Portfolio Update - Summer 2015

It’s been a while since OM gave a portfolio update, but after much promising, here it finally is…

International/Country – 34.6% 
The International/Country book is made up of 2 main exposures; Europe and Argentina.
- Europe (~19%): About 3/4 of Our Man’s European exposure is split between Spain and Italy, with the balance in Greece.  This reflects the long-term cheapness of Spain and Italy (on a CAPE-basis) coupled with the stronger technicals and higher probability that these countries are through the worst of their problems.  Greece appears exceptionally cheap, though this may prove superficial given the scale of the economic depression that the country has been through since the Financial Crisis.

- Argentina (~12.5% spread across 5 names):
The catalyst for the Argentinean positions is the upcoming Presidential election in Q4, and the positive news is that both of the primary candidates appear to understand the need for change, to improve the economy and to settle with the bond holdouts (giving Argentina access to global bond markets).  The big questions surround the timing and the ability of the candidates to execute.
The worries about Scioli center on whether he is too close to the existing regime, something that his VP choice (an ally of the President) only fueled.  However, he has the broad support of the Peronists and thus is likely to be able to push changes through, though this will be in a more gradual manner as he builds consensus.  As such, there remains the risk of an economic issue/crisis before change is implemented and can have an effect.
Macri is the bolder ‘change’ choice, as he is likely to attempt to try to do things much more quickly.  The questions surrounding him are whether, after the initial honeymoon period, he’ll be able to push things through (given his status as an outsider) or will he be bogged down fighting the opposition.

- GVAL: Is a very long-term holding; given this OM wanted to wait a full cycle before making any decisions on it, thus if was sized very small.  So far the performance has been disappointing, though the performance was (and still is) expected to be characterized by periods of large under/over performance.

Technical book – 34.1% 
As mentioned when it was implemented, the Technical book has a longer-term bias and changes are not expected to be made to it on a regular basis.  Thus unsurprisingly this year has shown no changes, especially with the market being in a ‘dead zone’ between 2040 and 2135 for the the last few months.  It’s broadly OM’s expectation that this is a long consolidation that’s likely to break the upper limit and start a strong move lasting into 2016.  So far that hasn’t happened, but despite some internal weakness in the market (advances/declines, and ever decreasing breadth, coupled with the reaction to companies missing/making numbers), it would likely take a move comfortably sub-2000 for the Technical book’s sell signals to be triggered.  (Editor’s Note:  And this is why you don’t leave a semi-written blog post waiting to be finished for a month or two.  The market closed on Friday at 1971, right around the level where the Technical book’s initial sell signals are triggered)

Equity Book – 22.5%
At this point there are 4 names in the book:
- RDY and TTM are both Indian stocks though there is no great theme to these investments.  There has also been no great change to either story; the generics business continues to grow strongly (RDY) and Land Rover/Jaguar have started to roll out new models and the rationalization of the manufacturing underway (TTM).

- VIPS and JD are both Chinese Internet retail/consumer plays.  China’s development has come at an interesting time, coinciding with the technological jumps that come with the Internet, meaning that that the country’s retail model could be very different to those of the already developed world as it moves more directly/aggressively to the internet (and mobile) rather than brick-and-mortar stores.  This wouldn’t be the first time we’ve seen a developing country skipping a step as it modernizes; most obviously with India moving straight to mobile telephony rather than putting fixed telephone lines down across the country.
As with (seemingly) all Chinese companies, there is speculation as to whether these companies are ‘real’ and though OM has never been to China, he has sources who’ve met both companies, seen their sites, etc and is thus confident that both companies exist and have real businesses.   
VIPS is comfortably the larger of the two positions, owing to the fact that (despite being an ‘Internet’ company) it’s profitable & generates cash – while some are disappointed by its recent growth, OM sees not competing aggressively for bad business to increase revenues (at the expense of margins, profits, etc) as a sign of good long-term management.

