Baling Out
THRX: The eagle-eyed amongst you will have noticed that it fell through Our Man's mental "stop loss" for the portion viewed as tactical. Despite some delays in getting the requisite approvals, Our Man sold just over 50% of the position. The owl-eyed amongst you, will notice that Our Man disposed of some of the strategic piece of the position too. This is a result of Our Man's increased bearishness, with the market (S&P) falling through a number of key technical levels in the recent week or so. The hope is that by under sizing the position now, Our Man will (at some point in the undetermined future) for taking the ‘opportunity cost’ risk and have both the available firepower and mental clarity to be able to top up his strategic position at a significantly more attractive price.
GLD: Our Man's Long position in Gold has long been the one that has been causing him the most intellectual discomfort. Today, the skeptic in him finally won out and the entire Gold position was closed. While Our Man is certainly sympathetic to the bullish arguments on Gold (in particular it's hedge against bad governance by the US Govt/Fed/Treasury, and as protection against a emerging-market type 'sudden stop' occurring in the US Dollar), the two primary bearish thoughts in his mind won out. Firstly, while the Fed/Treasury/US Govt have done little to show they can be trusted to not debase the dollar, currencies are a relative value instrument and the dollar is (in the short-medium term) the least worst of the major liquid currencies (the Euro, Yen and Sterling all have far more immediate risks in terms of budget deficits, bailouts, etc). Over the past 12months, based on Kitco's calculation, about 1/2 of Gold's return came as a result of weakening in the USD and about half from increased buying or 'fundamentals'. While this was important to Our Man's thinking, the second more philosophical point was of greater importance. Leaving aside those bulls that seem to believe that Gold will go up whatever the circumstance, over the last 6-12months there has been a general groundswell of opinion that Gold is a "flight to quality" safe haven. As this clamour has grown, Our Man has steadily become more skeptical of it -- can an instrument that's both viewed as a "flight to quality" (i.e. uber-low risk) safe haven AND bought by people as such PRIOR to the flight to quality, actually be a flight to quality instrument?? After much pondering, Our Man has decided the answer's probably not...that being out of favour, prior to the flight to quality, is probably a prerequisite for the instrument to actually behave like a safe haven during the flight to quality scenario.
Going (Almost) All In
HSTRX: Our Man added (or at least has tried to; he’s still waiting for the transaction to take place) a new position to the portfolio, in the Hussman Strategic Total Return Fund, though its theme is broadly consistent (a majority in Treasuries, though the ability to buy equities too) with Our Man's outlook. Given the constraints on Our Man (along with his lack of substantial fixed income experience and access to bonds), outsourcing the ability to choose between bonds seems sensible. Our Man has been fortunate enough to read Dr. Hussman's weekly market comments & thoughts over the last 5-years or so; while not always in total agreement with Dr. Hussman (such as currently on the probability of inflation), Our Man always finds him thought provoking and would heartily recommend his commentary.
With these changes to the portfolio, the tilt has become noticeably bearish with the majority of assets (combining the direct and indirect exposures) held in Treasuries, continuing to reflect Our Man's view both that they will be a flight to quality instrument and that (while lending remains constrained) the inflation prospects are much more limited than the market appreciates. Coupled with this the fund has a net Short position in equities (expressed through puts on the S&P and GS), which will only expand further should markets decline by 10-15%. While the use of puts constrains the capital loss in the equity positions (to c200bips), it should be expected that the portfolio will suffer from a return to risk-seeking behaviour in the markets.
Why Almost?
Our Man has a few other put positions he's pondering about, most notably in Mining & Australia (see upcoming China series) as well as potentially in REITS (especially Hotel REITs). However, he'd have to both find appropriate instruments and see a far more serious technical breakdown in the markets before considering putting these positions on.
Portfolio (as of cob 2/5)
56.98% Long Bonds
THRX: The eagle-eyed amongst you will have noticed that it fell through Our Man's mental "stop loss" for the portion viewed as tactical. Despite some delays in getting the requisite approvals, Our Man sold just over 50% of the position. The owl-eyed amongst you, will notice that Our Man disposed of some of the strategic piece of the position too. This is a result of Our Man's increased bearishness, with the market (S&P) falling through a number of key technical levels in the recent week or so. The hope is that by under sizing the position now, Our Man will (at some point in the undetermined future) for taking the ‘opportunity cost’ risk and have both the available firepower and mental clarity to be able to top up his strategic position at a significantly more attractive price.
