Another week of noise.  Not terribly surprising going into next week's Fed announcement, but still pretty tedious.  The only thing of any note was NASDAQ outperforming the S&P 500 by about 1% this week, continuing its long trend.  I'm going to make one small portfolio adjustment going into next week:

• Close the long Google (GOOG) position at 613.7, for a gain of $48.29

Even though I'm closing this position, it has the effect of increasing my risk, as the Google position was partially offsetting my short NASDAQ position.  On the other hand, it leaves me more balanced on the overall dollar devaluation issue (I had previously had a slight tilt towards further devaluation).  With the puts on the S&P 500, if the market sells off, I'd be increasingly skewed to the downside, which is what I want.

Current positions:

 

* Puts are on the S&P 500, dated March 2011, struck at 950

Results to date:

Wow, how exciting.  Next week should be much, much more interesting.  Monday and Tuesday will likely be completely dead, followed by an absolute explosion of activity once the Fed announces its QE policy going forward.  The elections may have some consequences down the road for the markets (hopefully they will, if the GOP gets off its ass and does something about all the fraud), but the Fed announcement completely dwarfs them in terms of importance.

My greatest concern going into next week is the NASDAQ outperformance.  While my focus is long term, I still need to account for shorter term trends that move against my thesis.  If, after the announcement on Wednesday, that position is still moving against me, I'll likely close it for now, reexamine that particular trade concept, and reestablish the trade later if I still think the concept is valid.  In any event, portfolio adjustments and rebalancing seem to be a likely event towards the end of next week.

Posted by: Hermit Dave at 02:25 PM | No Comments | Add Comment
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Today was just more noise, but I want to reposition my bank trades.  To that extent, I'm going to close the following trades:

• Short Banks, closed at 45.70, for a gain of $143.38
• Long JPM, closed at 37.58, for a loss of $14.59 
• Long GS, closed at 160.46, for a gain of $119.32

I had been long JP Morgan Chase in the thought that they were the most politically connected of the big commercial banks, but the truth of the fundamentals is that they're just as fucked as all the other commercial banks.  Goldman Sachs is the one bank that's different, and as far as being politically connected, they are the government for all intents and purposes.

My new and reestablished positions:

• $15,000 Short Banks, as measured by the BKX index, marked at 45.70
• $5,000 Short Bank of America, ticker BAC, marked at 11.56
• $10,000 Long Goldman Sachs, ticker GS, marked at 160.46

This leaves me $20,000 short / $10,000 long as before, but with a risk profile I greatly prefer.  BofA is easily in the worst position of the big commercial banks (financially and politically), and if there is to be a 'sacrificial lamb', they'll almost certainly be it.  In the event of a wholesale change to the banking system, I'm still net short.

These changes put my cash balance at $4,436.02.  Results for Week 2 on Friday.

Posted by: Hermit Dave at 11:47 AM | No Comments | Add Comment
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I'm going to stop doing a daily Model Portfolio update, as nobody reads this drivel anyway most days are likely to be short-term noise with very little long-term significance.  I'll update in the event of large-scale movement or if I make a change to the portfolio.  Weekly results will also continue.  Today was a noise kinda day, but generally good for the portfolio as banks got whacked even with the market up a bit.

If I have anything that I feel is worth saying in regard to the markets outside of portfolio performance, I'll do it in a separate post.  As my focus is much longer term than that of most traders, however, it's not likely I'm going to have much to say on day-to-day market crapola.

Meanwhile, read Denninger for constant updates on the mortgage fiasco, read Zero Hedge for your daily dose of market cynicism, gold touting, and conspiracy theories, and most importantly, Move Your Money.

Posted by: Hermit Dave at 12:03 PM | No Comments | Add Comment
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Today was one of those quiet, mildly annoying, short-covering days in the market.  This is perfectly understandable going into the weekend, especially with the G20 song and dance revving up.  As I think my portfolio is well-hedged for anything that might come out of the G20, I see no reason to take off risk (move into cash).  So, no changes to the portfolio at this time, just results for week 1.

