Fundamental Trading Diary

Fundamental analysis of the capital markets

Holdings

Overview

My holdings represent the belief that foreign economies (particularly Asia) will grow faster than the domestic, US assets will continue to drop in value and are in fact in a bear market rally, and PPI inflation will run high.

Position Breakdown

Position Breakdown

Ordinarily, I would say that if one major economy index did not confirm the other in a bull market, the action was a bear market rally.  What I believe to be happening is the long process of grand decoupling.  This picture is being obscured by monetary inflation.

Monetary inflation does make things more difficult to price, and if the professionals and well informed amateurs do not do a good job of out-performing the broad indices (which we don’t – there are only a handful of people in the world who can claim multi-decade outperformance), this spells an even greater trouble for the financial planning of the common household.

Further aggravating this is the sinking quality of economic reporting by government agencies.  The Federal Reserve removed the M3 (the broadest measure of money) statistic in 2007, and is now involved in a scandle involving billions of dollars in off-balance sheet transactions.  The US government has been consistently revising labour and inflation statistics for decades.  Economist John Williams’s site is an excellent resource to understand this better.

The end result is poorer financial decisions by consumers, governments and businesses made with less overall financial resources using consistently poorer information.

The end result is poorer financial decisions by consumers, governments and businesses made with less overall financial resources using consistently poorer information.

Holdings

Asian Bank Spreads:  The Asian economies have been growing at a much higher pace relative to the West.  Their banks are stronger, better capitalised, and their economies are becoming less regulated — not more encumbered with government intervention.  I started out long 33% SKF (ProShares UltraShort Financial), 22% KB (KB Financial Group), 22% HDB (HDFC Bank) and 22% MTU (Mitsubishi UFJ Financial Group).  Since then, I have done some rebalancing, but the positions have run into needing to be rebalanced once again – especially since I think we are likely ready for some sort of correction.

US Equities: My US equity exposure is limited to three companies:  GS (Goldman Sachs), AEA (Advance America) and DV (DeVry).  Goldman Sachs is the most well connected company on the planet.  Alumni occupy many important government and central bank positions in the world.  Even the most naive interpretation of this has extreme implications.

AEA is a cash advance company which operates in the USA, UK and Canada.  I selected it because of its attractive valuation.  Initially, I took a fairly hard hit on this position, but it’s rewarded me for my patience with a present gain of 39%.  Trading at 7 times earnings, I still believe this to have some room.

DeVry is on of the largest vocational colleges in the United States.  My treatise on investing here was that recessions provided a catalyst for people to ‘upgrade their skills’ and make career changes.  DeVry is one institution primed to take advantage of it, and this was confirmed a few months ago with their highest enrollment rate ever.  It still hasn’t recovered very much ($43.57 from a low of $38.19 from a previous high of $64.69), and I think there will be positive surprises as earnings news comes through for this stock.

Commodities: Marc Faber says that he is 100% certain that the US will experience hyper-inflation, and that buying agricultural commodities will be like investing in the oil sector in 2001 and 2002.  With the monetary base more than doubling in the last year, the only alternative I see is more vicious deflation.  The gold market put much stock in the deflation theme — at the worst of it, it was down -13% from peak in 2008.  It’s a few bucks away from all-time highs now.  Even bonds don’t believe it.  The 10y rate has gone from 2% to 3.8% in less than 6 months.  Government spending in both absolute and relative terms is pushing new records every day.  Any gain and any rally in USD is ultimately temporary.

That isn’t to say that there aren’t valid shorter term reasons for commodities to fall against the dollar.  There is so much oil supply, and so much potential supply in paused production that I doubt we’ll see oil pushing $100 for perhaps years.  Deflation is another reason.  Inflation and deflation is and will simply happen at the same time in different assets.  The cost of food to the consumer hasn’t had a single decrease throughout this recession, yet the average metro home price has fallen -20%.  This is one faucet of the grand decoupling.

This is implemented by long positions in OIL, DBC (Deutche Bank Commodity Index ETF) and DAG (Duetche Bank Agricultural Commodities ETF).

Any gain and any rally in USD is ultimately temporary.

Net Short US Assets: I am short industrials via SIJ, and I am about to make a lot of money on it as GM goes into bankruptcy tomorrow.  Additionally, I am short US housing via SRS.  My belief is that the US housing market hasn’t even corrected to mean, and it has at least 10% farther to go.

The Other Stuff: I am long volatility through the wonderful ETF VXX.  This is a liquid ETF which correlates extremely well with the theoretical index.  I also have positions in Chinese real estate (TAO), and roughly 17% cash.

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June 1, 2009 - Posted by | Uncategorized

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