Kelly: Revamping Portfolio to Play Defense

In Wednesday’s daily market wrap, I spoke of how I planned to revamp the portfolio Thursday to reflect what I thought was a significant deterioration in both the technicals and some of the fundamentals surrounding the bond insurers. I’ve made a number of moves to shift the portfolio further to the short side, and I will continue to judge the exposure of the portfolio and may become less long and/or more short in the coming few hours and days. Here are my moves so far:

Sold:

(QQQQ) March 49 calls at premium of 1.01. This was a moderate loss for the portfolio, but certainly nothing that is going to kill long term performance.

Sold (WB) at $33.67. I had some trepidation about being early when I entered this position, and that is why it was a small position in terms of size. With the rumors swirling regarding the bond insurers, I really think this stock is going to come under further pressure, and so I’m divesting myself of this.

(HRBN) at $20.05. I continue to like the fundamentals, but the stock broke down below the 50 day moving average. That is a significant technical problem, and so I’d rather sit out for now and see if this really turns into a value play.

New shorts:

(GLD)–I increased my short on the GLD here at $87.72. My basic reasoning is that, after looking at my long gold exposure via the junior miners, I thought that the hedge I had on gold through the GLD was inadequate. Bumping up the size of the position should help the hedge to function more effectively.

(LEH)–I shorted a modest amount of the stock at $57.57. My line of thought here is that, after reading further into the Florida money market debacle, I believe that Lehman has very significant litigation risk going forward. I had been wondering how Lehman managed to escape the worst of the CDO crisis, and after reading the recent Bloomberg article about the Florida crisis, it appears to me that Lehman dumped knowingly horrible products on the Florida government to clean up the books. It would seem that lawsuits are only a matter of time here.

(USO)–I shorted a small position at $71.39. I’ve wavered back and forth on oil, but I the continued stream of negative data that seems to be coming leads me to want to skew to the short side. There is a potential for a very big gain in shorting oil, but I believe the risk is also substantial. Therefore, I have kept this as a small portion of the portfolio.

(XLB) Mar 37 puts–I bought a moderate position at a premium of $2.05. I’m looking for more creative ways to be short here than just shorting the S&P, and I think the XLB is a good tool. The materials names have not come down that much and appear to still have plenty more room to come down, so I like shorting the XLB more than any of the 3 major indices.

Comments

[fourgreen:]

Have only been reading Kelly's comments for the past several weeks, but so far he seems a disaster not waiting to happen. When he isn't talking out of both sides of his mouth on whatever, he equivacates. And when he has a seemingly forward looking idea (LEH today), the folks at CNBC have already been onboard for (at least) several days. When you use a lot of fundamentals to buy (HRBN), and two days later use a "technical" breakdown to exit, you had better look for a new source of income methinks.

2008 Jan 17 09:04 PM

[vodka_tonic:]

i actually enjoy reading his posts, but can't really say i have been tracking them for several weeks, so don't want to pass judgement. i did check out his website to see his trades and enjoyed going through them, although he lists his exit price and never his entry price :) he is honest enough to note when he loses.
i read one of his posts today and it was an abysmal play, which i noted in the comments.

2008 Jan 23 12:45 AM

[fourgreen:]

If you ever make any $s from his comments, please let us know.

2008 Jan 25 04:10 AM