Reasonably Thinking

Todd Harrison of MarketWatch had a nice article today.  It offers a mid-year status report and forecast.  Normally I give a quote at the beginning of the article as a teaser, but I think giving the conclusion is more enticing.

This too shall pass, and when it does, there will be profound opportunities for those who proactively prepare and steadfastly persevere.

http://www.marketwatch.com/story/where-weve-been-and-where-were-going-2010-06-30?pagenumber=1

In other news…

I intend to have 2Q10 data and another major commentary piece in the near future.  Stay tuned!

Hussman pens a gem!

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

http://www.hussmanfunds.com/wmc/wmc100628.htm

Buttonwood (of the Economist) has a great article this week exploring the conundrum of low bond yields with high gold prices.  It is primarily an information piece that explains relationships between gold and inflation as well as between bond spreads/yields and growth.  I’ve read this multiple times and am keeping it handy for future reference.

http://www.economist.com/node/16381320?story_id=16381320

With a small market decline today, along with weak housing data, I decided to take some profits on my July ITB 17.50 puts.  I sold 2 of them for $5.60 each.

I still believe housing pain is yet to come as I continue to hold eight more put options on ITB.  Below is my trade history of ITB since I first established a negative position in February 2009.  The two red boxes highlight the culmination of today’s trade while the green shaded cells are the put options that I still hold.

While I haven’t played this as tactfully as I would have liked, I am managing to eek out nice gains.  The thesis remains sound, and I continue to believe that my positions against homebuilders will payoff.

With the market increase over the past week and a half, I decided to add a negative position.  I shorted 50 shares of SSO at $37.15.

A continuing theme I have opined about since October, is that the economy is on shaky ground.  Further, nothing in the private sector has convincingly driven growth—a theme highlighted by John Hussman yesterday in his Weekly Comment.  At this stage of the game, I refuse to believe that any published GDP is a sign of relief unless it is concurrently free from federal deficit spending.  In my eyes, taking on debt to increase assets fails to address the negative equity problem.

Independent from the economy, I still believe the market is overvalued, and this trade is a direct play on that theory.

As for executing the trade, and given the nature of how ultra leveraged ETFs work, I would rather short the ultra long (SSO) than long the ultra short (SDS).  Yes, there is always a risk of a broker forcing me to cover in a squeeze, but the long positions are also susceptible to sudden price drops.

To hit the rewind button, I originally bought the June $44 put for $8 on 2/2/10 and sold it on 5/25/10 for $10.20, netting me a gain of $420.96.  Today it is only worth $6.15.  Clearly this is an example of buying low, selling high, and essentially buying low again.

With the market decline today, I decided to increase my DBC position from 50 to 100 shares (purchased at $21.50).  My commodities allocation is still lower than I would like, so I may add to this position down the road.  Specifically, oil looks interesting if I could purchase it (USL) a little cheaper.

This week’s Hussman Commentary is a must read for any serious investor.  It almost reads like a capstone article, covering a multitude of relevant topics, which are well orchestrated into broader arguments.  The take-a-ways for me are the probability of an economic downturn (with a ‘recognition phase’ catalyst) along with continuing increases in credit problems.  These are supplemented with shrewd remarks about Europe, the Fed, and volatility.

http://www.hussmanfunds.com/wmc/wmc100601.htm