- Currencies (21.9%) & China Thesis (11%) 
Our Man has stated a number of times on this blog that he’s a dollar bull.  It’s his highest conviction belief that we’re in a dollar bull market, a true secular bull market in the dollar, which is something we’ve not seen for decades.  While it’s not ignored OM doesn’t really think it’s fully realized that the Federal Reserve hasn’t raised rates in over a decade, and the US Dollar hasn’t been in a true secular bull market for almost 20 years.  While the dollar’s recent rally has been noted by the markets, it barely compares to historical secular bull markets such as the 90% rally in the 1980s and the 50% rise in the 1990s!  Furthermore, with a more globalized world now, the impact of the rising dollar is likely to be larger than people expect – instead of Poles with loans in Swiss Frances, it’s going to be global corporates that have borrowed in US Dollars (especially in those countries, *ahem* China, where a pegged currency has led to the rapidly crumbling illusion of no currency risk).  As for China, the slowdown has clearly impacted commodity prices (a number of which are at, or threatening, their 2008/2009 lows) and it’s spilled over into the currencies of the commodity countries.  The China book’s Short Australian Dollar position has been great and OM expects it to be volatile but very profitable for a while.

- Precious Metals – 9.3% 
While OM’s medium-term thesis here - that Precious Metals are going to have a strong bounce (the kind that would have the would-be gold bugs believing again) - may prove to be correct he took the position too early, much too early.  OM would have been better off waiting for that final leg down, rather than getting into the positions.

After Half-Term Ponderings

After a flat first half, there’s not a vast amount to analyze with regards to the portfolio’s performance.  As such, this year’s half-term ponderings will focus on some (half-formed?) thoughts that have been germinating in my mind. 

- More QE – everywhere?

While the summer has largely been very quiet, the one thing that stands out is the increased likelihood of more quantitative easing or stimulus across the globe.  We’ve had the continual hints of QE3 from various Fed doves, and the market remembers Bernanke’s 2010 words at Jackson Hole that signaled QE2 while it waits for him to speak at the same venue on Friday (my guess is he’ll talk the market up, but we won’t see QE3 enacted till December’s Fed meeting).  More surprising was ECB President Mario Draghi’s July promise to “do whatever it takes” and claims that this action “will be enough”.  This being Europe, it goes without saying that “whatever it takes” depends on what country you’re from and the political dance matters as much as the promises; we wait to see what the reality of Draghi’s promise is and whether it’s enough.  Finally, there’s China where the data continues to come in weak, which has led to hopes of another 2009-style round of investment spending and stimulus.

Frankly, the fact we’re now discussing yet another round of QE should be sign to the Fed that they’re pushing on a string and that the previous rounds have failed at stimulating any sustainable growth.  However, I’m sure they feel the need to do something and the world of the counter-factual (“imagine how much worse it would be without QE1/2/Operation Twist/etc”) that they inhabit no doubt provides reason enough to try more unorthodox policy in the hope something works.   It’s no surprise that I’m skeptical about there being any medium-term benefits (despite the long-term costs).  However, with global QE/stimulus seemingly coming and the portfolio not particularly well positioned for it, Our Man’s added a little Gold as a 6-12month ‘trade’. 

- Has the Fed succeeded, at least on one psychological level, by turning everything into a yield asset?

While there’s much debate over the whether QE1/2/Lite, Operation Twist, et al have succeeded in generating any sustainable economic growth, they have succeeded in getting investors to focus on yields.  This is evident across markets, from the obvious places such performance of Investment Grade bonds (LQD: +9% YTD) and High Yield (JNK: +7.5%) to the keen focus on dividend yield stocks and on potential rental yields in the housing market.  By persuading investors to reach for yield, and kindling their animal spirits the Fed’s moves can be seen, so far, as a success by helping to drive a range of asset prices higher and endowing people with the wealth effect.

The problem, of course, is that by encouraging investors to “reach for yield” the Fed is also trying to persuade them to focus on return on capital rather than return of capital, and thus take more risk.  What do I mean by this?  Let’s take the simple examples: much has been written about how “cheap” stocks are, either due to their earnings yield (inverse of P/E) or their dividend yield.  As these yields compare very favourably to the low yield on a 10-year Treasury, the argument goes that one should own stocks.  After all, a 10-year Treasury yields a mere 1.6%, why wouldn’t you want to own the S&P 500, which has a 2.1% Dividend Yield, instead.  The answer of course lies in the risk you’re taking to earn those yields, or more simply – bond math matters.  In bond-world, a major risk metric is duration which simply tells you the weighted average of the time that the cash-flows from an asset are received.  For a 10-year Treasury bond this figure is between 7-8years, for the S&P based on the dividend yield it is 30-40years, hence in the world of bond-math you’re taking 4-5x the risk to own the S&P.  Suddenly, that extra 50bps/year of extra yield doesn’t quite look as attractive… 

- Earnings: But what about the margins?

