Model Portfolio Update: First Year Up +12.65%

• Posted by: Gregor Macdonald, September 1st, 2010 at 11:42 am
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The GregorWeekly model portfolio has now completed its first full year, which began September 1, 2009. Against an SP500 that was up +2.81% (not including dividends) in the same period, the model portfolio has recorded a +12.65% gain. The investment mandate, which I described late last Summer, has remained largely the same: to outperform senior equity indices while maintaining a much higher exposure to currencies, bullion, and commodities. The macro outlook employed last year also remains the same: bearish on the economy, but bullish on reflation. The second half of that equation has been downgraded somewhat, however, as the first wave of stimulus dissipated. While the markets one year later are again looking forward to either more QE, or more fiscal stimulus, or both, the failure to meaningfully resolve debt saturation remains a core problem. In the same way that the previous decade saw a declining marginal effect from both tax cuts and FED stimulus, the same phenomenon is at work now in our post-2008 credit-bubble environment.

From one of the first posts at GregorWeekly.com, on August 22, 2009:

Now, admittedly, the process of reflation unfolds over a dynamic–not a static–economic system. So one model I am starting to toy with is the idea that a weaker dollar and the flood of reflation-money could paper over the structural flaws in the US perhaps long enough for a 12 month cyclical recovery. While I’m not ready to adopt the Dow to 100K Zimbabwe model yet on the back of hyperinflation, changes to liquidity in a dynamic system can easily pull assets higher, especially in equities. Again, this has zero to do with earnings. And if not zero, then very little to do with earnings. Massive deflationary forces still roam the US in the form of consumer and mortgage debt and also in commercial real estate.

Over the past year the model portfolio’s core holding has been gold bullion, using GLD, the SPDR Gold Shares ETF. Profits were booked mostly by taking 1-3 month positions in Oil and Gas, Emerging Markets, and Gold Mining Stocks on weakness and then selling these into strength. Asset reflation, led by money printing, should be expected to be a choppy affair while at the same time acting like a longer-term ratchet that debases the purchasing power of the target currency. Since the home of Quantitative Easing remains here, in the US, it should have been expected that a kaleidoscope of assets would try to find a way to head higher, against the USD. And that’s exactly what happened, as oil–in the midst of an industrial depression in the US–rose back to levels in 2009 that were thought unsustainable just five years earlier, during a stronger economy.

The most damaging trade of the past year was the foray into the short US Treasury ETF. I avoided the leverage of TBT, and instead chose the straight version: TBF, the Proshares Short 20+ Year Treasury ETF , to limit damage should the thesis turn out to be wrong. Well, the thesis did indeed turn out wrong and it cost the model portfolio nearly 150 basis points this year. More broadly, the model portfolio largely stayed out of any meaningful trouble by keeping equity exposure at lower levels, and also holding long-term positions in the Canadian and Australian Dollars. In 2010, I also added the Swiss Franc. We are currently positioned as follows:

43.35% Gold via 400 shares of GLD, the SPDR Gold Shares ETF at an average price of 105.82 a share.   | 8.28% Canadian Dollar via 100 shares of FXC, the Rydex Currency Shares Canadian Dollar ETF at an average price of 93.45 per share.    | 7.93% Australian Dollar via 100 shares of  FXA, the Rydex Currency Shares Australian Dollar ETF at an average price of 86.68 a share.   | 5.54% Canadian Oil and Gas via 400 shares of ENY, the Claymore Canadian Energy Income Index ETF at an average price of 16.10 per share.   | 4.34% Swiss Franc via 50 shares of FXF, the Rydex Currency Shares Swiss Franc ETF at an average price of 92.16 per share.   | 3.36% Silver via 200 shares of SLV, the iShares Silver ETF at an average price of 18.71.   | 2.86% Coal Mining  via 100 shares of KOL, the Market Vectors Coal ETF at an average price of 35.94 per share.  | 2.69% Gold Mining shares via  100 shares of GDXJ, the Market Vectors Junior Gold Miners ETF at an average price of 24.99 per share. | 1.87% Australian Equities via 100 shares of EWA, the iShares MSCI Australia Index Fund ETF at an average price of 23.87.  | The cash level remains at 22288.33 US Dollars, and accounts for 19.79%.