This week's results were largely meaningless, even with the whoop-de-do on Tuesday and Wednesday.  Up a bit here, down a bit there, everything well within the parameters of short-term noise.  As net movement was so small, I'm not going to bother posting position-by-position info, just total results for the portfolio and benchmark(s).  One quick note:  due to an error in the spreadsheet I made to track this shit, my closed position proft/loss was slightly off, so I'm taking an adjustment of -17.57 to my cash balance.  The error had no effect on outstanding position PnL, and my cash balance is at $4,187.91.

   

So, stocks mildy up, hard assets down a bit, model portfolio almost dead flat.  If my results remain this boring and pointless for more than a few weeks, I'm gonna shoot myself for all the time I'm spending on this nonsense.

Have a good and risk-free weekend!

Posted by: Hermit Dave at 11:56 AM | No Comments | Add Comment
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Today was a big nothingburger, even with gold down a good bit.  Some random thoughts:

At some point Netflix (NFLX) is going to be a monstrous short.  Now, however, is not likely that time, as the current short interest is huge.  While they're clearly a legitimate business, they've got stiff competition in the on-line delivery space, and they're priced way way above any rational estimates of earnings growth.  One of these days, it's going to be 'look out below', but the stock could go much much higher before that occurs.

Gold looks like crap short-term.  However, while it's tempting to dump the position in the model portfolio, it would be a terrible move.  The model portfolio is for capital preservation, and trying to eliminate Fed risk.  Gold is a core holding of that strategy, so if it goes down, it goes down.  C'est la vie.  Still, if I were running a speculative portfolio, I'd short the living shit out if it short-term.

The more I look at a long SPX, short NASDAQ position, the more I like it.  I expect that to also be a core position of my model portfolio.  The spread between the two has absolutely blown out in the last couple years.  While technology is definitely the growth space, we're not growing.  In fact, NASDAQ encompasses much more discretionary spending than does the broader SPX.  I expect this spread to come in a lot over the coming years.

Tomorrow will be results day for Week 1 of the model portfolio.  Unless we see some really large movement somewhere, it's looking like I could have just kept the full $100,000 fake internet dollars in cash and taken a nap this week.  It would be pretty amusing if I finished the week completely flat.

Posted by: Hermit Dave at 12:14 PM | No Comments | Add Comment
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One theory of trading says that the market will move in such as way as to hurt as many participants as possible.  This is often referred to as the theory of maximum pain. Like most trading theories it works ... except when it doesn't.  But it can be fun to try to figure out a market move that will hurt a lot of traders.

From my perusal of trading sites, it seems that almost all participants are making two dangerous assumptions:  (1) Further QE is a given and it will keep the market levitating; and, (2) The market will not sell off prior to the election.  Even many traders with a long-term bearish outlook are assuming this and are currently long.

It would be fun to make a 'maximum pain' trade and bet on a sharp move downward that occurs prior to the elections.  Short-dated puts would be ideal for this, especially on gold.  A large downward move in risk assets would likely take everything with it, but in the short term gold seems most vulnerable.  It's due for a large correction and a big crack just before the elections would screw a lot of people.

Odds are, the two assumptions above are in fact correct, but they're still dangerous if one is not prepared for them to be wrong.  I'm tempted to put on a small 'maximum pain' trade in my model portfolio, but short-term gambling is not the purpose of that particular exercise.  If the market (especially gold) does tank prior to the election, the wailing and gnashing of teeth coming from various trading sites will be amusing as hell.