GLD: Our Man's Long position in Gold has long been the one that has been causing him the most intellectual discomfort. Today, the skeptic in him finally won out and the entire Gold position was closed. While Our Man is certainly sympathetic to the bullish arguments on Gold (in particular it's hedge against bad governance by the US Govt/Fed/Treasury, and as protection against a emerging-market type 'sudden stop' occurring in the US Dollar), the two primary bearish thoughts in his mind won out. Firstly, while the Fed/Treasury/US Govt have done little to show they can be trusted to not debase the dollar, currencies are a relative value instrument and the dollar is (in the short-medium term) the least worst of the major liquid currencies (the Euro, Yen and Sterling all have far more immediate risks in terms of budget deficits, bailouts, etc). Over the past 12months, based on Kitco's calculation, about 1/2 of Gold's return came as a result of weakening in the USD and about half from increased buying or 'fundamentals'. While this was important to Our Man's thinking, the second more philosophical point was of greater importance. Leaving aside those bulls that seem to believe that Gold will go up whatever the circumstance, over the last 6-12months there has been a general groundswell of opinion that Gold is a "flight to quality" safe haven. As this clamour has grown, Our Man has steadily become more skeptical of it -- can an instrument that's both viewed as a "flight to quality" (i.e. uber-low risk) safe haven AND bought by people as such PRIOR to the flight to quality, actually be a flight to quality instrument?? After much pondering, Our Man has decided the answer's probably not...that being out of favour, prior to the flight to quality, is probably a prerequisite for the instrument to actually behave like a safe haven during the flight to quality scenario.
Going (Almost) All In
HSTRX: Our Man added (or at least has tried to; he’s still waiting for the transaction to take place) a new position to the portfolio, in the Hussman Strategic Total Return Fund, though its theme is broadly consistent (a majority in Treasuries, though the ability to buy equities too) with Our Man's outlook. Given the constraints on Our Man (along with his lack of substantial fixed income experience and access to bonds), outsourcing the ability to choose between bonds seems sensible. Our Man has been fortunate enough to read Dr. Hussman's weekly market comments & thoughts over the last 5-years or so; while not always in total agreement with Dr. Hussman (such as currently on the probability of inflation), Our Man always finds him thought provoking and would heartily recommend his commentary.
With these changes to the portfolio, the tilt has become noticeably bearish with the majority of assets (combining the direct and indirect exposures) held in Treasuries, continuing to reflect Our Man's view both that they will be a flight to quality instrument and that (while lending remains constrained) the inflation prospects are much more limited than the market appreciates. Coupled with this the fund has a net Short position in equities (expressed through puts on the S&P and GS), which will only expand further should markets decline by 10-15%. While the use of puts constrains the capital loss in the equity positions (to c200bips), it should be expected that the portfolio will suffer from a return to risk-seeking behaviour in the markets.
Why Almost?
Our Man has a few other put positions he's pondering about, most notably in Mining & Australia (see upcoming China series) as well as potentially in REITS (especially Hotel REITs). However, he'd have to both find appropriate instruments and see a far more serious technical breakdown in the markets before considering putting these positions on.
Portfolio (as of cob 2/5)
56.98% Long Bonds
42.46%: L Long-end Treasuries (22.3% in the Aug-29 Bond, and 20.2% in TLT)
14.52%: L Bond-orientated Funds (7.7% in VBIIX and c6.79% in HSTRX, when its completed)
14.52%: L Bond-orientated Funds (7.7% in VBIIX and c6.79% in HSTRX, when its completed)
2.03% Short Equities (on a delta-adjusted basis)
2.33%: L THRX
4.51%: L Restricted Equities
-5.89%: S S&P (via SPY puts, with a Dec-10 expiry and strike prices of 100 and 85; 76bips and 34bips of premium at risk, respectively)
-2.98%: S GS (via a put, with a Dec-10 expiration and a 120 strike; 81bips of premium at risk)
4.51%: L Restricted Equities
-5.89%: S S&P (via SPY puts, with a Dec-10 expiry and strike prices of 100 and 85; 76bips and 34bips of premium at risk, respectively)
-2.98%: S GS (via a put, with a Dec-10 expiration and a 120 strike; 81bips of premium at risk)
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