Our Man has long been surprised at the resilience of corporate profit margins, which have hovered around historic highs for the l2mos and whose strong bounce-back from 2008/9 has driven Earnings-growth and been an important contributor to the rally in stocks.  Interestingly, we’re now starting to see Earnings-growth falter for the first time post-2008, with YOY Earnings growth turning negative in Q2-2012. 

This fall has also started to impact analyst projections for the upcoming quarters, which have steadily fallen throughout the year. 

Given the falling Earnings, and with margins at historic highs, it means that the market is relying on either multiple expansion or the quick reversion of this trend to help it go higher.  That should sound a note of caution to investors.

- Ideas: what’s Our Man looking at?

As is traditional a little note/insight, albeit brief this time, into some of the new things that Our Man is pondering and spending his free time looking at.

a). Europe:  There are signs, like this Global Shiller/CAPE analysis by Mebane Faber, that Europe is approaching the boundary being potentially very cheap.  While a number of European countries certainly look cheap comparative to other OECD nations, Our Man is keen on looking at them versus their own history before declaring them absolutely cheap and looking to invest.  Given Our Man is limited to US-listed positions, any future positions will largely be ETFs or potentially some ADRs.

b). Possible Puts/Shorts:  Generally, Our Man can only short using puts and predominantly has to use ETFs to get his exposure.  That said, I’m looking at few things that might be interesting.  The fall into two main buckets; (i) Stocks which have benefited as investors chased yield and may offer opportunity if the dividend isn’t as secure as it seems on the surface (areas of interest include REITs and some Consumer Staples/Telecoms), (ii) stocks where the drivers of growth are misunderstood or where the forward-looking expectations are particularly unrealistic (the two names, in particular, that have drawn Our Man’s interest are Lulu Lemon and Tesla, although Apple is, or rather one-day could be, potentially particularly fascinating)

Portfolio Update: Baling Out and Going (Almost) All In

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

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)

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)

Portfolio Update

You may have noticed, over the last few of days that Gold fell back into Our Man's stop loss range. Now given that Our Man is a fairly simple kind of chap and is unable to short-term trade his positions (given the investing constraints imposed upon him, not to mention the commission involved!), he's a big fan of having a Stop Loss range rather than a specific Stop Loss point. After all, how do you pick that specific point, without it being somewhat arbitrary?

A range also makes more sense to Our Man as it can help balance the two conflicting emotions; a desire to be patient with positions and to give them an opportunity to work, and the ex-post need* to be disciplined in managing risk. Thus by having a range Our Man is able to encapsulate a number of things into his decision such as key support levels (be they moving average related or just psychological round numbers like $1,100) and normal intra-day volatility.

Anyways, in this instance…Gold fell through $1,100 (a psychological round number) and the moving averages (support levels, in the $1,080-$1,090 range), touching and intraday an intra-day low of $1,074. Thus discipline trumps patience and Our Man exited just over half the Gold position at the equivalent of $1,085. The Gold position now represents 8.8% NAV, with the Cash position increasing to 29.5% NAV.

*Note that by "ex-post..." Our Man means the need to be disciplined in managing risk, after the decision to invest has been made. The ex-ante discipline in managing risk should (obviously) be done before making the investment and Our Man's consideration of risk is an important factor in both making the investment AND how the investment is sized.

Mid-Month Update: Waiting for Godot…

Our Man, being of a more laconic nature, has never been accused of being “communicative” but he had hoped to stumble upon such a talent upon starting this blog. Sadly old habits die hard, especially when aided by distractions of birthday and holiday season. Nonetheless, after an impressively dismal run of performance to start December there is surely no better time for update!

