Cautious Territory...

Portfolio Breakdown:
KFN - 88.8%
YRI - 3.2%
BAC - 3.7%
PRGN - 20.8%
APP - 7.9%
JPM - (4.5%)
BWR - 1.7%
CAD Cash - (0.5%)
USD Cash - (21.1%)

Portfolio Performance:
Return Since Last Update - 4.88%
Return Since Inception - 129.72%
S&P 500 - 1028.93
S&P 500 Return (June 30) - 11.97%

USD/CAD - 1.0925

The Prior Week of Trading:
Not much has changed since my last update, well more accurately that is, in terms of the composition of my portfolio. I would like to take a moment to express my trepidation regarding the current levels of the US market and the probability of its sustainability. From a purely empirically qualitative perspective, the market has seemed to have lost some of its ability to close significantly higher following good news and yet has been unable to be pushed down when we receive worse than expected economic tidbits; Thus, we must look to what other factors may become relevant enough to shove the market in one decided direction or another. I would first like to point out the Investors Intelligence bull-bear chart posted by http://www.market-harmonics.com/ showing a large percentage increase in apparent bullish sentiment in the market. Although, to paraphrase Keynes (write this moment down in history, as I so rarely even mention Keynes...) the market can stay irrational longer than we can remain solvent is poignant to remember when considering any indicators based on sentiment as that is fleeting at best. To the contrary, on a quantitative level, a Fibonacci retracement of the S&P 500 from its high of 1565 (10/09/07) to its closing low of 676 (03/09/09) puts the 50% level at 1120. As we approach this level, I become more and more cautious given that the S&P 500 has now rallied 52% of its closing low in less than 6 months; if this doesn't at least give a cautious investor pause, I don't know what will...

In this spirit, I will be looking towards next week with the following in mind: On those positions that I find to be undervalued and/or poised to outperform their peers I will look to write front month calls on my position; in general I would like to seek out more opportunities to execute pair trades or at least, add a short market position.

I should finish off this segment by mentioning my outlook for the 3 largest holdings in my portfolio. KFN has had another good week and seems to be headed straight towards my price target of $4. This is an intriguing position for me because I see so many options for dealing with its future in my portfolio. I have noticed that KFN seems to exude considerable strength pre-market, selling off mid-morning, only to stabilize and move higher towards the end of the day; as KFN is now moving close to my $4 target, I may try to capitalize on this occurrence while keeping myself protected with either a tight stop or an options collar. PRGN has been a relative laggard, as the Baltic Dry Index has remained weak; I think given the eventuality of a global economic recovery this shipper is still the best, and most undervalued, way to play this move. APP seems to be range bound between $3 - $4 and given the possible froth in the broader market, may sharply retreat to $3 in a correction, I will look to take profits here either through a sale or an equivalent options hedge.

The New Bull Market

Portfolio Breakdown:
KFN - 87.5%
YRI - 3.3%
BAC - 3.8%
PRGN - 18.8%
APP - 8.0%
JPM - (4.6%)
BWR - 1.8%
CAD Cash - (0.5%)
USD Cash - (18.1%)

Portfolio Performance:
Return Since Last Update - 22.58%
Return Since Inception - 119.03%
S&P 500 - 1003.65
S&P 500 Return (June 30) - 9.22%

USD/CAD - 1.0988

The Prior Week of Trading:
I continued to move in and out of my BAC/JPM pair trade this week with flat results. Over the longer term I am confident in BAC's ability to outperform its peers relative to its current price. APP continues to be a hold in my portfolio, but would likely be trimmed if we experience a significant market correction predicated on fears of a weak consumer and US economy. Continuing on the retail front I am looking at TRLG as a possible buy in the framework of an optimistic econmic scenario; TRLG has had solid earnings even during the recent recession as they have managed their balance sheet and most importantly, offered a product that consumers desire. I would look to enter into TRLG in the $19 range, ceteris peribus.

