Friday, May 13, 2011

The Glitter is Gone

I have been pretty straight forward in my philosophy over these 210 posts. High risk, high reward. Have no misconceptions about the market as an individual trading against the beast. And never forget Taleb's Thanksgiving Turkey.

My last two posts simply recommended buying food and metals. Easy to say now that it was the easy trade, but at the time SLV was trading at $23 and DBA around $25. Those positions have since been closed and I hope that you weren't waiting for a new post from me to give you a stop on SLV. I have been recommending GLD since 2008, and even with gold down $75 from it's all-time high, the trade worked out well. I have discussed my outlook several times recently with my brother who has asked what advantage I have in buying calls on commodities versus other investors. The simple answer is none. The slightly better answer is a belief that fiat money is ruining our economy and that we would pay dearly with commodity based, not wage-based inflation. So to lever that belief, I use options. It turns out silver was the most volatile of that group which enhanced my returns. While oil also rose 3x over the course of QEs 1&2, my advantage was nil as I mistakenly used USO as my tool, not oil futures (which is not an option for most of us). And I guess the bottom line answer then, is my only trading advantage is a willingness to take big risks in this game, which now more than ever seems like a casino.

If you need further proof, look no further than oil recently, which has had 3 trading days with 6% or more volatility, 6%! What about SLV, which tripled in less than 2 years and lost 28% in a week in no small part due to 4 margin requirement raises in a single week. How can anyone feel safe going home on a Friday and watching a position lose 12% in six minutes Sunday night? A commodity position? Think anyone was getting crushed by silver's rapid rise, perhaps Goldman, who saw silver rise 20% after their big note recommending a strong sell on commodities? Ironically, Goldman has dropped nearly 15% in the last few weeks as mounting litigation and perhaps the impending IPO of Glencore weigh on its share price.

The recent rise of the dollar has not only killed commodities, but sunk our market. You'd like to think that increasing value in your paper assets is good, but our leaders know better. As QE2 ends and uncertainty increases surrounding Europe and a willingness to let the U.S. devalue our dollar, there will be more of these triple digit days ahead. Days I have no interest in owning much until either the helicopters load up again or the world faces its debts. BAC under $12 today, Citi down 7% since its split, Open Table trading at 10x the multiple of Google, good luck out there.

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