So far, December has proved to be a microcosm of the scenario that Our Man fears most; a drifting market. It means, that in the absence of good news, the portfolio quietly bleeds a small amount as Our Man’ negative bets (through puts) quietly burn their theta (time decay), which his equity holdings barely offset this as they drift sideways. As such, the book’s performance is buffeted by the sparring forces of his (overly?) popular position in GLD (Gold) and his (overly?) unpopular position at the long-end of the Treasury curve (TLT). The two positions have combined fairly evenly for almost the entirety of the month-to-date losses and as the numbers below show, death by a thousand cuts never looks pretty…

Our Man’s Current Thoughts:

- TLT: Despite being the largest position in the book, the Treasuries position remains a comfortable one that Our Man would consider adding to in the future. The position reflects the underlying belief that we’re in a deleveraging cycle, as evidenced by the FED’s Commercial/Industrial and Consumer lending data, which will likely prove deflationary despite the FED’s attempts. Additionally, the position would also benefit from any flight to safety away from risky assets (in particular equities).

- GLD: As mentioned when the Gold position was cut-back, it is now a far more popular position than when it was originally put on. As such, Gold has also generated an array of articles from market commentators which run the gamut from “bubble” to “fair value of $6,000+”. Our Man’s thought process remains unchanged; Gold continues to be held firstly as a hedge against bad governance (by the Fed/Treasury), and secondly as a shorter-term momentum/trend play. In November, Our Man noted that he intended to place the equivalent of a rolling stop under 50-67% of the position once gold reached $1,250. While Gold never quite got there, it has retreated to the level where Our Man exited his first slug of his position and currently sits just above its 50-day & 65-day moving averages. Should it break these levels (c$1,080) then Our Man will be exiting at least 50% of the existing position.

On a more general basis, December has shown many of the potential risks that this portfolio could suffer from in 2010:

- How sideways markets will likely lead to small and steady theta burn that goes uncompensated by the equity positions
- How uncertainty over US government debt levels, increased supply of long-term bonds, and a lack of short-medium term clarity on inflation/deflationary trend, and no catalyst for a flight to safety will likely cause bond prices to drift.
- That whether or not Gold is in a bubble, its ride from here is likely to be more volatile…especially as the US-Dollar shows signs of strengthening.

Portfolio Update

This is an unexpected update and due to a sore neck that Our Man claims is from looking at the soaring markets, it shall be a brief one. Somewhat to OM’s surprise, Mrs. OM has decided that he should be in charge of a more substantial part of their LNW and as such has suggested he take over the rest of their assets in the market. Thankfully, such generosity of spirit does not come with a ban on the words such as Japan, bubble, Minsky, credit contraction, deflation and Treasuries that Our Man has a tendency to throw around, and so unfortunately you will not be spared his ludicrous ideas.

As with all things in life, while the move almost doubles the size of the portfolio it also comes with some downside; in this case, it’s that these assets while predominantly in cash also contain a number of securities, some of which cannot be sold at the current time (due to the constraints that Our Man operates under). However, this is but a minor detail and the assets are expected to be co-mingled and the portfolio reshaped to reflect Our Man’s views immediately.

The timing also allows Our Man to use the moment to introduce some of the new ideas that he’s been considering. The most notable of these is by adding some medium-term high quality bond exposure to the portfolio, by adding some risk exposure to the book but by limiting the directionality of the portfolio by adding a substantial exposure to medium-term downside equity protection (through puts).

It goes without saying that the performance and exposures will include these assets, the moment they are co-mingled within the portfolio. As noted, the incoming assets are primarily in cash but also include the following:

- 1 TIPS Bond

As someone who prattles on about deflation, it’s unsurprising that OM will sell it immediately.

- 2 Intermediate Term Bond funds

Our Man expects to sell one (which holds 40% in pass through mortgage securities!), and substantially increase the size of the other Fund (VBIIX), which holds both Treasuries and Corporate bonds and (ironically) was amongst the list of potential bond funds that OM had been looking at.

