January 23, 2012

GDX, SSO options expiration; bought TILT, PDP 20120123

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I had a lot of positions change today, and a lot of money moved around.  I’ll tackle this step by step.

Options Expiration

First, options expiration was Friday, and I had two positions to account for.  My short GDX put (at $52) finished out of the money, netting me a cool $450.  My short SSO call spread (short $50, long $60) finished in the money, but still netted me $621, which is the difference between the $787 premium I received in March and the current position value of $166.  For an introduction to options, click here.  To learn more about call spreads, click here.

With selling the SSO call at $50 and the shares ending at $50.83, I was assigned 200 shares (2 option contracts at 100 shares each) at $50 each.  This increased my portfolio short position by $10k ($50 x 200 shares), which is a significant increase.  To match this exposure on the short side, I decided to deploy cash toward the long side.

Investing in Fama-French

Earlier this month, I expressed my discontent with the capital asset pricing model (CAPM) and argued that the Fama-French 4 Factor Model was superior.  Reasonably thinking, since I had to purchase equities, I was able to invest in the risk factor methodologies that Fama and French support.  To do this, I purchased exchange traded funds TILT and PDP.  TILT is designed to replicate the Fama-French 3 Factor Model, focused on market, style, and size, by tilting the portfolio toward value stocks and small cap stocks.  PDP is a momentum fund, with momentum as the fourth risk factor in the Fama-French 4 Factor Model.

Trade Details

I purchased 150 shares of TILT at $54.65 and 65 shares of PDP at $24.93.  These long equity positions total $9.8k, which aligns well with my new $10k short position (from the SSO options).  One trade execution issue I had with purchasing TILT is market impact.  Since the fund trades on low volume, my bid moved the price.  As you can see, my 150 shares were the first traded shares of the day.

With an illiquid security, I verified that the net asset value ($54.67) was in line with what I paid.

Top Five is updated to incorporate changes to GDX, SSO, and TILT.

 

January 19, 2012

Sold JJG 20120119

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A year ago, I argued that a combination of floods in Australia, drought in Russia, and lack of adequate snowfall in the US grain states would dampen the current amount of global wheat supply, sending prices higher.  Purchasing the JJG, the grains fund, seemed to be a prudent play on the topic, and through February, proved to be a fortuitous investment.  Alas, I overstayed my welcome and exited my position at a loss.

 

1/4/2011 JJG bought 30 52.05  $   (1,568.05)
1/19/2012 JJG sold 30 42.5187  $    1,266.58
           $     (301.47)

Going forward, I will likely replace this position with another real asset, perhaps timber.  Moving to cash also eases up my margin account, where I may be assigned two options positions expiring tomorrow.  I’ll be keeping an eye on the 50 strike for SSO and 52 strike for GDX.

 

January 10, 2012

Too early, covered IEI 20120110

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Back in September, I discussed the paradox of the US debt rating downgrade causing the US 10yr yield to fall.  Through parity relationships, we normally would have expected interest rates to rise.  My action at the time was to short US Treasuries by shorting the IEI ETF, which corresponds to the 3-7 year portion of the US Treasuries curve.  My thesis centered on the idea that economic malaise and/or currency devaluation would not be tolerated.  We see flashes of this with protestors in the occupy movement and rhetoric on the primary campaign trail.  However, I’ve realized that I am too early here.

I recently wrote in the inflation/deflation debate, that “For rates to rise, the US dollar would likely need to lose a significant value relative to other currencies.  At the very least, shorting Treasuries seems imprudent in the short run.”  While I believe shorting US Treasuries will be profitable in the long run, this trade is too early.  The current situation enables both US Treasuries and gold to perform concurrently.

Hence, I covered my short position today at a small loss, mostly attributable to transaction costs.  I may use the freed up margin to initiate other short positions in the near future.

9/2/2011 IEI short -15 121.7  $    1,815.51
10/7/2011 IEI dividend      $         (2.18)
11/7/2011 IEI dividend      $         (2.31)
12/7/2011 IEI dividend      $         (1.94)
1/4/2012 IEI dividend      $         (1.81)
1/10/2012 IEI bought to cover 15 121.84  $   (1,836.70)
           $       (29.43)
 

January 9, 2012

New material to the site

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I’ve added a lot of content to the site recently.  In addition, I made the Investment Philosophy page much more user friendly.  Enjoy.

