We started the year off red hot in Q1 up over 20% in the DWCM Fund only to cool off in Q2 with the annual spring swoon down 5.8%. We've still fared very well against our other benchmarks for the year and since starting the DWCM Fund on March 31, 2011.
Yesterday we had what some traders call a "rip your face off" rally" on news of a proposed round of money giving in the EU. We have talked at great lengths that especially during the summer with light trading volumes you can have these massive swings to either the upside or downside on European rumors or so-called plans.
We were actually fortunate yesterday because our plan was to go a bit defensive and short some equity names such as the home builders, Amazon, and a few other high beta names with high P/E's that we just don't believe will hold up. Some times it is better to be lucky than good and thus we did not put on any positions.
It did surprise us that the rally continued throughout the day with markets finishing at basically their highs of the day. We thought that the rally would tapper off in the afternoon as people would come in to start selling into the rally. Depending if anything happens in Europe over the weekend we would suspect that Monday will be a down day as it has typically been over the last two month. After people realize that nothing has changed in the EU and the euphoria of the rally is over we expect the markets to come back in.
One of the reasons why we are looking to short home builders is as follows:
- We believe that there is additional pain left in the housing markets. Inventory is getting tight as we have discussed previously because banks are not letting additional foreclosures hit the market. People that want to move or refinance can't because they are under water. This is causing a temporarily increase in the price of houses seen this week in the S&P Case-Shiller HPI.
- People need income in order to buy a house or keep up with their payments. With a slowing economy we believe that there will be a continued stretch of high unemployment. The jobs report will come out this Friday which has greatly disappointed the last two months while previous months have been revised lower as well.
- From a technical perspective the home builders have been red hot this year some up nearly 100%. These names have just run too far too fast and I believe will start to break down. From a fundamental standpoint I don't believe their valuations can support their current stock price.
We had yet another week with the DWCM Fund where our hands were off of the trading buttons. As I mentioned previously it was our intention to enter the markets on Friday but circumstances could not warrant any action on our part.
We still feel very comfortable owning the names in the Fund as they are aligned with our long-term strategies. My goal with putting on some shorter term trades is to take advantage of what the markets are giving us.
The Week Ahead
Expect another volatile week ahead with European news unfortunately continuing to drive our market action. Also with the US July 4th holiday expect extremely light trading volumes which could spark volatile moves higher or lower.
As mentioned previously the jobs report is out this Friday. For a short week there will be allot of economic data to ignite the markets. Auto sales are out Tuesday which will be key as Ford has already announced this week that they will miss upcoming earnings due to issues in Europe. Like houses, to drive auto sales you need to have income and with a slowing economy and fewer jobs especially good paying jobs, auto sales may be a key indicator to watch.
- Mon - PMI Manufacturing Index, ISM Mfg Index, Construction Spending
- Tue - Motor Vehicle Sales, ICSC-Goldman Store Sales, Factory Orders
- Wed - US markets closed for 4th of July holiday
- Thu - Chain Store Sales, Challenger Job-Cut Report, ADP Employment Report, Jobless Claims, Bloomberg Consumer Comfort Index, ISM Non-Mfg Index
- Fri - Employment Situation
DreamWorks Capital Management
As mentioned last week we have scheduled our next finance lecture & seminar for Tuesday September 18th at the The Community House located in Birmingham, MI. This quarters topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy. This is going to be a very broad topic in which we will cover significant points regarding creating, developing, and executing on your wealth management plan. We should have a very interactive group so be sure to sign up by emailing me directly at pfenner@dwcmllc.com or by contacting The Community House at 248-644-5832
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