- 4 Equity positions

These are positions that OM expects to be restricted from adding/removing from the portfolio (or in 1 case the commission would make it pointless to do so). While none of these names fall into the ideas that OM was considering investing, and add directionality to the book, they also make up a relatively small part of the book (OM estimates <4% style="">

- L THRX (OM doesn’t believe that it will be restricted)

However, it is a position that Our Man knows reasonably well, having done a stock pitch on the name just under a year ago while he was a loafing student, and having encouraged Mrs. OM to purchase it when she was considering adding exposure. Ironically, the stock trades today at almost the exact price that Mrs. OM entered the name (read what you will into that, about OM’s stock-picking ability!) and Our Man is secretly quite pleased to be inheriting this name. The sizing is a little large (6.5% of total assets, estimated), but OM is comfortable with the downside given the heavy equity put-hedge that he intends to apply.

Other portfolio moves that will be made, concurrently:

- TLT

So far Our Man’s exposure to long-end Treasuries has been through a specific bond; with the need to add to the Treasuries position in order to take long-end Treasuries back up towards 40% of the book, TLT will be added to the portfolio.

- Put Options (SPY and Financial Firm/ETF)

Our Man is largely constrained in expressing his negative views on things except via options (especially since he has no understanding why people with time horizon >1week would invest in Short/Ultrashort ETFs, and have the magic of simple mathematics working against them)

During December, we’ll look a little more closely at what Our Man suspects and fears could happen in 2010. Suffice to say, that it’s not likely the most bullish of views and this is reflected by a heavy put hedge on the portfolio. Our Man intends to buy Dec-10 options on the SPY, with a couple of different strikes (one close to at the money, one out of the money) and to do so now (rather than later/in the New Year) as he’s somewhat more skeptical of a strong run into year-end (potentially in the face of weakening data) than most.

In addition, there will also be a longer-dated option on a Financial Institution/ETF reflecting the belief that the “Credit Crisis” is in hibernation rather than over, and spread to prime mortgages, Option-ARM recasts (rather than resets) and CRE weakness will raise further issues for financial firms in 2010.

The premium is likely to be 2-3% of the total assets.

- GLD

The Gold position has proved the hardest to decide what to do with; while Our Man would like to add to it (to retain its % of NAV in the book), it seems like it will be somewhat impractical to do so. This a function of the gold price (now $1,170-ish), OM’s desire to run a ‘mental’ stop under the 50%+ of the existing position once it goes through the $1,200-$1,250 barrier, and given the constraints imposed (OM would not be able to trade in it again for at least 1-month). If the last issue wasn’t applicable, Our Man would double the position and continue with his original plan, but given its presence (and the pace at which Gold is moving!) OM is currently leaning (very frustratedly) to forsaking on adding to the GLD position and instead running that mental stop underneath a far smaller part of the resultant position.

Portfolio Update

Just before the close today, after some pondering Our Man decided closed out 1/3 of the GLD position in the portfolio account, though GLD remains a sizable portion of the portfolio (see below).

But why so?
OM continues to lean towards a deflationary view of the world, and thinks that GLD offers a decent hedge against any and all of bad Fed governance, a weak currency and an EM-style ’sudden-stop’ and as such GLD remains a valuable part of the portfolio (especially given it is anchored around Long-end Treasuries).

However, there are a number of other things to consider, which reflect Our Man’s way of thinking. Conceptually-speaking Our Man doesn’t view his GLD position as 1 position, but rather mentally splits the holding to reflect 3 time horizons (though even this is a simplification, as he tries to view it in 2 dimensions, based on both time horizon and price). Thus he broadly viewed the GLD position as 25-33% short-term (c1-4mos), 33-67% medium-term (c4-12mos) and 10-15% long-term (12mos+). As such, today’s reduction represents the elimination of the original short-term position. When we began this portfolio in early September, gold was trading beneath its March-high but was threatening to break through these highs; hence Our Man thought it was a reasonable opportunity to take a short-term position.

