Monthly Letter March 2012

Worries; there are always a lot of things for the market to worry about. A common misconception is that the market worries about one thing at a time. This is not the case. Money managers worry constantly about what potentially can go wrong. When troubles arise in areas the market viewed as healthy, the impact on the market is greater. If you are long you worry about what might take the price down and vice versa if you are short. As the equity market is long by definition there is more worry about the downside than the upside. The most shorted stock is also the most crowded long as there has to be a buyer for every seller. This is sometimes forgotten when you get arguments about crowded positioning. One might argue that the shorts worry more about their positions and that the longs are more complacent. At Madrague we worry just as much about our long positions as we do about our short positions.

In the last 5 years (i.e. since the financial crisis began) the equity market has had plenty to be concerned about. The longs have been (or should have been) worrying about excessive leverage, deteriorating economies, budgetary imbalances, bubbles in housing to name a few. The shorts have been worrying about monetary and fiscal stimulus, upside surprises to low expectations, a sustainable recovery, again, just to name just a few.

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