January 23, 2012

GDX, SSO options expiration; bought TILT, PDP 20120123

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I had a lot of positions change today, and a lot of money moved around.  I’ll tackle this step by step.

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.

 

January 19, 2012

Sold JJG 20120119

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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.

 

1/4/2011 JJG bought 30 52.05  $   (1,568.05)
1/19/2012 JJG sold 30 42.5187  $    1,266.58
           $     (301.47)

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.

 

December 1, 2011

Swapped commodities to junior gold miners 20111201

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I slightly altered the commodities composition of my portfolio today.  I sold DBC, the commodities ETF, to fund GDXJ, a junior gold miners ETF.  The problem with some of the futures-based ETFs is the roll yield expense.  Since the ETF has certain rules it uses and discloses, other market participants can move first, making futures rollovers marginally more expensive for the ETF.  I alluded to this a few weeks ago when I traded out of my DBA position.

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:

1/19/2010 DBC buy 50 24.5  $   (1,232.00)
6/4/2010 DBC buy 50 21.5  $   (1,082.00)
3/7/2011 DBC32JulC sold 1 1  $        91.74
7/15/2011 DBC32JulC expired 1 0  $             -  
12/1/2011 DBC sold 100 27.5  $    2,742.94
           $      520.68
 

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.

 

August 5, 2011

Bought Gold Miners 20110805

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When an investment manager uses meaningful data and reasonable assumptions to formulate his investment theses, and is successful at executing his strategies, he will attract my attention.  Most managers are too short-sighted in that what they present as evidence either does not prove reliable over various time periods or is not the most important data that should be used.  Some of my favorite managers, who have demonstrated the ability to construct logical investment theses and profit from them, are Jeremy Grantham, John Hussman, Peter Schiff, and PIMCO’s team (headed by Mohammed El-Erian and Bill Gross).  Moreover, each of them views capital markets from a slightly different perspective, which include history, econometrics, currency, and fixed income (respectively).  Add in The Economist (international perspective), and the eclectic mix of brainpower provides me with a good overall sense of how capital markets will move. 

Today, I am primarily using John Hussman’s research, and I corroborate it the best I can.  In his article Going for the Gold, Hussman explains the scenario in which investors should own gold.  To accomplish this, he uses meaningful market data points with safe assumptions, which are backed by statistical correlations.  His explanation is a more complete description (which you should read), but I will attempt to summarize it here.

First, gold should be owned when either world inflation is rising or the US Dollar is falling.  These can be observed when inflation is rising, long term yields are falling, AND the economy is softening.  The assumptions that tie some of these together are based on foreign exchange parity relations, but again, for the full story in his words, see Hussman’s article.

Currently, we have all three factors in play.  Inflation is rising (3.6% over that past 12 months), yields are falling (graph), and the economy is weak. 

(Image from MarketWatch)

Furthermore, I believe these general trends are likely to persist.  The Federal Reserve will continue to purchase long-term securities, which keeps yields low.  Meanwhile, inefficient fiscal policy will continue to propel inflation, and confidence (or lack thereof) will constrain production.

The final variable is a matter of execution.  We know that given the current situation, gold is likely to perform.  To determine the best method for acquiring gold, two main ownership options exist:  actual gold and gold stocks.  Recently, gold has rallied significantly relative to gold stocks.

(Image from MarketWatch)

Gold is the main export for gold producing companies, so increased gold prices means more revenue will flow through the income statement.  The disparity in the graph above shows that this increase in gold companies’ earnings, relative to gold, is not accounted for.  Therefore, gold stocks appear to be lagging gold, and are relatively more attractive.

To participate in this opportunity, I purchased the gold stocks exchange traded fund, GDX, 100 shares at $55.20 per share.  This is one of my larger positions and is reflected as such on the Top Five page.

Here are some other stories of interest that compliment the thesis above:

Switzerland and Japan are weaking thier currencies to remain competitive

Opinion piece arguing US should be downgraded (hence money looking for a new safe like gold)

Opinion piece arguing long gold stocks and short gold

BNY Mellon imposes fee on rapidly growing deposits  indicative of lots of cash looking for a home (perhaps gold)

 

August 5, 2011

Sold CYB to fund GDX 20110805

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I sold my stake in Chinese Yuan today to fund the purchase of GDX.  I consider CYB to be a currency just like US dollars and am perfectly willing to sell the position to fund an investment opportunity.

Keeping score, the only thing that really cost me here was commissions:

12/23/2010 CYB bought 50 25.19  $   (1,266.50)
8/5/2011 CYB sold 50 25.45  $    1,265.47
           $         (1.03)
 

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