Week 50 Performance..... Innocence Lost in Tragedy

It is with a heavy heart that I begin this weekly performance post.  Having four small, unique, and special children of my own, the tragedy that occurred in Newtown, CT strikes extremely close to home.  As I monitored the coverage throughout the day, my wife and I watched the events unfold in greater detail last evening and wondered what if those were our children?  I'm sure that every parent was asking the same question but for those that wake up in Newtown this morning that thought is a reality and they must now figure out how to deal with this senseless tragedy.

I really don't know how you begin to explain to a child of 6, 7, or 8 years old what has transpired?  Or how to explain to a sibling that their brother or sister will no longer be coming home?  All we can do at this point is show support to those affected by this tragedy and try to explain to our children that there is more good than evil in this world.

As is the case we must now turn our attention to what has transpired with the capital markets this week.

All but the Russell 2000 index were down this week including the DWCM Fund.  All equity markets were climbing higher throughout the week until Wednesday afternoon.  This turn in markets coincided with the Fed press conference which obviously the markets did not like.

The Fed is in uncharted territory if you will writing it's own playbook on how to solve the US economic woes of stagnant growth, high unemployment, and a recovery that has been anemic at best especially given all of the stimulus pumped into the economy after the great recession began over 3 years ago.

At the heart of the issue is that the Fed is trying to solve something that it has no business trying to solve.  The economy can not continue to function properly with the current mismanagement of the government.  Whether or not we go over the fiscal cliff, the damage has likely already been done.  Consumer and business confidence are so dampened that even if a deal is reached, it is not going to be the miracle that everyone may be expecting that turns things around.

There are serious structural problems that are facing this country that neither the Fed nor Congress can correct with monetary or fiscal policy.  With rising debt levels, changes in both the manufacturing and service sectors, an education bubble ready to burst, and an aging population just to name a few, are certainly issues that cannot be adjusted easily.  People must begin to look beyond the short-term window of what is happening in the next 1, 3, or 6 month periods but instead to what does our long-term future look like 10, 15, or 20 years from now if we continue to go down the reckless path we are currently on now?  

We posted Jeremy Granthom's Q3 Newsletter in which he discuss these pertinent issues and the fact that we are running out of time fast to do something about them.  It is a long read but well worth it so I urge each of you to take a look.

As we struggle getting to the finish line this year with our full year performance return, the last quarter has not been kind to the DWCM Fund nor the major equity indices.  However, this week we made quite a few moves within the DWCM Fund to solidify both our short-term and long-term strategies.  

When we first started the DWCM Fund nearly 2 years ago, one of our edicts was that we would own positions in our personal accounts that we owned within the Fund.  We stated this because most mutual fund managers do not even own a stake in the vary fund that they manage themselves.  We like to say here at DWCM that we eat our own cooking.  We have a vested interest in the positions that we take on in both a personal and professional manor.

Below are the changes that occurred within the week and the reasoning behind the moves.

• Began short position in Netflix NFLX, we already had a low rating on this stock and when it announced it's content deal with Disney the price of the stock spiked even higher and we saw this opportunity to take advantage of a stock that we believe is over priced.  We believe that content prices will continue to climb and that subscriber growth will not materialize as the company believes.
• Added to our position in Buffalo Wild Wings, BWLD, this stock ranks extremely high in our proprietary research model that we use to value companies.  We believe that there is value at the lower $70 price range.  The company has shown a resiliency to grow even during the great recession and has been able to ward off higher chicken prices by being able to pass some price increase through to their customers.
• Eliminated our position in fertilizer company Potash POT.  This may seem to go against our long-term strategy of investing in agricultural companies, but we believe that there are better names within this sector right now including Mosaic which we currently own.  We are also trying to balance our sector weightings so that we are not overly exposed to one particular sector.
• Eliminated position in drug manufacturer Novartis NVS.  Again this may seem to go against our long-term strategy of owning health care stocks but since we already own Eli Lilly and Merck, two names we believe are better than NVS, we needed to rebalance and put this capital to work elsewhere within the Fund.
• As much as we like companies with strong balance sheets who pay a healthy dividend, we decided to take profits and eliminate our position in AT&T T.  We still believe that the telecom sector provides relative stability in these uncertain times, but we see two companies China Mobile and Telefonica Brasil as better options with this space.  We currently do not own positions in either company but would be looking to establish new positions at the right price.
• Began new long position in the discount retailer Dollar Tree DLTR.  This is a defensive type position even though it does not pay a dividend.  DLTR scores very high in our research model and in our opinion at it's current price point is undervalued.  This is a place that cost conscience consumers can finds bargains on the cheap.

This was by far our most active trading week in months within the DWCM Fund.  More activity could certainly warrant itself in the coming weeks as the uncertainty mounts over the fiscal cliff debates.

The Week Ahead

There is a solid amount of economic data being released this week and most of it centers around the housing industry.  The housing industry has been seen as a positive in this anemic recovery since the sector hit rock bottom.  This could obviously be a big week for our short home builder positions one way or another.

New GDP numbers are released Thursday and this data point could force the direction of the equity markets as well.  Consensus estimates call for growth of 2.7% annualized.

• Mon - Empire State Mfg Survey
• Tue - Housing Market Index
• Wed - Housing Starts
• Thu - GDP, Jobless Claims, Existing Home Sales, Philadelphia Fed Survey, FHFA House Price Index, Leading Indicators
• Fri - Durable Goods Orders, Personal Income and Outlays, Chicago Fed National Activity Index, Consumer Sentiment, Kansas City Fed Manufacturing Index

Have a great week!

DreamWorks Capital Management

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