PRGN has traded lower following a very upbeat earnings release moving from $4.61 on Aug. 11 to close at $4.21 on Aug. 14 (9% drop). Adjusted EPS for the quarter came in at 0.51 making the ttm earnings 2.25 (P/E - 1.87), it's current P/B is 0.26, P/S - 0.66, P/FCF - 10.12 is all well below the industry average. Of course the ultimate fate of any shipper is tied directly to the Baltic Dry Index which has suffered over the last couple months; after bottoming out in the 600's in 2008, the BDI recovered to over 4000 in early June but now sits at around 2750. A continued improvement in the global economy means improvement in global trade and a demand for commodities, this scenario would prove to be beneficial for PRGN.

KFN has obviously been a major driver of my portfolio's success to date; and I think it will continue to perform in the future. My price target of $4-5 remains, although I dont believe we will reach this level until the next earnings release or the market continues to move appreciably up in value. I am content to hold until the next earnings release and will re-evaluate the price target and situation at that time.

US Economy Shows Stabalization

Portfolio Breakdown:
KFN - 83.2%
YRI - 4.0%
BAC - 4.3%
PRGN - 11.8%
APP - 10.2%
JPM - (5.5%)
CAD Cash - 1.6%
USD Cash - (9.6%)

Portfolio Performance:
Return Since Last Update - 13.16%
Return Since Inception - 79.41%
S&P 500 - 1010.48
S&P 500 Return (June 30) - 9.97%

USD/CAD - 1.0828

The Prior Week of Trading:
KFN has continued to outperform the market, running into the $3 range ahead of earnings; the company reported in-line EPS and a reasonable outlook for coming quarters and the stock sold off sharply. This appears to be an over-exaggerated snap based on profit taking as the stock has moved more than 5x off its lows; as long as expectations remain high and short term traders sell into big gains, I will gladly take the other side of this trade in the expectation that this deep value investment will reach my $4-5 target in the coming months.

I executed a pair trade going long BAC and short JPM; I still believe this is the right move, although I executed the trade very poorly. I like the growth that the Countrywide and Merrill Lynch acquisitions will add to BAC; the core businesses of mortgage origination and refinancing from Countrywide and investment banking and trading that Merrill Lynch bring to the table will be very strong as the economy and capital markets continue to rebound. JPM, at current levels, is only off 33% from its all time high of 64.15 in March of 2000 while it has de-levered its business model substantially and can not conceivably have the same EPS growth expectations as it had in the past. On the flip side, BAC should be adding to the bottom line as its acquisitions become fully accretive giving it a much more reasonable forward looking P/E.

I continue to believe in the rebounding US economy and thus believe PRGN and APP will be very well positioned with rebounding global trade and a strengthening consumer. YRI is held primarily as a means to lower my beta and protect against a weak US dollar. I sold off my PHM too early into this weeks rally, but am happy with the profit I made. Including my shorts, I am 102% invested; I am confident in the economy, but hesitant of having the market rally too far too fast. In the coming weeks, it is my expectation to add to my portfolio with pairs, so as to stay fully invested but have protection from the short side.

Movin' On Up

Portfolio Breakdown:
KFN - 67.2%
YRI - 4.7%
PHM - 4.5%
BAC - 4.4%
PRGN - 12.4%
APP - 11.4%
CAD Cash - (2.7%)
USD Cash - (1.9%)

Portfolio Performance:
Return Since Last Update - 24.3%
Return Since Inception - 58.5%
S&P 500 - 979.73
S&P 500 Return (June 30) - 6.6%

USD/CAD - 1.0788

The Prior Week of Trading:
I sold half my BAC and PHM positions into strength in the sector and the market; banks and homebuilders have both outperformed as of late and I believe would be the hardest hit in a correction phase. I am bullish longer term on the banks and the market as a whole, but it is getting hard to ignore how overbought conditions appear to be when considering various technical and fundamental indicators. I added to my PRGN position ahead of earnings scheduled for Aug 11; this company has a great EPS track record and should look to improve with continued improvement in the Baltic Dry Index. KFN still remains as an unusually high portion of my portfolio, this is due to it's recent exceptional performance, not because of additional purchases. KFN is still well below my price target for the near term of $4 and thus remains a very attractive hold in my portfolio. I will look to diversify this position at the earliest possible opportunity.