Week 34 Performance.....Indexes winning streak comes to an end but not DWCM

All four major indices finished down this week after a nearly 6 week run to the upside.  The silver lining to the week was that the DWCM Fund continued it's hot streak up 6 weeks in a row.

The major news story of the week was the release of the FOMC minutes on Wednesday which indicated that the Fed again was standing ready to launch a new round of quantitative easing [see Fed Moving Closer to Action].  The Fed will be in the spotlight again this week as it gathers for it's annual conference in Jackson Hole, WY.

While widely speculated but still unknown, is weather the Fed will announce any news action plan at the conference.  In years past, the Jackson Hole summit has been the launch point of major Fed actions such as QE 2 and Operation Twist.

Other economic data that had a direct impact on the DWCM Fund, was the release of additional home data.  Via Barron's

• Existing home sales rebounded 2.3 percent in July to a 4.47 million annual rate in a gain that partially reverses a 5.4 percent decline in June. The annual rate hit its recovery peak in January this year as warm weather spurred counter-seasonal buying.  July's gain was fed by price concessions with the median price down 0.8 percent to $187,300. Note that the median price is being held down by underperformance of lower priced sales. But the year-on-year median price rate, at plus 9.4 percent, is the best of the recovery and an indication of overall improvement for the market.  Thin supply has been limiting sales in recent months and looks to be a continuing headwind. Supply relative to the sales rate is at 6.4 months, down from 6.5 months in June and compared against 9.3 months a year ago when distressed properties were flooding the market. In unit terms, unadjusted supply is 2.40 million units, up slightly from June's 2.37 million but down from May's 2.47 million.

• New homes are selling, up 3.6 percent in July to an annual unit rate of 372,000. This is 10,000 above the Econoday consensus and the best of the recovery outside of stimulus driven sales in the spring of 2010. July matches May's downward revised level, while offsetting the downward revision to May is an upward revision to June to 359,000.  New home sales have been outperforming sales of existing homes which hit a peak right at the outset of this year. Should momentum continue to build for new home sales, and home builders think it will, confidence in the housing market as well as confidence in the economy's momentum would get a big lift. Showing little initial reaction is the Dow which should however get some support from this report.

The housing data has continued to put pressure on our short housing position which is now down almost 9% since we started it back in early July.  The position represents a relatively small % of our overall DWCM portfolio at 2.3% so we are poised to ride this out for a little while longer.  There may be some short-term headwinds to deal with it, but in the long-term we see increased pressures facing the housing recovery over the next 6 to 18 months.

We added one new position to the DWCM Fund this week which was Terra Nitrogen TNH.  Terra produces liquid fertilizer and fits our long-term agriculture strategy.  Terra pays a healthy dividend currently at 7.8% while holding a strong balance sheet and good growth prospects.  

There were no sales this week in the Fund so our cash position now stands at 39.8% of the overall portfolio.  This is a little lighter than we would like and we may take actions this week to increase our cash holdings.

The Week Ahead
As mentioned previously and last week as well, all eyes will be on the Fed summit which takes place towards the end of the week culminating in Bernanke's speech on Friday.  The other major data point will be the release of GDP figures on Wednesday.  Don't overlook the release of several sentiment surveys this week as they could drive intraday trading which could allow for some additional profit taking.

As we have pointed out in prior posts, if the Fed does not deliver what the market expects which at this point is likely another major QE program, look for the equity markets to drop significantly and give back a portion of their summer gains.

We will begin positioning the DWCM Fund over the weekend and early in the week to take risk off of the table.  We would like to take our current cash position of 39.8% up to 50% prior to Friday.  Even if the Fed does announce some program there is still a chance that the markets may not like what it hears.  In our view at DWCM there is more risk to the downside than there is upside potential which is why we will begin to take a defensive approach and try to preserve capital.

• Mon -  Dallas Fed Mfg Survey
• Tue -  S&P Case-Shiller HPI,  Consumer Confidence,  Richmond Fed Manufacturing Index,  State Street Investor Confidence Index
• Wed -  GDP,  Pending Home Sales Index,  Beige Book
• Thu -  Jobless Claims,  Personal Income and Outlays,  Kansas City Fed Manufacturing Index
• Fri -  Speech,  Chicago PMI,  Consumer Sentiment,  Factory Orders

Have a great week!

DreamWorks Capital Management
FREE LECTURE:  Our next finance lecture will be on Tuesday September 18th at the The Community House.   The topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy.  We will cover significant points regarding creating, developing, and executing on your wealth management plan.  We hope to have another 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.  There is no charge and light refreshments will be served.