickly when the momentum began to fade.
On the plus side, the market is shedding the complacency that fed the long, grinding bear market drop. Instead we have the classic “wall of worry” that Wall Street likes to see before institutions step in and buy for the long-term.
The earnings reports for the portfolio’s top holdings were generally excellent, meeting or beating expectations with strong cash flow and profits. In a more confident market, I would expect most of these shares to trade at least 50% higher based on their recent good performance (in a sluggish economy, it should be noted). But bear markets produce absurdly low valuations similar to the extreme overvaluations we saw in 1999-2000. It also creates a total lack of leadership with no strong stocks or sectors moving up consistently to provide leadership to the laggards.
The portfolio remains concentrated in financial stocks in niches that produce strong cash flow – reinsurance, mortgage REITs, a broker-dealer specializing in non-equity instruments, and similar stocks. Technology has not demonstrated a spending recovery strong enough to justify more than limited exposure to the sector (except for select high-yield bonds in telcoms and defense stocks). Investors who bet on the NASDAQ 100 rebounding this year lost 42% of their investment year to date.
When will the markets get over their malaise and head up again? No one knows for sure. The upcoming 9/11 anniversary is likely to paralyze major players in coming weeks. Then we face the earnings preview season for Q3 2002; if fewer companies warn or present a gloomy outlook, the expected Q4 rally could get started ahead of schedule.
My short-term market outlook is neutral to poor while I remain (almost) fully invested for what I expect will be much more promising Q4 2002. |
