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Ken Heebner's CGM Fund Short US Treasuries

September 03, 2014 | About:

Ken Heebner has released his second quarter letter where he talks about his investments, the rise in the consumer price index, auto sales, and how geopolitics are affecting yields. He also reveals that more than 31% of the portfolio was invested in U.S. Treasuies being sold short.

Highly Informative Interview in April with WealthTrack

CGM Focus Fund Letter Summary

CGM Focus Fund in the second quarter returned 2% compared to the S&P 500 that return 5.2%. The fund return -0.3% during the first six month of the year while the S&P 500 return 7%. He talks about the manufacturing index rising to 53.7 from 53.2 in February, and March employment numbers came in at 192,000 jobs added. He spoke about inflation staying stable, comsumer price index rising slightly in March (0.2%) and in April rose (0.3%). He talked about the Federal Reserve decreasing it bond purchases by another $10 billion to $45 billion a month. Existing home sales comprise 90% of the housing market, and the housing market rose 1.35% in April. Housing numbers are coming in lower from a year ago, and this may be caused by housing prices rising 11% from a year ago. Also mortgage rates rose nearly one full percentage point, which has increased potential homerbuyers monthly mortgage outlay as much as 25%. Despite the increase in expenses, existing homes sales in May increased 4.9% and new home sales jumped 18%.

Auto sales in May rose an annual rate of 16 million vehicles, the highest since February 2007. The average age of cars on the road exceeds 11 years, and credit remains available for new purchases of cars. Auto sales will likely rise at a healthy rate and at the June Fed meeting, the Fed reduced the bond buying purchases to $35 billion.

As of June 30, the CGM focus fund has large industral positions in housing and building materials, electronic components and money center banks. The Fund three largest holdings were Lennar Corporations (NYSE:LEN), Micron Technology Inc (NASDAQ:MU), and Toll Brothers Inc (NYSE:TOL). At the end of the second quarter, 31.5% of the portfolio was invested in Treasury bonds sold short.

CGM Second Quarter Letter

CGM Focus Fund increased 2.0% during the second quarter of 2014 compared to a return of 5.2% for the unmanaged Standard and Poor’s 500 Index over the same period. For the first six months of the year, CGM Focus Fund returned -0.3% and the unmanaged Standard and Poor’s 500 Index, 7.1%. In late June, the Bureau of Economic Analysis released a revised estimate for first quarter 2014 gross domestic product which indicated negative growth of 2.9%. Severe winter weather in much of the country was at least partially to blame, along with a late-falling Easter holiday though some pundits and media outlets were quick to predict a return to recession. However, data for the second quarter of 2014—specifically in housing and auto sales—suggests a rebound in economic growth.

In fact, with the arrival of milder weather as early as March, the economy began to pick up. The Institute of Supply Management’s manufacturing index rose to 53.7 from 53.2 in February, and March employment numbers clocked in at a respectable 192,000 jobs added. Inflation remained relatively benign with the Consumer Price Index rising a slight 0.2% in March and 0.3% in April. On the first Friday in May, April employment numbers were released with 288,000 jobs reportedly added. The following month, May new job numbers were made public and the addition of 217,000 new hires, in our view, effectively dismissed many of the winter fears of a returning recession.

Meeting in late April, the Federal Reserve Board voted once again to reduce its bond buying program by another $10 billion, lowering the rate to $45 billion monthly from a recession high of $85 billion monthly. Despite its continued confidence in the recovery, the Fed noted the housing market has been slower to rebound than other sectors of the economy. Then, in mid-May, April new housing starts were reported, soaring 13% though most of the gain was in multifamily housing starts, rather than singlefamily homes. The month-over-month jump was primarily in the Northeast and Midwest, parts of the country hardest hit by the extreme cold weather earlier in the year. Existing home sales which comprise 90% of the housing market rose 1.3% in April, increasing for the first time in 2014 though still coming in at levels below one year ago. This may be attributable to an 11% spike in home prices in the past year along with mortgage rates that have risen nearly a full percentage point to increase a potential homebuyer’s monthly mortgage outlay by as much as 25%. Yet, despite rising expenses, existing home sales in May increased 4.9% and new home sales jumped 18.6%.

Auto sales have provided a significant boost to the economic recovery with sales in May up to an annual rate of 16.7 million vehicles, the highest since February 2007. Credit remains available for purchases and with the average age of cars on American roads exceeding eleven years, we believe that auto sales are likely to continue at a healthy clip. Consumer Confidence, as measured by the Conference Board Index, is on the upswing from 82.2 in May to 85.2 in June which, in our view, also bodes well for auto sales. A potential drag on the recovery is geopolitical uncertainty in the Middle East. The threat to oil supplies drove oil prices higher in the second quarter of the year and pushed the Consumer Price Index up 0.4% in May. The Fed noted the slightly higher inflation rate at its meeting in mid-June, but again reiterated its confidence in the recovery by voting yet again to reduce its bond buying program to $35 billion per month. The yield on ten-year U.S. Treasury bonds was 2.72% at the beginning of the second quarter, dropped to as low as 2.42% on May 28 and has since recovered to 2.52% on June 30. We believe most of the decline in yield reflects a “flight to safety” prompted by conflicts in the Middle East and Ukraine. With bond yields at such low levels, the S&P 500, which is selling at near all-time highs, is priced at 16.4 times this year’s earnings, which we consider to be a reasonable level.

On June 30, 2014, CGM Focus Fund held large industry positions in housing and building materials, electronic components and money center banks. The Fund’s three largest long holdings were Lennar Corporation (NYSE:LEN) (housing and building materials), Micron Technology, Inc. (NASDAQ:MU) (electronic components) and Toll Brothers Inc (NYSE:TOL) (housing and building materials). At the end of the quarter, approximately 31.5% of the CGM Focus Fund portfolio was invested in U.S. Treasury bonds sold short.

Robert L. Kemp


July 1, 2014


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