Posted by: Hermit Dave at 07:15 PM | No Comments | Add Comment
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The market broadly reversed yesterday's price action, and my rebalanced portfolio behaved beautifully.  The only thing I'm missing is some downside beta and asset crash protection.  To that end, one new position:

• $1,000 Long Mar 2011 S&P 500 Puts, 950 Strike (marked at the CBOE bid/ask midpoint -- 14.35)

With today's rally and associated decline in volatility, it's a great day to be buying long-dated puts, so I'm going to take advantage of it.  All other positions remain the same and I'm left with a $4,205.48 cash reserve, which should be enough to cover any short-term moves against my positions.

Bring it Bernanke!  Let's see whatcha got, punk!

Posted by: Hermit Dave at 12:25 PM | No Comments | Add Comment
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I picked a bad week to start sniffing glue.  Things are all over the freaking map, thanks to the Fed dicking with dollar devaluation.  Almost everything is trading strictly based on various views of whether and how much the Fed will continue to devalue the dollar.  Fundamentals?  Common sense?  Bankrupt companies being forced to tell the truth about their balance sheet and actually go under?  I wish.

One thing about my portfolio is clear -- it's way too concentrated in certain places, so I need to rebalance and diversify.  To that end:

• Closing the short bank position at a mark of 46.03, a loss of $429.07
• Closing the NASDAQ short at a mark of 2,436.95, a gain of $195.86
• Closing the short EUR / long USD position at a mark of 1.3734, a gain of $438.69

This leaves me with my long gold and long S&P 500 positions, and a cash balance of $75,205.48.  I don't want to have a zillion positions, but I need to spread the risk out a bit.  New and re-established positions:

• $20,000 short banks (KBW bank index mark of 46.03)
• $5,000 long Goldman Sachs (Symbol GS, marked at 156.72)
• $5,000 long JP Morgan Chase (Symbol JPM, marked at 37.69)
• $10,000 long oil (Nymex front month mark of $79.52) 
• $15,000 short EUR / long USD (mark of 1.3734)
• $10,000 short NASDAQ (mark of 2,436.95)
• $5,000 long Google (Symbol GOOG, marked at 607.83)

That's much better and I'm left with a cash balance of $5,205.48.  Essentially I've got a bunch of pairs-type trades, in an attempt to capture value between strong and weak parts of the current insanity.  I'm trying to stay relatively neutral in regard to dollar devaluation -- currently I have a slight bias towards further devaluation.  My main focus is, as stated previously, capital preservation (independent of Fed action).  Hopefully I won't need to do major daily rebalancing, but if things keep whipping around 2 to 5 percent a day, it might be inevitable.

Posted by: Hermit Dave at 12:45 PM | Comments (2) | Add Comment
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I ate shit on the bank short today, mostly due to a lousy entry point near the bottom of the recent range.  They bounced back strongly into the middle of the range -- good thing I'm not a day trader.  Everything else was pretty much a wash.

I'm going to add a position in forex:

• $25,000 short EUR / long USD -- current mark of 1.3975

This leaves me with $10,000 cash reserve.  Forex is a continuously traded market, so there is no real end-of-day mark on which to base my trades.  I'm just marking it to where it is right now.

Posted by: Hermit Dave at 04:52 PM | No Comments | Add Comment
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In the previous post, I say that I'm going to benchmark my trading performance to the S&P 500.  In the current environment, this is kind of lame, or at least lazy.

The point of benchmarking is to measure one's performance against a standard, so that one's performance can be evaluated.  If a money manager makes a 10% return in a given year, it might sound great, but if the broad market has gone up 20% at the same time, his performance is actually crap.  He's effectively lost 10% against the mindless strategy of just buying the broad market.

The key to benchmarking is to select a benchmark that is appropriate to one's goals.  If you're a stock-picking money manager who is supposed to be fully invested at all times, then the S&P 500 is an appropriate benchmark.  If your goal is to preserve capital in an uncertain environment, then the S&P 500 is a mediocre benchmark at best.

