It's been a while since I posted, but as this is towards the end of the month... I thought I would review some of the trades I've made this month as well as provide some insight going forward.
I started this month down 30% because I got caught up in earnings announcements and decided to play a lot more earnings with a lot more capital than I rationally should have. I did not do my homework and decided to account for that by placing successively larger bets to account for my losses. In short, I began to gamble a lot. Trying to recoup losses when your portfolio was +20% for the year at mid-July really does have the psychological effect of grabbing at any string that presents itself to lift you out of the hole. Little did I know that most of the strings just had me falling further into the hole. Now that I've learned the hard way with little capital, the same reminders will come up in the future when I am investing with larger capital.
This month has been slightly different. I have stopped playing earnings (sans HPQ - which I will discuss in a future post). I decided to do a lot more reading and painting a larger macro picture and investing in broader trends rather than specific companies. As I read, I realized that even a great company in a horrible sector can lead you to bad outcomes. Thus, macro matters first, then back out the sector performance, then finally companies. Top-down approach.
One big bet this month has been the Eurozone. I have been reading significantly and following religiously on the Eurozone crisis. I have read about Merkel and Sarkozy so many times that I do literally see "Sarkozy" when they are mentioned together. That led me to short EWI and EWP at the beginning of the month. The playing out of the dramatics and the implementation of the short-sale ban has led me to take a few profits, but mostly to stay in the position - as it has really great returns, limited downside, and a great risk/reward ratio for the upside. Thanks to these two plays, my portfolio has rocketed back upwards and is in positive territory again.
Another one of the plays I've been in and out of has been gold. Instead of buying paper/physical gold, I have been investing in gold companies. The main position I like to play is the Canadian company, Yamaha Gold (AUY). They are a well managed company that usually does a little better than gold, while dropping a little less on dips (worth exploring compression trade soon).
Gold has performed marvelously over the past couple of months, and through my outlook still has some upside to it, though there might be a near-term correction. Monetary policy by printing and Eurozone worries keeps AUY in my port.
Another precious metal (PM) worth looking into is SLV. For lack of a good company with solid fundamentals and good management, I just hold the ETF. Silver had a sneaky run-up but for the most part has sold off due to possible margin-hikes and "risk-off" sentiment. I am still a holder as I feel market participants are pricing in further easing and blue skies when all the data suggests otherwise.
As for my outlook - I have just summarized it. Correction is imminent, it just depends on when. There have been multiple multiple low-volume days where the market just floats up on short coverings and High-Frequency shops running up the bids. All of last week was relatively light volume days. This week will further be light volume, sans some crazy announcement, until Friday's non-farm-payroll numbers, which IMO aren't going to look pretty. Many Federal Banks have already shown their numbers about a faltering and slowing economy... and how the Q2 GDP report could cause a 2%+ rally in the markets is anybody's guess (Don't tell me Ben's leaving the door open is the cause - QE3 had slowly been priced in during the week off bad numbers on Monday).
Europe is not looking any better. There are lots of liquidity issues going on in banks, and questions about insolvency are still lingering. CDS spreads are very wide and have lowered a little bit, but expect more widening to come. I have become a proponent of using CDS spreads as proxy for stock performance, as I think that bond-holders usually have a better gauge of the company's financials than equity holders. If they are buying insurance to cover their bonds, and the spread is going up... equity holders should be wary. While bondholders still might get back 80 cents on the dollar, equity holders get NOTHING. If CDS spreads continue to widen (which I believe they will due to liquidity constraints and ineffective leadership), look for further negative market reaction. For the limited upside on the Eurozone, it will take a long time for them to get things in order - and that will most likely require a new leadership, as current leadership (Merkel) is not likely to get the support needed for EFSF, and even if she does it's over for her political career. No one cares about the IMF apparently, as Lagarde's harsh words on the current state of affairs in Europe and US led to a world-wide rally in stocks, with greater than 2% gains in European indices.
I will end with BAC. Are they in trouble, or are they not? Apparently new facts appear every day, and I have differing views with people I deem smarter and more knowledgeable in the banking industry. I think that their settlement will ultimately cost more than $8.5b, but as my old-boss pointed out, any new lawsuits or adjustments will result in something that will be stretched out to 3 years and be settled when everyone's forgotten about it. Thus, I have changed my unhedged short position to a straddle position. Any news will move the stock significantly, as the headlines will be significant (like Buffett falling asleep in the tub and deciding that he will invest in BAC after only 24 hours to review the company's books - it takes a full team roughly 3 days to have a good picture of a company, let alone one with so many illiquid and complex assets such as BAC). So far, so good.