————————————————————

Performance 4Q11     This page provides a brief recap and outlook for the capital markets, shows my performance through the end of the year, and displays my current asset allocation.

The Inflation/Deflation Debate     This article explores arguments promoting both US inflation and US deflation.

Risk Factors, Fama-French 4 Factor Model     Here is my take on how the FF4FM is superior to the CAPM.

Endowments     This paper examines the unique needs of endowments, their asset allocation decisions, and performance results.

 

January 9, 2012

Hussman: recession risk still present

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John Hussman, a favorite of mine, published his weekly commentary today arguing that the present circumstances still pose a recession risk for the US.  His thesis counters recent positive economic reports by claiming that the recent news focuses on economic data that is a lagging or coincident indicator (not leading) or has weak historical significance.  For example, the unemployment rate tends to peak at least 9 months after a recession has begun; thus, such a data point should not be used to predict a recession.

http://www.hussmanfunds.com/wmc/wmc120109.htm

 

December 30, 2011

FAS no longer shortable, bought to cover 20111230

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Two months ago, I swapped out my short position in UYG for a short position in FAS.  The goal was to further take advantage of the dubious compounding intrinsic to levered ETFs.  Unfortunately, my broker ran out of shortable shares today (yes, this is real money being dealt with).  Thus, my position was closed upon the market’s open today.  I look forward to replenishing this position, or something similar to it, in 2012.  The Top Five page is now updated.

10/21/2011 FAS short 150 13.55  $    2,022.51
11/10/2011 FAS rev split 1:5 30 67.75  $             -  
12/30/2011 FAS bought to cover 30 65.35  $   (1,969.45)
           $        53.06
 

December 27, 2011

Need a taxable gain, bought to cover PHH 20111227

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With the end of the year approaching, I need to be mindful of my capital gains situation.  Since some of my market hedges realized capital losses earlier in 2011, prudence dictates the need to realize capital gains* this week before the year closes.  Today I bought to cover my short position on PHH.

PHH provides mortgage production and servicing along with fleet (vehicle) management.  Last November, I presented my thesis for shorting this stock, citing problems in the mortgage market, macroeconomic pessimism, and overvaluation.  Along with these issues that pushed the stock down over the past year, the CFO resigned in the spring, and S&P downgraded PHH’s debt last week.  The stock fell from $20.90 to today’s price of $10.55.

11/24/2010 PHH short 100 20.9  $    2,080.01
12/27/2011 PHH buy to cover 100 10.55  $   (1,063.95)
           $    1,016.06

 

*All short positions generate short-term capital gains.  The logic is that the a capital gain is based on how long the taxpayer owns the stock, not necessarily how long the taxpayer borrows the stock.  Ownership of the stock takes place the same day the position is covered.  Hence, even though I borrowed the stock for more than a year, the stock was owned for only one calendar day and is therefore a short-term taxable gain.

 

December 1, 2011

Swapped commodities to junior gold miners 20111201

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I slightly altered the commodities composition of my portfolio today.  I sold DBC, the commodities ETF, to fund GDXJ, a junior gold miners ETF.  The problem with some of the futures-based ETFs is the roll yield expense.  Since the ETF has certain rules it uses and discloses, other market participants can move first, making futures rollovers marginally more expensive for the ETF.  I alluded to this a few weeks ago when I traded out of my DBA position.

The thesis of buying GDXJ has more to do with my view of gold as a currency.  I continue to believe that the US Dollar is a shaky currency, despite the sideshow in Europe right now.  The coordination of central banks yesterday may be intended to provide funds that the private market is not supplying, however I view it as a means to make dollars cheaper and enable the use of other currencies as capital.

At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.

http://www.federalreserve.gov/newsevents/press/monetary/20111130a.htm

Thus, while I view the effort as sound, it implies to investors an ability to utilize capital alternatives to the US Dollar.  Perhaps this is an acknowledgement that the US Dollar is losing its reserve status.  This remains to be seen.

