Reasonably Thinking

On Thursday, when I bought USL, the intention of the purchase was an investment to be held for months.  However, since the price moved quickly in my favor, I decided to take profits here.

(image from Google Finance)

The headlines attributed to today’s broader market rally–and by association a rally in oil–was China’s proclamation to continue holding (and not to sell) European debt holdings.  With one major player keeping steady, the markets rallied.  Although I view this as noise, the past few days have offered opportunities to enter/exit long term positions.  With regard to oil, I would still consider recycling this trade down the road, and I would like to have more commodities exposure.

Keeping score:

With the recent drop in the market over the past month, I decided to take profits on my SSO puts (a trade that bet on the market falling).  This trade also makes sense since the options expire next month–I would have been forced to act in June had I held onto the position.

As you can see below, I was behind on this trade through all of March and April.  Yet, I still managed a nice gain here.  The opposite side of the trade was ahead for two months and ended up with a loss.  Given the choice of the two, I’ll happily trail behind for a bit if I believe the trade will work in my favor.  (The graph is of SSO, the security that the put option is derived from; the arrow is my entry point on 2/2/10, when SSO traded at about $37).

(image from Google Finance)

Even after exiting this downward position, I still maintain a substantial market short position.  Further, if the market was to rally from here, I would consider recylcing this trade.

Keeping score:

I purchased 50 shares of USL (US 12 month oil futures) today, at $35.10 per share.  USL is an exchange traded fund that mimics the price of oil.  Generally speaking, if oil prices rise, USL will also rise.

Reasonably thinking, oil has been on a slide this month, falling from nearly $90 per barrel to under $70 per barrel.  As for safe havens, oil has decoupled from gold over the past month.  This is mainly attributable eurozone fears and perhaps decreasing Chinese demand for commodities.  In fact, many of the metals (copper, nickel, etc.) have fallen along with oil this month, yet gold has managed to hold its own.  Additional worries and decreased consumption could easily push oil (and metals) lower.  This is the risk I’m bearing in this trade.  (Side note:  exiting my copper position in March turned out to be a shrewd manuever).

Gold decouples from Oil in May

(image from Google Finance)

Metals fall with Oil in May, Gold remains steady

(image from Google Finance)

My first thesis to this trade is that I still believe geopolitical tensions in the Middle East (Israel-Iran) could cause a supply shock in oil, sending prices higher.  A second idea is that the Deepwater Horizon spill in the Gulf could prompt congress to pass restrictive legislation onto the oil industry; discussion plans for new wells have already been scrapped since the incident.  A final argument is that I would rather own something tangible rather than a currency right now; it may be easy to argue against the euro, but other currencies are similarly susceptible to declines.

As for my portfolio, this will increase my allocation to commodities, which was previously below my goal of 10%.  My portfolio allocation goals can be seen at the conclusion of my 1Q10 Performance.

I found this Bloomberg article, by Jonathan Weil, rather interesting.

In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter… How exactly do these banks’ trading divisions make money?

…A better question might be: How did Morgan Stanley’s traders somehow manage to lose money on four days last quarter?

http://www.bloomberg.com/apps/news?pid=20601039&sid=ax0kTsl0dBXw

Welcome back!

If you own, or are considering owning a home, you may want to read my most recent article How a Housing Bubble is Created and the Oncoming Housing Bust.

For those of you who own Equity Indexed Annuities, or are interested in an advanced options lessons, check out this article.  Also new to the site is an ETF Guide that you may use at your leisure.

And finally, you can check out my recent trades and first quarter performance.

Enjoy!