A BETTER YEAR THAN YOU WOULD THINK
Being down only 5% in a year where the S&P500 was down 36.6% is not that bad at all. The reason I didn’t beat the S&P500 by 31.6%, is that the Canadian dollar was down 19.2% over the same period. So in Canadian dollar terms, the S&P500 was down only 17.4%. Another way of putting it is, instead of using REAP, had I invested in an S&P500 index fund at the beginning of January with a much stronger Canadian dollar at the time, I would have lost only 17.4% instead of 36.6% because of the strong rally in the US dollar.
Even if I beat the S&P500 by 12.4%, still, why bother if lost 5% in actual value? Because while losing 5%, I more than doubled the portfolio share-count.
SETTING THE TABLE FOR 2009
On the last trading day of 2008, I made some changes to position the portfolio closer to the following themes:
- more commodity exposure in general,
- eventual inflation,
- shortage-based rises in commodity prices (especially grains and energy), and
- higher overall portfolio internal volatility.
I like commodities in general because they more truly reflect economic supply and demand than companies higher up the food chain. There also is generally no managenent or credit risk (ETFs) to blind-side you at the individual securities level. Another advantage is that commodities are easier to follow than a basket of diverse stocks – the main markets are constantly discussed in the media, particularly in Canada, and it’s fairly easy to pick up useful tidbits of information to help fill in the blanks in assessing these markets.
It may not happen right away, but I believe the massive stimulus by governments around the world will create crises of confidence in currencies down the road, with the US dollar being vulnerable once the general fear level abates. The US dollar is the most liquid world currency, and one of the two primary choices of refuge for flight capital (the other being gold) – at least for now. There is a chance we could stay in a prolonged deflationary period first with America and Europe also experiencing Japan-like “lost decades”, so the inflation theme needs to be offset somewhat by deflation protection (e.g. the short side for commodities and equities) just in case.
The Curious Case of Cocoa. In a dismal year where almost all commodities were down hugely (all but 20% of the CRB index gain of 250% since 2002 has now been wiped out), cocoa gained 37%. Why? – because of supply disruptions and associated shortages, particularly in the main growing area of the Ivory Coast. Some of our major commodities are subject to the same shortage risks. Who can forget the panic wheat hoarding of early 2008? With unclear and volatile environmental and political landscapes going forward, we could easily experience both crop shortages as well as energy shortages. The peak oil issue has not gone away; in fact is has likely been exacerbated by the current shortage of capital to develop the high-cost non-conventional sources (e.g. oil sands and gas shales) that need to come onstream to replace depleting fields.
High volatility clearly benefited REAP in 2008 – it was instrumental in overcoming several timing and weighting errors on my part. Despite my concerns about their intrinsic price erosion (if you were to buy and hold), my favourite trading instruments are 2x leveraged ETFs, particularly commodity ETFs. I expect choppier markets with periodic short and sharp spikes in 2009, and REAP functions best through chop rather than long sweeping trends. Markets that traditionally have a choppy profile are gold, silver, grains/soybeans, and natural gas (except for recently, but I expect gas to revert to its “normal” behaviour this year). Trading both long and short positions through these types of choppy markets should produce superior compounding results, and the opposite correlations will dampen overall portfolio volatility and keeps things stable.
Here are the specific adjustments made on the afternoon of December 31, 2008 to set the table for the above themes:
| POSITIONING TRADES | ||||||||
| # | Trade | Qty | Stock | Symbol | Price | Grp | ||
| Sold | 100% | Zweig Fund | ZF | @ | $2.86 | 1 | ||
| Sold | 100% | Intel Corp | INTC | @ | $14.85 | 1 | ||
| Bought | 100% | HBP DJIA Ag Bear+ ETF | HAD | @ | $14.85 | 1 | ||
| Bought | 100% | HBP SP500 Bear+ ETF | HSD | @ | $29.42 | 1 | ||
| Sold | 100% | iSh Australia ETF | EWA | @ | $14.01 | 2 | ||
| Sold | 100% | Forest Laboratories | FRX | @ | $25.30 | 2 | ||
| Bought | 100% | ProSh UlSht Bond ETF | TBT | @ | $37.70 | 2 | ||
| Bought | 100% | ProSh Ultra Silver ETF | AGQ | @ | $31.30 | 2 | ||
| Bought | 100% | HBP DJIA Ag Bull+ ETF | FRX | @ | $25.30 | 2 | ||
| Sold | 100% | Precision Drilling Trust | PD.UN | @ | $10.60 | 3 | ||
| Sold | 100% | Cree Inc | CREE | @ | $15.94 | 3 | ||
| Bought | 100% | HBP N Gas Bear+ ETF | HND | @ | $15.94 | 3 | ||
| Bought | 100% | ProSh Ultra Cr Oil ETF | UCO | @ | $14.33 | 3 | ||
| Sold | 31% | IGM Financial | IGM | @ | $34.98 | 4 | ||
| Bought | 100% | ProSh UlSht Silver ETF | ZSL | @ | $17.70 | 4 | ||
| REAP methodology detailed in the blogroll under “My Portfolio” | ||||||||
| Qty % are amount by which shares counts are decreased/increased | ||||||||
Let me explain.
