Up here at 8000 feet elevation at this time of year we use our wood stoves as a constant source of heat. Sure, we have propane but the glow and atmosphere of wood makes mountain life much more enjoyable in the winter. This year we’ve been burning some of the previously mentioned pine which was cut due to Pine Beetle infestation which as you may or may not know has been devastating to our region.
One trait unexpected in burning pine has been the spike in temperature since pine can burn so fast and the point of all of this is the equity markets by my measures are spiking in temperature as well. Market temperature guaged by sentiment and the apparent lack of fear amongst traders. The uniform consensus appear that the short term prospects of the markets are rosy and the long term…blech. I’ll take the reverse of the consensus and brace for short term caution and let the markets cool off.
There can be no guarantee that markets will sell off soon but data and experience tells me a sell-off is in order, probably by the end of this quarter or early 2nd Q.
We’ve been selling of piecemeal our high flyers, of which no stock of ours has been hotter than CAGC which we primarily acquired in the low teens and is now at $38. Pine won’t grow to the sky and neither will Chinese equities. While the majority of our big winners from 2009 where Chinese, I suspect they could repeat their dominance in 2010 as no group has the combination of cheap valuation and growth rates. Sure, they have issues such as accounting and possibly an inflated Chinese economy, but so far the trends are still very friendly. I just think a “pause to refresh” is greatly in order.
The bottom line is we continue to build our cash levels and for the first time in ages we’ve added some “QID” (Nasdaq Ultra Short) to hedge our existing long positions.
BTW we are still long the “TBT” (Ultra short 10-year Treasury) as we remain bearish on bonds and interest rates.
Be careful out there
Brad
Long CAGC, QID
We’ve added to our TBT position as models are turning bearish for LT Treasuries. Gun to my head says that 2010 will be a flattish year for US equities but without a major breakdown. So, we have to capitalize on other markets a la Brazil on a pullback and the move back up in interest rates in the US.
My whacko ultra right wing barber is still convinced the dollar will crash and gold goes to $2000. Hmmm makes me think the dollar rally has legs, lots of legs and gold is kaput.
Long TBT, UGL.
With unemployment apparently peaking, we are becoming increasing alert for a drop in price in long term bonds. This morning Morgan Stanley outlined their interest rate expectations for 2010 and 2011: They see the 10 year Treasury moving to 4.5% by Summer 2010 and 5.5% by the end of 2010.
For this reason I believe the “TBT” represents a very good risk reward trade to benefit from the looming price decline in bonds.
Long TBT
There are important ramifications for the potential end of the weak dollar. With the positive employment number this morning, gold goes from a long to a short and must be sold.
Oh I know the boys at my barbershop…true to the core paranoid gold bugs will never sell.
The short bond trade might now be ideal and we’re considering an investment stake in the “TBT” which is getting jiggy on the employment data. The “TBT is considered a long trade and acceptable to IRA’s but the TBT moves inverse to the price action of the 20 year Treasury Bond.
Be careful out there.
Keeping in mind that the “hardest trade is sometimes the best trade” time to exit Gold. Stunning rally but its now 40% above its 200 day moving average which has to now be a fools bet. Commitment of Traders reports that Commercial Traders (aka Smart Money) now has the biggest short position on Gold in its history.
Gold can still be in a Bull Market but endure one helluva pullback.
Long Gold, but not for long.
Being that I’m of a certain age where most of my formative years were computer-less I have been forced to rely on experience and observation as a foundation to justify a strategy when data was unavailable to prove a point. Running the portfolios for a small firm gives us an advantage in attention to detail that might be impossible for much larger institutions. We run portfolio performance on a daily basis which allows us to spot excelling and lagging portfolios and fix the laggards.
This attention to detail can cause a portfolio to have a turnover in excess of 200% a year. Sound like alot? It may if you’re used to mutual funds where the turnover is hidden from the fund holder, but on average 200% is not excessive to most Growth mutual funds.
For most of my 25 years of trading, I’ve fielded questions to the value of portfolio turnover. The typical questions revolve around the expense and justification of the culling of dead money or losing holdings. Inherent within the reasoning of the questioner is the premise that somehow “Lower turnover is better”.
This morning I ran portfolio simulations for varying review periods for our model portfolio, which we put into live trading early this year, results are as follows:
“Review” refers to the evaluation of all holdings where positions are added or deleted by our proprietary ranking system.
Simulation range 3/31/01 to 10/24/09. Returns are annualized estimates.
Daily Review: +16.95%
Weekly Review: +16.46%
Monthly Review: +12.62%
Six Week Review: +12.24%
Three Month Review: +13.19%
Six Month Review: +12.94%
Benchmark comparison (S&P 500): -6.96%
In sum, the data means that using our proprietary model if I only review a portfolio once every month, the account will underperform a portfolio that is monitored daily by an average of 4.33% annually. Ouch!
As the evidence shows there is significant value to maintaining an active portfolio, where every holding is evaluation to the potential merits of contributing to the return of a portfolio. While a certain amount of patience might be a virtue in other professions, holding a stock that is not participating in a market advance is equivalent to dead money. This is not to be confused with rapid trading, day trading or the ilk, but by allowing winning stocks to be held for extended periods of time and culling laggards our clients have a better chance of exceeding the market averages.
Returns are hypothetical, include trading expenses and slippage but not including management expenses. As usual, past performance can never guarantee future results.
