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)
 

September 29, 2011

Commodity prices falling, sold GDX put 20110929

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With Operation Twist underway, commodities prices have descended over the past week or so.  As I wrote earlier last month (and made a substantial purchase), I fully believe that gold is a place to be.  To drive this conclusion, we looked for three variables:  rising inflation, falling yields, and economic weakness.

Inflation is still rising (3.8% over the last 12 months, which is an even greater increase than September’s 3.6% TTM figure).  Yields, thanks to the Fed, have certainly continued descending over the past three months (see image).  The economy is, and will remain, weak for some time.

(Image from MarketWatch)

On the valuation side, gold stocks still seem to be lagging the metal on both 1yr and 5yr time periods.  Hence, a long GDX position is more attractive than a long GLD position at this time.  As for acting now, the security (and gold) has fallen substantially in the past few weeks.  However, my investment thesis is unchanged–it even may have strengthened.  Adding to my commodities on current weakness is a logical move.  To execute the trade, I sold a put on GDX.  Since I am considering increasing my position on a recent decline, I would be more willing to invest at an even lower price.  Selling the put fulfills this desire while providing income in the process.  The put is secured by cash, which I otherwise would not have deployed over the next few months.

Specifically, I sold one GDX Jan12 52P at $4.65.  Net of commission fees, my breakeven price is roughly $47.50.  If GDX stays above $52 through January, I pocket $450.02.  If GDX falls below $52 at expiration, I have committed to purchasing 100 shares at $52 with the $450 subsidy, effectively making the breakeven price $47.50.

My Top Five positions has been updated accordingly.

For more information how selling cash secured puts (and covered calls) generates income, read Options – Income Producing Strategies.

 

September 2, 2011

1.99%: The US 10yr Treasury Paradox; shorted IEI 20110902

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I spent minutes staring at this:  the US 10yr Treasury Bond finished the day at 1.99%.  I want the reader to first step back and think about the inherent paradox of investors buying a downgrade, and secondly, consider what a current and continued low rate structure implies.

Paradox

Last month, S&P downgraded the US’s sovereign credit rating from AAA to AA+ (with a negative outlook).  Since then, the US 10yr Treasury Bond yield has fallen from 2.40% to 1.99%.  This means that as US credit is officially considered to be worsening, more investors are buying it!  The opposite is normally true:  when a country is downgraded, investors normally demand higher compensation for lending funds to that country.  In the US’s current situation, the country suffered a downgrade and investors now demand less compensation for funds lent–quite the paradox!  I believe this situation to be unsustainable.

Implications

Suppressing interest rates to abnormally low levels both hurts the economy and the currency.  My assumptions are as follows:

  • An economy is based on what it produces
  • New sources of production depend on businesses investing in capital expenditures
  • Financing for capital expenditures depends on another party saving money (forgoing consumption)
  • Saving money requires an incentive of high interest rates

AND

  • Printing money to enable low rates (via purchasing treasuries) devalues the currency
  • A devalued currency appears as broad-based inflation with increased commodity prices

Today’s Trade

 I argue that the economic malaise, devalued currency, or both, will not be tolerated over the next few years.  I have already established investment positions for an economic downturn, and I have multiple positions that hedge against the US Dollar (see Commodities and Coins allocation in this pie graph).  Today’s trade directly attacks the yield curve.  I strongly believe that the US 10yr Treasury Bond will yield significantly higher than 1.99% in a few years.  I choose to short the 3-7 year portion of the curve by shorting 15 shares of IEI, which is a bond fund ETF mimicking the Treasury Yield curve, at $121.70.  Ideally, I would have like to have also shorted IEF, which is the 7-10 year portion of the curve, but shares of the ETF were unavailable for shorting; I may revisit this next week…  And for those of you who are long-time followers, I still own JFR and would consider purchasing more at a lower price.

 

August 18, 2011

Sold volatility 20110818

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With the market’s continued decline, lack of confidence, and borderline fear, volatility crept up during the past few weeks.  I originally purchased VXX back in March 2010 with the belief that the market was overvalued and volatility was low.  I still hold that my thesis was correct, however the tool I used to implement the strategy proved faulty.  Even though volatility, as measured by the CBOE Volatility Index, has clearly risen over the past 18 months, VXX, which supposedly tracks the CBOE VIX has fallen tremendously.  Thus, I exited my losing position today while the stock is temporarily elevated.  The unfortunate takeaway is that VXX is a poor ETF for investing in volatility for extended time periods.

Keeping score (even in defeat):

3/31/2010 VXX bought 65 21.12  $   (1,379.80)
8/2/2010 VXX bought 35 21.6  $     (763.00)
9/3/2010 VXX 18 Oct10P sold 1 1  $        85.03
10/14/2010 VXX 18 Oct10P bought to cover 1 3.3  $     (344.96)
  VXX 1:4 reverse split 25    $             -  
8/18/2011 VXX sold 25 40.85  $    1,014.23
           $   (1,388.50)

Side note:  Anyone realize that the 10yr yield dipped below 2% today?

 

August 3, 2011

Bought to Cover MHO 20110803

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With the general market decline over the past handful of trading sessions, I wanted to take profits from one of my short positions.  Today, I bought to cover MHO.  Of all the short positions I have, this was the one where I had the most limited information.  Hence, I successfully exited the position pocketing $285.58.

Back in January, I made a field bet on housing stocks whereby I bought NVR and concurrently shorted KBH, RYL, MHO, and SPF.  With positions remaining in NVR and RYL, here are my results thus far:

1/24/2011 NVR bought 1 779  $     (786.00)    
Current value NVR        $      648.56        
           $     (137.44)        
                   
1/24/2011 KBH short 75 15.05  $    1,118.77    
5/19/2011 KBH dividend 75 0.06253  $         (4.59)        
7/8/2011 KBH bought to cover 75 9.71  $     (738.20)      
           $      375.98        
                   
1/24/2011 RYL short 50 17.6  $      870.03    
4/29/2011 RYL dividend 50 0.03  $         (1.50)        
7/29/2011 RYL dividend 50 0.03  $         (1.50)        
Current value RYL        $     (688.50)        
           $      178.53        
                   
1/24/2011 MHO short 65 15.1  $      971.53    
8/3/2011 MHO bought to cover 65 10.4  $     (685.95)    
           $      285.58        
                   
1/24/2011 SPF 9 Sep11P bought 2 4.6  $     (934.97)    
5/17/2011 SPF 9 Sep11P sold 2 5.5  $    1,084.98      
           $      150.01        

Side note– is anyone noticing that the US 10yr is at 2.60%??  This seems incredibly low.  Perhaps I will make a play on this in the near future.

 

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