Keeping score, I earned $600.88 from the five individual positions and a loss of $113.14 from ITB, netting me a gain of $487.74.

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.

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.

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.

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.

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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.

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

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.

*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.

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:

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.