Gregor Weekly Macro Note: Sunday 03 January 2010

• Gregor Macdonald
• January 3rd, 2010

The GregorWeekly model portfolio was initiated the last week of August in 2009, with $100,000 USD notional. My stated goal at that time was to achieve positive absolute returns, while assigning a lesser role to individual equities. In addition, I neither wanted to trade too actively or waste time taking out a series of insurance positions either by going short or having to babysit an options portfolio. Essentially, I wanted to run a post-crisis portfolio. (or at least my conception of such). One without leverage, and simpler in style.

The model portfolio ends the calendar year up 6.687%, since inception 4 months ago. That’s too short a timeframe to “annualize” of course, so I’ll refrain. The lowest cash levels were seen briefly in early November, which prompted me to start letting go of positions in Agriculture, Brazil, Oil and Gas, and Gold Mining. I was bullish on equities coming out of late Summer, but only in a cynical way from the standpoint of reflation. I used the time instead to build the positions in Gold, Silver, and Canadian and Australian dollars. Those positions form the core of the portfolio today. Though Oil and Gas, which I reduced in November, has been strong of late and that sector weighting has risen.

Speaking of oil and gas, it’s been enjoyable for me to abandon my usual overfocus on oil in this portfolio, in order to concentrate on the mayhem triggered by the bursting of the credit bubble. This accounts of course for the “money” orientation as the precious metals and the currencies account for nearly 60% of the positions. And yes, the USD cash balance–that too is very much a position in our age of debasement. That said, as my subscribers know, I am less bullish on pan-reflation now as we head into 2010, and actually somewhat positive on Asian energy demand. The looming force for destablization of course resides with the government debt markets.

The portfolio is positioned as follows: 32.69% Gold via 325 shares of GLD, the SPDR Gold Shares ETF at an average price of 103.34 a share. | 10.17% Canadian Oil and Gas via 100 shares of ECA, Encana, as traded on the NYSE at an average price of 30.88 per share, 100 shares of CVE, Cenovus as traded on the NYSE at an average price of 26.83 per shares,  and 300 shares of ENY, the Claymore Canadian Energy Income Index ETF at an average price of 14.93 per share.| 9.30% Silver via 600 shares of SLV, the Barclays iShares Silver Trust ETF at an average price of 16.91 per share. | 9.15% Gold Mining shares via 100 shares of GDX, the Market Vectors Gold Miners ETF at an average price of 44.81 per share and 200 shares of GDXJ, the Market Vectors Junior Gold Miners ETF at an average price of 25.66 per share.  | 8.89% Canadian Dollar via 100 shares of FXC, the Rydex Currency Shares Canadian Dollar ETF at an average price of 92.90 per share. | 8.44% Australian Dollar via 100 shares of  FXA, the Rydex Currency Shares Australian Dollar ETF at an average price of 86.68 a share. |  4.73% Short 20+ Year US Treasuries via 100 shares of  TBF, the Proshares Short 20+ Year Treasury ETF at an average price of 49.80 a share. |  3.39% Coal Mining shares via 100 shares of KOL, the Market Vectors Coal ETF on at an average price of 36.62.  |  The cash level is remains at 13.22% via 14,100.41 in USDollars.

Two of the newer positions in the portfolio may have great promise in 2010. The short position on long-dated USTreasuries is my bet that the gargantuan supply of US paper does not mesh well with economic recovery in the developing world. Moreover, I have started to wonder that the dollar flood unleashed by the FED over the past year takes only the sting out of deflationary forces in the OECD, but potentially unleashes inflation in the developing world. The other position with promise is coal. This too is related to developing world recovery. It is also a play on my own thesis that coal is the downmarket energy source for a world getting poorer, not richer. If coal and treasuries head further in their respective directions, I will add more to those positions.

Three pieces of crowd sentiment surprised me in 2009. First, the same consensus that viewed 50 dollar oil in Q4 of 2004 as ridiculously overvalued during a growing global economy now regards 70 dollar oil in the midst of a depression as moderate. Second, I don’t know why being very negative on the OECD economic outlook necessitated that one take the view that reflation was impossible. Finally, in one of the worst years for government bonds in many years US Treasuries were still discussed as safe investments. Imagine, for example, that you not only were congealed into a deflationist view last Winter, but that you concluded that long dated Gilts and Treasuries were the way to play it? The highs and lows in price of the UK perpetual War Bond from the FT’s daily price sheet makes for good reading in this regard.

Sovereign debt in the developed world vs coal demand in the developing world. If you’d like to get a sense of how I see 2010 unfolding, that framing sums it up. Gold and Silver are less central this year, though I think they will hit new highs earlier–into the end of Q2, rather than the Fall. Oil meanwhile suddenly looks ornery. This may sound folksy but whenever oil is at 80, getting to 100 can unfold pretty easily over just 10 trading sessions. The US economy is in no shape to weather higher interest rates or even 80 dollar oil let alone 100 dollar oil. And yet, oil’s surprising contra-seasonal strength in December is either an artifact of a trailing 12 month financial crisis in which many distortions were let loose upon the world–or–oil is about to surprise on the upside here in Q1.

One aspect of oil inventories, which I touch upon here in my post announcement to the Gregor.us Annual, is that here in the States the media concentrates only on US inventories. While Cushing, Oklahoma can indeed influence price on a very short time frame it’s total OECD inventories that have more price influence over 6-12 month timeframes. And in my opinion OECD oil inventories have peaked for our current depression cycle. This suggests that developed nations may have to contend with not only upward pressure on interest rates, but an oil price that starts to damage fragile confidence.

-Gregor

Today’s post is free. Happy New Year.

More from Gregor Weekly

• Gregor Weekly Macro Note: Saturday 05 December 2009
• Oil Update: Gregor Weekly Macro Note
• Gregor Weekly Macro Note: Saturday 03 October 2009
• Gregor Weekly Macro Note: Sunday 27 December 2009
• Loss of Purchasing Power: Gregor Weekly Macro Note

From the Stocktwits Network

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• Summers Has No Doubts (Aiki 14 Market Sense)
• January 2010  (StockTwitsFX)

Tickers: CVE, ECA, ENY, FXA, FXC, GDX, GDXJ, GLD, KOL, SLV, TBF