Reasonably Thinking

Recycling the CYN trade

On Friday afternoon, I shorted 50 shares of CYN at $41.22.  This is a recycled trade from August, but the investment thesis has slightly changed.

This is not financial health story.  I am not shorting CYN based on capital ratios, a speculated dividend cut, or anything to do with management.  I have no gripes in any of these areas.

Shorting CYN is a valuation story.  This is a California economy story.  This is a creditworthiness story.  This is a market is overvalued and going to harm CYN on its way down story.

From the August article, three arguments remain sound.

• The market is overvalued at 1,100.  CYN is defenseless against a market decline.
• Credit problems will hamper earnings.  Oncoming mortgage reset rates (Option-ARM & Alt-A) will be problematic and of lengthy duration.  When loans fail to be repaid, CYN will suffer.
• California is of the four worst states to conduct business (the other three being New York, New Jersey, and Illinois).  The state has severe fiscal woes and rising unemployment.  Last week’s edition of The Economist publicized this in an article, stating that California has unfunded liabilities for retirement programs exceeding $100 billion through the next six years.  An unhealthy economy is sour news for banks operating within it.

Further, on a personal level, I am trying to increase my short exposure to better align myself with my portfolio allocation goals (which I am hoping to publish in early January).

One concern I am aware of is that 24.7% of float is short.  So, there is the potential that other short sellers simultaneously exit their positions, which would temporarily increase the stock price.

Other Reasonably Thinking news:

I still presume my option on SDS will be put to me.  (Though, this is not yet reflected in my account).

Also, I’m drafting an end of year page which should be up in early January.  Stay tuned!

I purchased 50 shares of DBV this afternoon at $22.95.  From the prospectus:  “The Index is designed to reflect the return from investing on a 2:1 leveraged basis in long currency futures… with relatively high yielding interest rates and in short currency futures… with relatively low yielding interest rates.”

Reasonably thinking, I have been selling various positions all through 2H09, which has resulted in a large cash position.  Purchasing DBV is an attempt at putting some of that cash to work.  Given a steady investing thesis, I hope that I can pick up additional shares of DBV down the road.

Upcoming trade… the SDS put option I sold back in August comes due tomorrow; I will likely the have shares put to me.  (I will provide an update only if something changes).

Upcoming for the blog…  At the end of the year, I will document my 2009 performance (both new trades and personal account).  In my personal account*, I have beaten the market 10 of the past 11 rolling four quarters, however I do not expect to extend this streak since I have moved into cash to prepare for the next recession.

*I use rolling four quarter increments (a trailing twelve month internal rate of return) because it is the most applicable and accurate measurement.  This takes into perspective the timing of when cash moves into and out of an account.  This is the most logical way to measure a personal account since cash movements vary into and out of different accounts throughout the year.

This week’s issue of Forutne kicks off with a great interview with PIMCO’s El-Erian (who I believe is of the best visionary investors of our time).  This is another solid read, yet simple enough for the novice.  Here are selected excerpts.

“We’ve had the biggest stimulus in history, fiscal and monetary… And there’s a natural inventory cycle… These are not permanent sources of growth.  So you need to hand off to the private sector — to consumers and companies — and for that to happen, a lot of very positive things have to occur, and they are unlikely to occur.”

“[American consumer saving is] absolutely a good thing.”

“…the asset allocation of tomorrow is much more global than the asset allocation of yesterday… We’re moving toward a much more fluid world in which, at some point, inflation will come back.”

http://money.cnn.com/2009/12/09/news/economy/mohamed_el_erian.fortune/index.htm

Hussman kicks off December with a nice visual display.

http://www.hussmanfunds.com/wmc/wmc091207.htm

“…U.S. national debt will rise by $8.5 trillion over the next three years. Debt rises for a variety of reasons, including bailout costs and fiscal stimulus. But the No. 1 factor is the collapse in tax revenues that inevitably accompanies a deep recession.” (Hussman quotes Rogoff & Reinhart)

References for above:  Hussman via OMB, US Treasury; Trepp

Healthcare ETF swap 20091204

This morning, I sold one healthcare ETF and purchased another.  Since the end of the year is nearing, and I have some taxable losses, it made sense to take a capital gain here.  At the same time, since I wanted to hedge some of my equity exposure, my sale was larger than my purchase.  Also of importance, I expanded my position to include global healthcare companies, not just US healthcare companies.

Sold 50 XLV @ $31.35

Bought 25 IXJ @ $52.29

This is quite possibly one of the best investment pieces I’ve read all year.  It is short, well argued, yet simple to read.  I’ll give you the punch line here, but this is must read for anyone who comes across this site.

“The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.”

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Dec+Gross+Anything+but+01.htm

Bought More SDS 20091201

I have been in this trade since late May and am down about $1.7k.  Yet, my thesis has remained strong, and I still believe the market continues to be overvalued.  With the S&P 500 at 1109, expected market returns are somewhere between 6.0-6.5% per year.  This fails to whet my appetite.  With the economic pressures of deleveraging, housing, and regulation setting the stage for The Next Recession, I’m definitely cutting against the grain.

The Trade:  Bought 50 more shares of SDS @35.64

New Cumulative SDS Position:  Long 100 shares; sold 1 Dec $46 put option

Tactically thinking, I generally move gradually in and out of positions.  This gives me multiple opportunities to reevaluate my investment thesis.  There are instances when this delayed maneuvering forgoes profit potential; however, it has saved me money contrasted to had I gone all in back in May.

(Should the market remain elevated, I may extend this commentary with an update to the Market Valuation article.  Or, if something in the upcoming unemployment data catches my eye, I may opine on that instead).

News item:  The business cards and refrigerator magnets have arrived!  They look great!  Let me know if anyone needs a good logo.  My design guy was great.

“In my estimation, there is still close to an 80% probability that a second market plunge and economic downturn will unfold during the coming year.”

“…Almost by definition, money given to corporations will show up most quickly as improvements in corporate earnings, and then slightly later, as executive compensation… It is truly mind-numbing that a moment after a temporary surge of trillions of dollars, borrowed and tossed out of a helicopter (though to specific corporations and private beneficiaries), analysts would hail a subsequent improvement in corporate results as evidence of “resilience.””

Hussman’s weekly article is a little lengthier than normal, but lays down some strong economic arguments.  Note:  this one might be a challenge to the novice reader.

http://www.hussmanfunds.com/wmc/wmc091130.htm