In recent weeks exposure to equities was reduced further, and that included previously higher exposure to gold mining stocks via both GDX, the Market Vectors Gold Miners ETF and GDXJ, the Market Vectors Junior Gold Miners ETF. Current equity exposure is hovering around 12% of assets, with a weighting towards Energy in both Canadian Oil and Gas, and Coal. Both of these have performed poorly of late, but my tracking of coal prices suggests that oil and especially coal are not poised for meaningful downside, at this point. And that’s even considering the weaker seasonal period of October/November.

Here is the screenshot of the model portfolio as of the close last night, August 31, 2010:

As subscribers to GregorWeekly.com know, I am finally skeptical towards the effectiveness of more Stimulus, in contrast to last Fall. On both a structural, and also on a behavioral level, I see new stimulus now as something that pours over a more desensitized marketplace, and populace. Balance sheets of US households, from a holistic perspective, have not made much improvement. If we take together lost equity in homes, flat wages, pending cuts in pension benefits, higher food and energy costs, and still damaged retirement accounts, there really is very little prospect for “stimulating” the US consumer. Whether we gave Americans Tax Cuts, or FDR style Work Programs, any extra cash flow would now be devoted to savings. And savings, while not a bad thing at all, will not in the near term create tax revenues for the federal or state governments–nor will they flow into consumption. Again, that’s not a bad thing from a broad perspective. It’s just important to recognize the current juncture.

I’m inclined to take equity exposure towards zero in the weeks ahead, as this pre-election uptick in stimulus chatter pushes the market higher on the back of structural short positions. Yes, I might keep a small exposure to energy but I anticipate staying in the gold sector more concertedly via the method of the past year: keeping core positions in Gold and Silver, while moving in and out of gold mining stocks.

-Gregor

Tickers: ENY, FXA, FXC, FXF, GLD, SLV

MacroTwits Sunday Night Show 29 August 2010

• Posted by: Gregor Macdonald, August 30th, 2010 at 11:55 pm
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Tickers: Bernanke, China, Debt, deflation, depression, GLD

Off Grid: GregorWeekly Macro Note

• Posted by: Gregor Macdonald, August 29th, 2010 at 11:02 pm
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Tickers: ENY, EWA, FXA, FXC, GLD, KOL, SLV, UUP

USD Deterioration: GregorWeekly Model Portfolio Update

• Posted by: Gregor Macdonald, August 27th, 2010 at 7:14 am
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Tickers: FXF, GLD

MacroTwits Sunday Night Show 22 August 2010

• Posted by: Gregor Macdonald, August 25th, 2010 at 11:55 pm
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Market Juncture: 24 August 2010

• Posted by: Gregor Macdonald, August 24th, 2010 at 11:54 pm
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Tickers: GLD, USD, UUP

No Mod Cons: GregorWeekly Macro Note

• Posted by: Gregor Macdonald, August 22nd, 2010 at 7:39 pm
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Tickers: Austerity, EWA, FXF, GLD, UK

Watching the Hook in California Employment

• Posted by: Gregor Macdonald, August 20th, 2010 at 6:55 pm
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Earlier today I sent out a tweet saying that California, liked the rest of the country, looked poised to start making new highs in unemployment. While there are many ways to talk about job losses, and the unemployment rate is the most common, my preferred data point is the actual size of total employment. As readers will understand, unemployment rates, and the various categories of unemployment, can obscure what is happening in the labor market–especially when so many who are still unemployed are no longer counted as such. Moreover, in states like California, it matters to track the total number employed as unemployment rates might actually be helped by outward immigration. Accordingly, I have been using the seasonally adjusted data for the Total Employed in California to paint the fullest picture of the Golden State’s jobs situation. With today’s fresh data release, I have updated my chart. | see: California Employment in Millions 2000 – 2010 (data now through July 2010):

As you can see, the state of California is running at employed labor force levels last seen ten years ago. That in itself is its own subject for discussion. Given the recent data in the US economy, the fresh decline in the US housing market, and the near certainty that US GDP is already on its way back down again, the hook downward you see in today’s updated chart is not likely to be so benign.

-Gregor

Tickers: California, depression, Dip, GDP, Labor

FED Woe: GregorWeekly Model Portfolio Update

• Posted by: Gregor Macdonald, August 19th, 2010 at 10:15 pm
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Tickers: FXA, FXC, GLD, IVN, TBF

Market Juncture: 17 August 2010

• Posted by: Gregor Macdonald, August 17th, 2010 at 11:13 pm
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Tickers: BHP, GDX, GDXJ, KOL, POT, SID, TNE