If you saw the movie Mighty Wind that title will make sense and the question could apply to the rally on Tuesday and the action in the entire commodity complex.Wha' Happened?
First I will reference Tuesday's post which mentioned that Dennis Gartman talked about this on Monday on Fast Money. He looks to be correct so far but his being correct does not make you (or me) any more or less suited to make major short portfolio shifts based on the action on one day.
Let me be clear, his call looks very good right out of the chute but I think I heard him say on Monday that equities might look good, which was correct for Tuesday, but then I think I heard him express caution toward equities yesterday on the same show. That is not a shot at all but it makes the point from Tuesday, when you try to make big changes in reaction to a day or two you must be prepared to make yet more big changes a day or two later. Gartman can do it, I cannot, what about you?
Onto commodities. Is it over? Has the entire theme broken down by the side of the road like an old car driving up a mountain in the summer? You know, 'cause it overheated. If you read enough articles or watch enough stock market television you will probably be able to come up with an explanation that makes sense to you regardless of whether it is correct or not but maybe there is no real reason other than one way trades reverse course eventually regardless of the fundies or anything else.
I have been a believer in commodity exposure since before I started this site (back then there were far fewer choices) but I always repeat by belief in having moderate exposure. My thoughts about my commodity exposure is not that I am going long commodities but that I am adding in a little zig to my stock market zag (to be clear I do have long exposure, I just don't view it as a bet on commodities).
There is plenty of research that compellingly argues for 20%, give or take, in commodities and some readers subscribe to that line of thinking but I have never been comfortable with a number anywhere close to that.
In buying gold I hope I am buying a little something what will go up if there is an external event that crushes the market so in a way the price does not matter. No matter where gold is today or where it was yesterday if there is a terror attack tomorrow I think gold would go up.
Another aspect about small commodity exposure versus large is how levered you are to one theme. If you were 20% yesterday you really need to decide what you think the Wednesday sell off means and whether or not you need to do anything about it. With a 3 or 4 or 5% weighting the consequences for being wrong are much less which makes managing a portfolio much easier.
As this has played out over the last few months I have not sold any GLD, a couple of people have DBA and I sold 1/3 of that in late Feb right around $40 (I think I disclosed that in the comments of a post but am not sure) and I have also disclosed selling some Vale (RIO) at around $35 and then later at $30 (a sale for which I do not find a post for).
The sales were not about trying to make big changes or time anything but one sort of exit strategy is partial sales after a huge run. There is no right or wrong with this, something grows faster than the portfolio there is logic in reducing, something gets too frothy there is logic in reducing (or maybe selling out).
Needless to say I am thrilled about the NCAA tourney starting today. Before I started working from home I used to schedule vacation days to catch the first two days of games.
13 comments:
Dear Roger: You sold your clients' SDS shares on Jan. 22. Since then, SDS shares have gone up a bit and down a bit and are now at about where you sold them. I held mine because I liked the insurance they provide. How do you feel about SDS now?
Thanks for your important and readable blog. It is the best sanest blog around.
Norm
I guess you missed this post from that same week where I disclosed buying it back.
Thanks. I was searching for the symbol and it didn't come up. Sorry.
Norm
I think Gartman is one of those guys who can move markets, especially when he gets a megaphone like CNBC. So, at least in the near term, I think he's bound to be right about commodities. Stocks, I'm not so sure.
I've been long gold for most of the decade. And, it's been a big position. I have noticed several things along the way:
1.) There's a lot of people on TV that have been calling it a "bubble" from $400, $500, $600, $700, $800, $900, and $1,000. Part of this may be because they never saw the tech bubble coming and need redepemtion. Or, maybe so they can say "I told you so" even though they were wrong for 300% of the move.
2.) For three nights in a row I have seen either on the NBC News or local news that people are running as fast as they can to pawn shops to sell their gold and cash in on "high" prices. However, that is not the sign of a bubble. A bubble is when everyone and their brother becomes a gold dealer and people stuff gold in their safe deposit boxes and hoard sugar in their basement. And, CNBC claims "it will never go down." Remember tech stocks? Dentists and lawyers were becoming day traders and students in college becoming VCs. That's a bubble.
3.) There's a lot of forced unwinding of hedge funds. I suspect we'll see numerous blow ups in the news.