NEW SILVER ETFS
ProShares had just introduced a long (AGQ) and short (ZSL) 2x leveraged pair for silver. I think silver will trade similarly to gold, and has typically traded in choppy fashion, even when trending. This plays to the commodity, inflation, and volatility themes.
SHORT 20+ YEAR MATURITY TREASURIES
Everyone stampeded into treasuries as a safe haven in the second half of 2008. Treasuries are essentially the last bubble market. It may not happen overnight, but I think this is a solid entry point to play the reversal and unwinding of low-yielding treasuries.
LONG AND SHORT AGS
I miscalculated and sold down a large position in HAU back in November, although it was rolled into less volatile, high-yielding ag investment trust which is now starting to recover. So the purchase is to top up again. HAD was in the portfolio before, and it is re-introduced to play the general volatility of ags, though I believe over the longer run ags will continue to rise in value. If the liquidity remains poor I may switch to the new US-traded ProShares instruments.
SHORT NATURAL GAS
HND was also in the portfolio, and was just naturally sold out as gas declined in the second half of 2008. Although gas is at low levels here, it can be pretty spikey and choppy, and the short has been re-established to play that chop. The initial quantity is very small – I’d rather be getting short from higher levels, as I think gas will rally soon.
SHORT EQUITIES
Although I covered the last of the short equity ETFs near the lows in December, I have re-instated one (HSD) to have some contra exposure for when equities pull back again. If the market goes higher, I plan to re-introduce additional short equity ETFs. I think the economic damage has been too great for the markets to simply shrug it all off and start another bull market right away. There will be rallies, but a roaring bull? – not yet. Of particular concern is continued mutual fund redemptions as homeowners with reduced or eliminated home equity turn to other sources for their living expenses. The mutual fund industry asset base built up to where it is over two decades – who knows where it is going to stop unwinding? (The housing market will have a lot to do with that.)
In commodities I also thought about adding PTM (platinum) and COW (livestock) ETFs, but these are not leveraged and would not be as effective for REAP’s purposes as the 2X ETFs. If I’m going to go unleveraged, then I’d rather have some yield to compensate for the reduced volatility. You can however do something like ace trader Jeff Watson’s gold/platinum spread trade by say, buying 2 lots of PTM against 1 lot of GLL (ProShares 2x leveraged short gold ETF).
I sacrificed FRX, ZF, INTC, EWA, CREE and PD.UN principally for increased volatility, and this does drop the portfolio yield down from 4.8% or so to 3.4%. But the re-allocation compounding should far more than offset the reduced yield. The commodities are also currently positioned long vs short at a 2:1 ratio, reflecting the current relatively low prices.
Here’s an excellent resource for finding long/short commodity ETFs, and the new batting line-up for 2009.
| PORTFOLIO SUMMARY | 31-Dec-08 | ||||
| (in $C, adjusted for $US exchange rates) | |||||
| PORTFOLIO | S&P500 | S&P500 | SP500 $C | REAP | vs S&P |
| Tot Retrn | |||||
| Reference Date | Start | Last | % | % | Var. |
| Inception MAR 07 | 1406.2 | 903.3 | -27.9% | -26.8% | 1.1% |
| Re-start OCT 07 | 1526.7 | 903.3 | -19.7% | -14.5% | 5.2% |
| 2008 Year to Date | 1468.4 | 903.3 | -17.4% | -5.0% | 12.4% |