If the Fed decides to print dollars like mad, then the S&P 500 is a terrible benchmark, because the stock market is bound to go up relative to dollars.  It reality, the stock market hasn't gone up; the value of the dollar has gone down.  If the value of one's stock holdings double, but the prices of consumer goods quadruple, then an investor in stocks is screwed -- not as screwed as a holder of cash, but still screwed.

In today's crazy economic environment, the best benchmark is probably a basket of consumable commodities.  Our goal should be to preserve our purchasing power, which is broadly related to our wealth, which is what we are truly trying to maximize.  Ideally, I should be benchmarking to a consumption-weighted basket of things like oil, corn, wheat, soybeans, copper, etc.  This, however, is a pain in the ass (and I'm a lazy bastard), so I'll just leave it for now.

Posted by: Hermit Dave at 11:17 AM | No Comments | Add Comment
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I can hear you out there, all zero of my readers.  "If you're such an economic whiz, Hermit Dave, why don't you put your fake internet money where your big, obnoxious mouth is?"

OK, even though things are about as uncertain as they can be, and I'd just love to be able to do the financial equivalent of hiding under the bed, I'll bite.  So, I'm going to start 'trading' and tracking a model portfolio, for the amusement of myself and my zero readers.  If I do well, I get to gloat.  If I stink up the joint, nobody will ridicule me, because no one reads my drivel.  Come to think of it, it's kind of a win-win.

A few simple rules:

• My benchmark will be the Standard and Poors 500 Stock Index.  Obviously, I'd like to make money, but in the current environment, capital preservation is the most important thing.  So, if the market is down by 50% and I'm only down 10% I still get to gloat.  
• My thing is macro economics, so don't expect me to pick stocks.  I might use a stock (or more likely a sub-index that represents an industry group) to bet on a larger macro-economic concept, but it's generally safe to assume that I know jack shit about company-specific fundamentals.
• I can go short as well as long, with the exception of options.  I can only buy, not sell, options.
• I don't get to use leverage.  If I'm shorting, it must be for the full notional value of the short.  If I'm going long, I can't use margin.
• To keep me from gaming short-term price volatility, all 'trades' will be done at end-of-day prices.
• I can use index values as my 'investments'.  In the real world, there are equivalents for all these indexes, whether through futures, ETFs, or direct trading of stock baskets.  Using the index value is a convenient shorthand, and has very little effect on real-world returns.  
• Both transaction costs and taxes will be ignored.
• All positions will be marked at the end of each week, and I'll post the current results.  For shorts that have gone against me, I either have to post additional funds (whether from cash reserves or by selling another position) to get back to full notional value, or I have to buy the short back and take the loss.
• I can keep any or all of my money in 'cash'.  Cash earns zero interest but has no direct risk.  
• I start with $100,000 certified fake internet dollars.

That's more than enough rules, I think.  Still, one last thing must be said:  This is not trading advice.  This is a moron jacking off on the internet.  Anyone who tries to use any of this crap in the real world deserves to lose all their money and have to eat out of a dumpster for the rest of their short, miserable lives.

My starting position:

• $10,000 long gold (as measured by the COMEX close) -- current mark of $1,371.10 / oz.
• $25,000 short banks (as measured by the KBW Bank Index) -- current mark of 45.24
• $15,000 short NASDAQ  -- current mark of 2,468.77
• $15,000 long S&P 500 -- current mark of 1,176.19
• $35,000 cash

This is a conservative starting position, as weekend risk is quite high at the moment.  The US Dollar seems oversold right now, so a largish cash position is reasonable, plus just holding cash is less risky than making a foreign exchange trade.  These bets offset to some extent -- what I'm attempting to do is capture value from where they differ.

This should be entertaining, as my ass is swinging in the breeze for all to see.  I hope I don't fuck up too badly.

Posted by: Hermit Dave at 08:54 PM | No Comments | Add Comment
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Best. Financial. Interview. Ever.

(via Zero Hedge)

Posted by: Hermit Dave at 06:03 PM | No Comments | Add Comment
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