In any event, the markets got ahead of themselves. Pullbacks are required to wipe out speculative buyers.
4.) Gold is less than half it's all-time high in real terms.
I e-mailed one of my favorite analysts -- Marc Faber -- who has been totally right on just about everything for the last decade, and in his view Gold won't end until it buys between 1 and 5 shares of the Dow Jones. One man's opinion, FWIW.
He mentioned in a recent interview that the bull market for Taiwenese stocks from 1984 to 1990 went from 500 to 12,500 but that in '87,'88, and '89 you had a 50%, 40%, and 30%correction along the way.
So, in my view if you latch onto a secular bull market (hard assets in today's case) and cannot withstand big pullbacks, you have no business being in those markets in the first place.
Even Jim Rogers was hoping for a USD rally so he could cash out more of his dollar holdings.
Obviously, I am long gold, but I hold other assets too. I'm not losing any sleep. It's been much better owning stocks which are in a HUGE bear market in gold-adjusted terms. Does anyone mention this on Fast Money as they have been bashing gold hundreds of dollars an ounce ago (other than Eric Bolling way back when because he was a big gold bull).
John
Let me see if I can sort some of this out. When the Fed lowers interest rates, the dollar also goes down and then the market follows down. Well, not today, but what about next week etc? Also, Gold and oil, commodities have crashed. They were the leadership. Is that the end of leadership, so now there are none.How much do I have right or wrong?
When a stock or industry or sector that has been strong, what might be considered a normal correction in long term uptrend of say 5 years or so? How much of a gain might be retraced and still be considered an uptrend?
I think John DelVecchio makes some good points that this may be just a pull back in gold, but I think everything is dependent on getting the ted spread corrected.
That said I have chossen to keep the gdx I did not already sell closser to the high because now I am starting to wonder when gold will reach a good buying point.
More importantly while I am also negative on the dollar I have not done that much about it. I thought things were a little over done in the short run. I think taking Jim Rogers advice and using this retracement to sell dollars is the smart move. Now All I need to do is figure out how long it will last :)
seg
I don't have much invested in the price of gold, but I hope this correction of over 10% in just two days will put to rest once and for all the silly notion that gold is a 'safe' asset compared to stocks, bonds, or cash.
In fact, gold is more volatile than almost any other asset available to the average retail investor, and most of the demand for gold is speculative (backed up by enormous margins); stocks and bonds have an underlying earnings stream and asset to back them up. Gold has no earnings or yield and the price of gold is determined almost entirely by speculative fervor. Seen in this light, gold at this point is a more risky investment than tech stocks in 1999, because there is nothing whatsoever underpinning the price of gold.
"...because there is nothing whatsoever underpinning the price of gold."
except when you need to go to the mercantile to get some beans and dynamite.
humor attempt
Gold is speculative, volatile, etc.
But it does have value. If we get a lot of inflation or a severe decline in the dollar it would be an excellent investment.
Nothing is all that safe. Look at dollars compared to euros, swiss francs etc over the last 5 years. The dollar is not safe.
Normally I would have to agree with you equities are the place to be. But not now IMO.
10:03
not disagreeing with you but many would say the dollar has already gone down a lot--not that it can't go more, I'm just saying.
The dollar has gone down a lot and a little to quickly of late, but after this needed correction I think the dollar will continue down even further.
There is a lot of excess debt out there that still needs to be written down. Sorry but I am with jim rogers on this one and look forward to this correction to get my assets out of the dollar.
seg
Roger,
Your post (and some of your comments re Gold) caused some sort of a light to go on in the back of my mind.
Is it fair to say that measures of one's portfolio and its performance need to be a bit more sensitive than "add up the latest marks"? By that I mean, the value TO YOU of having some gold exposure is not really measured by the market's mark on gold.
Similarly, the exposure to commodities.
In fact, (and maybe I'm tripping over the obvious), for a lot of portfolio analysis, the value of the exposure is (in some ways) independent of the current market value. (Even holding a position for no reason other than it damps volatility qualifies - in that case, it may be the covariance, and not the price, that is the relevant measure.)
I guess I'm convincing myself of other ways to look currently at my portfolio's (deteriorated in price terms) value. But up until liquidity is the sole measure, the "bid" marks are in some ways distracting from the assessment of value.
Hope this isn't an exercise in self-delusion, though.
R in NY
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