50% GAINS PORTFOLIO – OCTOBER 12
KEY RATIOS:
TECH – 15%
NON-TECH – 87%
CASH – (-2%)
OPTIONS - 1.5%
BONDS/CONVERTIBLES/PREFERREDS – 14%
IN: AMCR (18.35), UB (38.9), IWV May 44 calls (3.2)
OUT: COCO, DUK, EDS-short, NVR-short
TOP TEN: MAXF, NFI, WM, BFCFB, NXTL bonds, UB, BRMIX, FMT_p, WMB_pi, IDCO. **Percentage of total portfolio: 55%. Top five holdings: 37.5%. Total portfolio: 37 companies (stocks, options, bonds, funds and shorts).
CURRENT SHORTS AND PUTS: CVC-short (10.09), EDS-short (13.02), MCCC-short (5.85), NVR-short (309), ZIXI Nov 5 puts (2.15)
SECTORS: Finance 48%, Energy 8.5%, Transportation 7.5%, Bonds 7%, Europe Fund 6%, Real Estate 5.5%, Business Services 5%, Other Fund 5%, Broadcasting 4%, Communications Services 2%, Retail 2%, Communications Infrastructure 1%, Internet .5%, Precious Metals .5%, Cash -2%.
**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), UB (38.9), WM (33.5), WTM (300)
ENERGY – EPD (18.74), 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)
EUROPE FUND - EWU (12), IRL (9)
REAL ESTATE - NFI (22)
BUSINESS SERVICES –COGI (2), IDCO (12.65)
OTHER FUND - BRMIX (11.20), IWV May 44 calls (3.2)
BROADCASTING - CVC-short (10.09), DIS (17.3), L (8.61), L Jan 10 calls (1.10), MCCC-short (5.85)
COMMUNICATIONS SERVICES - SBC (30.3), TWTC (1.18)
RETAIL – AMCR (18.35)
COMMUNICATIONS INFRASTRUCTURE - OCPI (1.18), RSTN (.91)
INTERNET - ZIXI Nov 5 puts (2.15)
PRECIOUS METALS – CDE (1.53)
**Monthly update on YTD performance: September 30, 2002: -11% YTD.
Dow -24% YTD, SP500 -29% YTD, NASDAQ -40% YTD.
COMMENT– No reason to sugarcoat the worst market quarter in decades. The panic began in July, then the failed August rebound attempt gave way to multi-year lows by the end of September.
The market drop this quarter was the worst since the 1987 crash. Since June 30, the Dow was off 18%, the SP500 also 18% and the NASDAQ a full 20%. Business Week noted that the average tech fund is down 50% YTD, with Fidelity Magellan and other big funds down 13-20% last quarter.
A double-edged blow from mutual funds and other large institutions hit US markets in September. Most funds are “graded” on their end of quarter results; they are required to publicize their top holdings on September 30. So “window dressing” becomes the norm as funds dump any stock that hasn’t performed well, to get it off their portfolio list. Obviously, many stocks qualified this quarter.
Normally the proceeds from “bad stocks” would go into buying the top performers, to make the “window dressing” look even better. But US mutual funds have faced substantial cash withdrawals in the bear market. As they sell stocks to raise cash, the cash is mostly set aside to provide a reserve for redemptions. So it was no surprise to see large market drops through September 30 followed by a snapback rally on October 1 as bargain hunters and short covering drove stocks up (temporarily) against very little selling pressure.
As I noted in earlier reports, the stock markets offered very few “safe haven” sectors. Only a handful of Dow Jones Market Sectors were positive for the quarter, including volatile stocks in medical technology and casinos (both of which were weak the previous quarter).
Should we place a substantial bet on gold going through the roof? Until the price of gold breaks $330 per ounce and stays there, I am not a believer. New lows in the equity markets have not produced new highs in the gold price. If traders give up on gold, the mining stocks will drop substantially. Look at silver stock darling SSRI, down from $6 to less than $4 with less than a 10% drop in the silver price since the July peak.
Where does that leave our portfolio? We continue to see stocks with strong earnings and cash flow trading at absurdly low valuations. The handful of speculative plays also face more selling than buying in the short-term, a result of the overall foul mood in the markets. Many small cap stocks are trading well below their cash on hand, a typical sign of a bear market.
The past three months are the “worst case” I could imagine for 2002 (which means it could get worse too). I remain convinced that buying and holding high-quality value stocks will pay off once the markets find a bottom and shake off the last symptoms of the bubble-bursting hangover. For now, it’s a good time to focus on your “real” jobs and let the market work out its problems over the next quarter. |