| Discretionary Trading P&L (included in above results) | -5.5% | ||||
| Canadian dollar | Last | Inceptn | Var. | Restart | Var. |
| 0.8182 | 0.8547 | 4.3% | 1.0069 | 18.7% | |
| Dividend Yield (current) | 3.40% | ||||
| Intrinsic leverage (from 2x ETFs) | x | 1.37 | |||
| Currency Mix | 100.0% | ||||
| Canadian Investments/Cash | 48.8% | ||||
| US Investments | 43.0% | ||||
| Other (country ETFs) | 8.2% | ||||
| Market Bias | Net Long | 65.3% | |||
| Cash | 1.2% | ||||
| Short | 16.7% | ||||
| Long | 82.0% | ||||
| Theme Mix | 100.0% | ||||
| Commodity ETFs | 21.9% | ||||
| Short Commodity ETFs | 11.1% | ||||
| Short Equity ETFs | 2.2% | ||||
| Short Bond ETFs | 3.4% | ||||
| Energy | 10.0% | ||||
| Agriculture | 8.2% | ||||
| Alt Energy/Infrastructure | 13.0% | ||||
| Financials | 14.7% | ||||
| Health Care | 0.0% | ||||
| Technology | 6.3% | ||||
| Transportation | 2.2% | ||||
| Restaurants | 0.0% | ||||
| Country ETF | 5.7% | ||||
| Cash | 1.2% | ||||
| Portfolio Notes | |||||
| Inception date is when I started tracking portfolio performance in | |||||
| this blog. I track it to reflect total performance after initial mistakes | |||||
| and discretionary trading losses. A more accurate representation | |||||
| of REAP’s “pure” performance is as of 10 Oct 07, when I | |||||
| re-established it after selling out the portfolio twice due to | |||||
| sub-prime systemic concerns. | |||||
| *** S&P Comparison is total return to reflect dividend re-investment | |||||
| REAP GROUPS | Canadian Securities | U.S. Securities | |||
| Stock | Sym | Last | Gain % | Weight | Yld |
| Group #1 | |||||
| Global Agri-Bus Trust | ABG.UN | $3.49 | -13.40% | 3.9% | 12.41% |
| HBP DJIA-Ag Bear+ ETF | HAD | $21.10 | -0.97% | 2.2% | 0.00% |
| HBP CrOil Bull+ ETF | HOU | $2.42 | -45.45% | 5.9% | 0.00% |
| HBP SP500 Bear+ ETF | HSD | $29.46 | -0.84% | 2.2% | 0.00% |
| Husky Energy | HSE | $30.87 | 12.09% | 3.4% | 7.26% |
| Sun Hydraulics | SNHY | $18.84 | 37.79% | 1.9% | 2.63% |
| PrSh Ultra Financ’l | UYG | $6.03 | 4.32% | 3.2% | 6.86% |
| Group #2 | |||||
| Arc Energy Trust | AET.UN | $20.10 | 21.30% | 6.6% | 10.86% |
| HBP DJIA Ag Bull+ ETF | HAU | $23.50 | 2.47% | 2.6% | 0.00% |
| HBP GoldSh Bear+ ETF | HGD | $2.13 | -46.02% | 5.5% | 0.00% |
| ProSh Ultra Silver ETF | AGQ | $31.50 | -0.26% | 2.5% | 0.00% |
| Gen & Wyom | GWR | $30.50 | 11.58% | 2.2% | 0.00% |
| Nvidia | NVDA | $8.07 | -6.66% | 1.1% | 0.00% |
| ProSh USht Bonds ETF | TBT | $37.73 | -0.51% | 3.4% | 1.74% |
| Group #3 | |||||
| HBP Gold Bull+ ETF | HBU | $16.34 | 21.00% | 1.6% | 0.00% |
| HBP N Gas Bear+ ETF | HND | $32.61 | -1.36% | 1.2% | 0.00% |
| Nthld Pwr Inc Fund | NPI.UN | $11.60 | 4.79% | 5.8% | 10.12% |
| Potash Corp Sask | POT | $89.54 | -6.37% | 4.3% | 0.42% |
| CME Group | CME | $208.11 | -13.33% | 6.2% | 8.33% |
| Formfactor | FORM | $14.60 | 6.39% | 2.4% | 0.00% |
| ProSh Ult Cr Oil ETF | UCO | $13.69 | -6.73% | 2.5% | 0.00% |
| Group #4 | |||||
| HBP GoldSh Bull+ ETF | HGU | $13.23 | 85.65% | 1.1% | 0.00% |
| HBP NGas Bull+ ETF | HNU | $4.89 | -46.25% | 5.8% | 0.00% |
| IGM Financial | IGM | $35.45 | 9.68% | 5.3% | 6.34% |
| FTSE/Xinhua China ETF | FXI | $29.09 | -4.82% | 5.7% | 3.64% |
| Nokia | NOK | $15.60 | -7.08% | 2.8% | 4.64% |
| Claym Gl Solar ETF | TAN | $8.77 | 3.82% | 5.2% | 0.00% |
| ProSh UlSht Silver ETF | ZSL | $17.51 | -1.54% | 2.2% | 0.00% |
| Nortel Networks | NT | $0.32 | -78.59% | 0.1% | 0.00% |
All the best to you all in what looks to be set up as another turbulent year.
Cheers,
Allocator,
a.k.a George Parkanyi
gparkanyi@hotmail.com
Copyright 2009 – all rights reserved
