"Don't wait for people to be friendly, show them how"
Author Unknown

I have received an enormous number of e-mails recently related to my posts here and at MSN- and I will take a few posts to simply answer them in as few sentences as possible:

1. What was the logic behind my portfolio rebalancing two weeks ago?
As I mentioned several times already- I am an active investor and I thus scan for new ideas every several weeks? Why so often? Logic here is very simple- I don't believe that major indices will close in the green in 2008- hence in my opinion is that the most recent rally, that took us almost to a breakeven point for the year, has pretty much exhausted the return potential for any passive investor out there for the next 6-12 months. So simply passively waiting for your existing positions to take you higher could very well lead to the opposite as higher beta stocks move faster in each direction... What does this mean for me?- it means slowly preparing for the next downside move and hedging using lower beta positions in healthcare and adding new shorts. Does it mean my portfolio is going to actually go up when Dow is going down? Probably not- but it could certainly help to preserve some of the excess returns...

2. Why healthcare?
During the most recent market scan - a surprisingly large number of healthcare stocks came up on one of my screens. So I did my homework and here is what I found- it is true that healthcare sector has been under pressure with a huge number of patent expirations, cost pressures across the board and potentially unpredictable consequences of democrats sweeping the elections in the fall. However, the truth of the matter is very simple- earnings for the sector as whole grew 13% and 7% y-o-y during the two most recent quarters, while the earnings for the market as a whole declined 56% and 29% respectively. Actually using the data from WSJ one can notice that healthcare sector earnings have grown faster than overall market for 6 quarters in a row...At the same time healthcare sector's stock prices actually lagged the market over the last 2 years as measured by VHT (healthcare ETF). So there is certainly a disconnect there, at least on the surface...

Source for original data: WSJ Market Data Group
Edited and graphed by SkepticalCapitalist.com

source: Yahoo

3. Am I bearish or bullish at the moment?
Anyone who read my last posts should have noticed that I have been deleveraging my portfolio for about two weeks now. Sold some of the riskier tech names for healthcare, added some new shorts and this morning actually sold off half of my FSIN and CHNG positions. That obviously implies that I am growing a bit more skeptical on whether the economy can actually avoid a recession in 2008. Here is why- based on several pieces of not widely publicized economic data, like growth in income tax withholdings published by US Treasury, the economy has slowed down markedly in late April and early May- which could now very well mean that payroll growth again moved firmly into a negative territory, and the GDP reading for Q2 could again come in lower than expected at flat or negative. FYI-this data came out yesterday and thus might help to explain the 400 point sell off in the Dow. Media does not really cover this too widely and only boutique research firms like TrimTabs and other sophisticated investors are actually tracking this data closely...

Anyway, enough for today -stay safe and cheers,
skepticalcapitalist@gmail.com

P.S. I have received a lot of information requests about my new hedge fund. Due to some serious legal limitations - I can not answer them publicly on the web site-

P.S.S. Before relying on the my opinions, you should always assume that Vad Yazvinski personally and other investors influenced by him have material financial interests in any of the stocks mentioned and hold or trade them contrary to those opinions.