Why sell now?
Firstly, price…gold did indeed breakthrough its March highs, and has continued to climb leading to a tidy profit on the short-term piece. Secondly, it’s a far more popular trade now (Our Man remembers when “activism” started to get viewed as a strategy, rather than as a tool for achieving an objective) and that brings inherent risks with it. Furthermore, Our Man wonders…if everyone believes that Gold is a good hedge against (inflation/bad FED governance/etc) does that mean it’s more likely to fail to behave as one? (He’s certain there’s a smart name for that type of thing, but can’t remember it) or more simply put, is Gold more likely to behave as a good hedge when it’s not widely held and subject to the investment whims, decisions and liabilities of the many holders? Finally, and relatedly, Our Man doesn’t believe in religion (never has, and despite Mrs. OM’s best efforts probably never will) and when he hears many rail with such certainty against fiat currencies and their weaknesses, even though Gold itself’s value is largely dependent on people’s belief in its value rather than its economic value, he cannot help but smile a little skeptically.

What about the rest of the GLD position?
Well, Our Man still believes that Gold has further to run…and would be looking to put in the equivalent of a rolling stop behind the 50-75% of the remaining position, should Gold run through $1,250. Should it fall back, through the March highs, he’s also likely to close out that portion of the holding.

However, things are never so simple and one-dimensional and Our Man also considers the portfolio context. Currently, with just a L TLT/20yr+ Treasury position that is simple, but Our Man has also been investigating adding some new positions to the portfolio both on the Long-side and the short-side (through puts). Should he do so that would impact the amount of market-related risk he would be willing to accept (either negatively, or positively, depending on the other positions)

Portfolio Positioning (cob 11/18/09):
L GLD 37.44%
L 20yr+ Treasuries 39.93%
Cash 22.64%

Disclosure: Long Gold and TLT/Individual 20yr+ Treasuries

Portfolio Thoughts

Frankly, Our Man is somewhat surprised by the slide over recent days having expected to hear a number of companies talk about how 2010 (or 2011!) is going to be the best year…ever! However, slide the market has, and thankfully OM’s portfolio has largely managed to resist the urge to join in.

So firstly, it’s important to note, that if the recent weakness is just a head-fake or a buy on the dips opportunity for others, then OM is comfortable with his book.

However, today the market has started to reach the technical levels that Our Man had jotted down as interesting in the…”this might not just be another opportunity for (the ubiquitous) them to buy on the dips” kinda way. While he’s relatively comfortable with the portfolio and not planning on doing anything, yet, Our Man has begun pondering the following:

- L GLD: Is it time to trim the GLD from its oversized position?
The position was oversized as OM felt that as the trade became more popular Gold would break through its March highs (turning the resistance to support) and possibly head up towards $1,200. With Gold now back around the level of those March highs, Our Man is watching carefully to see if they hold. Should gold be unable to hold it, OM will likely reluctantly part with some of his loot.

- L TLT: Is it time to roll some of the TLT position into SPY puts?
Our Man had circled the 1060, 1050 and 1020 levels on the S&P Index as his numbers to watch, after taking it as a positive sign that his simplistic technical analysis and Elliot Wave Theory seemed to settle on similar numbers for the first time. 1060 as a level at which to start pondering, 1050 as one to see whether there were any buyers on these dips and 1020 as a sign that there weren’t enough of those buyers.

Our Man’s view of market structure is pretty simplistic, as there are only 3 investors Momentum guys, Fundamental guys and Others (Who? Well our man looks at them as the wild cards…a mixture of I-need-to-keep-my-job people and retail investors).
- Momentum guys have been buyers on the way up, Fundamental guys have been holders on the way up, and Others have been neutral to net buyers on the way up.
The market has now fallen 5% from peak -- will people call it a dip and still be buyers (like every pullback in this rally)?
Or will the plethora of negative data give a pause as people wait to see what happens (hello, to OM's boss)? If it does give a pause, does that mean Fundamental guys start/continue to bail (they know they're beyond fair value, and were likely running winners) and do Others (especially those that lost a ton last year, made a good chunk this year and can see year-end redemption so close at hand) join them getting out to protect themselves? If so, given retail has shown little interest in playing this rally and there's no natural buyers -- does that cause momentum guys to want to move from L to S? Especially if the move downwards stretches from 5-8% and the peak drifts further into the past?

Thus, if the market eases through 1050, is that the time to find some puts…with the intent of adding more if it ever goes through 1020? Or should he stick with his flight to quality play? Or is there a more creative way to use his mix of TLT, GLD and SPY put assets to profit from a falling market?