As for my gold positions, the gold thesis is an anticipation of higher inflation, falling long-term yields, and softening economy.  The fact that the yellow metal has outperformed the shares generally indicates that the shares will play catch-up.  A brief check still shows this to be true.  Operating margins for top gold miners are increasing (on a quarterly basis), thus the increase in gold prices should flow through the income statement to the benefit of shareholders over stakeholders.  Another reason for the price disparity may lay with the fact that sell-side analysts have low gold price estimates in their estimates for 2012.  With these two arguments in hand, I feel good about purchasing gold miners.

Since I already own gold miners in the form of GDX, complementing this position with gold exploration companies, also known as “juniors,” seems to be a logical step.  GDXJ generally sports a high covariance with GDX.  However, at the beginning of August the returns of the two seemed to split.  I don’t have a reason for this and have yet to find a convincing article as to why.  Feel free to send me thoughts on this if you have any.

Top Five is update accordingly.

Keeping score for DBC:

1/19/2010 DBC buy 50 24.5  $   (1,232.00)
6/4/2010 DBC buy 50 21.5  $   (1,082.00)
3/7/2011 DBC32JulC sold 1 1  $        91.74
7/15/2011 DBC32JulC expired 1 0  $             -  
12/1/2011 DBC sold 100 27.5  $    2,742.94
           $      520.68
 

November 25, 2011

Hungary downgrade forces euro cover 20111125

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Hungary received a downgrade to junk status today, which placed further downward pressure on the euro.  As the euro fell, my broker covered my short position since FXE shares were unable to be found for further shorting.

When I initiated this position a year ago, I shorted the euro knowing that I was long gold.  Essentially, my effective paired trade was long GLD and short FXE.  This has proven well over the year.

Image from Google Finance

I’m okay without my FXE short.  Gold is still likely to be good long-term, and the euro could rally on any perceived good news.  While I still have over a 23% gain in gold, the euro hedge cost me a mild $53.

Top Five is updated to reflect this transaction.

11/29/2010 FXE short 20 130.65  $    2,603.00
3/8/2011 FXE dividend 20  $    (0.04)  $         (0.76)
5/10/2011 FXE dividend 20  $    (0.04)  $         (0.82)
6/8/2011 FXE dividend 20  $    (0.05)  $         (0.91)
7/11/2011 FXE dividend 20  $    (0.06)  $         (1.13)
8/8/2011 FXE dividend 20  $    (0.04)  $         (0.83)
9/9/2011 FXE dividend 20  $    (0.03)  $         (0.57)
10/11/2011 FXE dividend 21  $    (0.04)  $         (0.74)
11/8/2011 FXE dividend 22  $    (0.04)  $         (0.76)
11/25/2011 FXE bought to cover 20  $ 132.00  $   (2,649.95)
           $       (53.47)
 

November 18, 2011

Oil field bet, exit DBA, SSO hedge 20111118

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Oil Field Bet!

Last month when I purchased DBA, I was looking for someplace liquid to park assets while participating in any upside inflation.  Unfortunately, I have been underestimating ETF futures roll expenses for DBA, JJG, and DBC.  Thus, I was willing to exit my DBA position today (at a manageable $50 loss) to fund a new position.

 The new position is a field bet on oil producers and servicers.  Oil markets seem to have a structural tightness to them that are unlikely to ease in the near future.  Furthermore, energy serves as a real asset by correlating to inflation.  Today I purchased producers XOM & CVX and servicers SLB, BHI, & HAL, all of which have at least a four star rating from both S&P and Morningstar.  To hedge my equity correlation exposure, I took a negative equity position by shorting SSO (this trade accumulates to my existing SSO short position).

XOM long 20 78  $   (1,567.00)
CVX long 10 99.53  $   (1,002.30)
SLB long 15 71.54  $   (1,080.10)
BHI long 20 54.39  $   (1,094.80)
HAL long 30 30  $   (1,094.77)

>>>

SSO short 100 43.8  $    4,369.97

>>>

10/3/2011 DBA long 100 29.7  $   (2,977.00)
11/18/2011 DBA sold 100 29.335  $    2,926.44
           $       (50.56)

>>>

Top Five is updated to reflect for the changes in SSO and DBA.

 

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