Market Pawn's Nowhere to Hide Blog - June 2012
Market Pawn's Total Holdings by Weight and YTD Performance
Short Term Investment Grade Bond Funds: 49%
Intermediate Term Investment Grade Bond Funds: 25%
Cash: 19%
U.S. Equities (60% REIT): 7%
Year-to-Date Performance: 1.61%
This Blog: I'm a business owner and amateur investor. My blog is to record over time my positions in the market and to explain them. My portfolio described above includes all my liquid assets.
What I Did in the Quarter: In the quarter just closed I did the following:
Rotated most of my cash into short-term bond holdings.
Eliminated all exposure to long term bonds.
Increased my exposure to equities, primarily through additional purchase of a mortgage REIT.
The explanation and results for the above are:
Since short-term bonds are as close to cash as you can get without being in actual cash, this move was just a conservative admission that I should get a little more yield on my cash.
Exiting long term bonds proved to be a mistake. I was persuaded by the argument that these bonds would continue to weaken as the economy strengthened and as we got closer to the end of Operation Twist. The actual upward move in the long end (just after I exited) was breathtaking and unexpected. I think the prices in the long end earlier in this quarter are not returning now for a long time, and it was a missed opportunity not to stay in and buy more.
I like mortgage REITs for their high yield, but I distrust them for their high amount of leverage. I read the prospectus for AGNC this quarter, but I have to admit that reading such material doesn't protect one from the operational flexibility that these funds can employ, especially as regards to issuing new equity and changing their leverage ratio. In the end I decided to gradually average more money into this space by purchasing shares just after the X date and by spreading my risk over several securities. I now own two: NLY and AGNC.
Trading: In the current quarter I put on a couple of trades, mostly out of boredom. I shorted the S & P 500 at about 1400 and closed the short seven days later. I made money but lacked the conviction to make even more. Then I put on a trade that was long U.S. and short Japan. It was a small position, and I closed it fairly quickly when it was obvious that the near term dynamics were against me. I've ended almost all my short-term trading because my schedule precludes me from spending much time actually setting up such trades or watching the market during trading hours. I'm more convinced than ever that short-term trading is a great way to lose money.
H2: With the economy continuing to slow and with the government still to wrangle with the Fiscal Cliff, it is very hard to be bullish equities for the second half of the year. I'm looking to again short the S & P 500, this time hopefully with more conviction. Europe is clearly headed for a strategy of buying more time with greater fiscal integration. In my opinion a fiscal integration that imposes German austerity on Spain and Italy is not going to work very well in the long run. It will put a lid on the bond market for a while, so it's possible that they will push a financial crisis off the table through the rest of this year.
I do believe that equity traders will bid the markets higher from here, as the Twist extension and the recent euro agreement will embolden those with a near term outlook. Friday was one of the biggest short capitulations we've seen in a while, as all the downward pressure came out of commodities. For me the play is to let the rally run its course over the next few weeks. Hopefully, the long bond will come off a little, and I will allocate some money back into the long end. I would also be happy to take a longer term and larger short on the S & P at around 1400 where I think the downside risk would be about 5% and the upside potential about 11%.
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