More commentary will follow shortly, but the objective is to outperform the S&P 500 by over- or under-weighting sectors based on macroeconomic views. I intend to add emerging markets, and more direct exposure to non-dollars and energies as those markets pull back, but going into the morning of September 25th, this is my long/short portfolio. Debate is welcome of course.
- 40% SPY
- 20% XLP
- 15% QQQQ
- 10% BBH
- 5% XLU
- 5% AA
- 5% NMX
- -5% WMT
- -5% XLY
- -10% SHW
Addendum 9/25/07: Some comments on the initial positions:
NMX: I hesitated to include this merger/acquisition play as it is probably a crowded trade by now and it’s clear from the price action that someone (Insiders? What is their lockup schedule?) doesn’t believe the takeout prices that are bandied about. Truth be told, I would have included an exchange industry ETF instead if one existed.
BBH: The problem with healthcare is that it is not yet levered to global growth, and thus has done relatively little for the past 4 years. Biotech also has a positive skew feel to it – i.e. there will be big winners, but in the short run the index may bleed relative to others. Maturing product portfolios and pipelines not to mention political changes bode well for the index here though.
XLP-WMT: Consumer staples should outperform in a recession and will benefit from a weak dollar, especially after canceling-out the WMT exposure (and then some). Plus, however you feel about WMT, they probably will face special challenges with global expansion.
XLY: Not that the American consumer is going away but a lot of the names in this index are tied to housing and this is one sector I just don’t want exposure to.
SHW: This is the most unusual part of the portfolio but is quintessential to it insofar as it tries to capture lagged effects of other markets, here those of a housing slowdown and high oil prices on a paint manufacturer.
Again, I would like to establish emerging market and more direct energy positions as those markets cool. The iShares China ETF for instance is up nearly 60% since the bottom on August 16th:
Addendum 10/21/07: Watching the paint dry, the portfolio is up 0.37% since inception vs. -1.13% for the S&P.
Since it has been running at only 80% long, you might think the outperformance is mainly because of the short exposure, but the short part of the portfolio is only up 0.19%. Consumer discretionary stocks played catch-up with the overall market during most of the period and WMT has been unusually lively. I am not impressed with their price cuts and tend to think it’s a value trap at this point.
The real battleground of the portfolio here is the overweight short position in SHW, which reports earnings next week and expanded its buyback on Friday. Although I expect the recession in housing and high oil prices to pressure the paint maker, and would not be surprised by a bad number, I am inclined to cut the position to -5%, taking profits here.
Clearly I underestimated the melt-up in emerging markets and energy. I will buy at better levels.
Addendum 10/22/07: SHW opened at 62.71 and the position is -5% going into earnings.
Addendum 11/12/07: Exited all shorts on open this morning.
Addendum 01/02/08: Exited all positions on open this morning. Portfolio is up about half a percent while the S&P has been down 3.2%.. seems like a good time to move on.