Eight Themes for 2008: How Did They Do?

Well, 2008 has closed, and as it turned out, it was one of the worst years on record for the stock market. Although our politicians and news media would have you believe that no one saw this coming, I could see "the writing on the wall" as early as the summer of 2007. That is why I decided to post about how to make a profit amidst the turmoil that was to come. How did I do? How's nearly tripling your money sound? Okay, enough back patting, let's review...

On December 31st, 2007, I posted my eight themes for 2008. Several were right on the money, several were not. Let's start with what I did not expect to see in 2008.

First and foremost, I did not expect to see commodities melt down like they did. Although anyone who was paying attention could see the global recession on the horizon, I did not go one step further and see the rapid pullback in commodities that would follow. Lesson learned.

The second lesson that I learned was that government intervention is a powerful force. The Federal Reserve, the SEC, and Congress, acting together, have come up with numerous ways to prolong the agony. Many of the themes I expected to see play out early in the year were simply pushed back by the forces that be. The term "kicking the can down the curb" comes to mind.

Finally, I learned that locking yourself into one particular theme for a full twelve months is foolhardy in a global economy that is as fragile and as volatile as we find ourselves in. I would have loved to dump the Long China theme by about March of this year, but had already committed to the theme in December of '07.

With the lessons learned behind us, let's delve into the actual themes to see how we did. Several of these themes involved trading into and out of options at selective times. All of those moves were documented on my blog.

Theme 1: Long China. (-43%). As I stated in my last paragraph, this was a theme that I would have liked to have jumped out of by March '08 when the global recession was becoming apparent.

Theme 2: Long Yen. (+320%). The Yen itself gained about 20% on the US Dollar during 2008. By using options and selective timing, we were able to capitalize on this theme.

Theme 3: Short Canadian Dollar. (-100%). Although I had the theme right (the Canadian Dollar fell about 20% compared to the US Dollar during 2008), I was out of this trade early in the year on an options trade that expired worthless.

Theme 4: Short British Pound. (+1100%). Clearly my best call of the year. If I had gotten all seven other calls wrong, and only scored on this one, the portfolio would still be up over 50% on the year. The British Pound dropped against the US Dollar by 28% during 2008. By using options and timing, we were able to make a killing on this theme.

Theme 5: Long Gold. (-3%). Gold itself was up about 4% on the year. Using an ETF, and a little bit of timing left me with a small loss.

Theme 6: Short REITs. (-57%). By far, the most frustrating theme of them all. By all accounts, real estate has had another dismal year, and commercial real estate is showing signs of cracking as well. The double inverse ETF that I invested in (SRS) has really taken a dive lately. Stay tuned, I'll be keeping this theme alive for 2009.

Theme 7: Long Agricultural Stocks. (-30%). These stocks started off the year strong, but quickly turned sour as the market and commodities sold off. Yet another theme I would have liked to have been out of by about July or August.

Theme 8: Long Volatility. (+381%). This theme really went nowhere until October's market meltdown. Then the VIX really took off, taking my December 30 Call options with them.

Themes in review: Although only 3 of 8 showed in the green, 5 of 8 were correct calls. Using options really enabled us to capitalize on a few of these themes. In summary, we divided $1,000,000 of ficticious funds evenly among these themes. The final value of the Aggressive Trader Portfolio was $2,959,924.06, for a total return of 196% outpacing the S&P 500's decline of 38% by 234%.

Disclosure: None.

Comments

[Greg Pinelli:]

Matt...many of the themes you chose to invest in in 2008 need time to play out..for instance..
1. I like gold in a longer term vehicle like the ETF GLD ...same for the Ag side...DBA and an Ag sector fund..maybe MOO are great longer term plays..Both Gold and Ag are parts of an unstoppable secular wave..one plays on papers inherent weaknesses..the other, literally, on a growing populations hunger.
2. Your currency calls were right on the money...the C$ loss was unfortunate since you had the right scenario! Options for those swing trades makes a lot of sense....

Jan 02 10:46 AM

[dc1:]

It is sooooo easy to be right with FICTICIOUS funds. Why I ask myself do I read posts like this? Hope dies soooooo slowly.

Jan 02 11:56 AM

[NOWHEREMAN:]

dc1: I hope for but prepare against should be your motto.

Pinelli: New Year predictions? Degree in what?

Silver is essential for Drinking water? Scientific data please.

Start the New Year right, stop pontificating.

Jan 02 12:13 PM

[Matt Callow_:]

I made an error regarding Theme 3 that I need to clarify. Although my overall results and theme results did not change, I actually predicted the Canadian Dollar would rise against the US Dollar in 2008. Therefore, I only got four of eight themes right.

Jan 02 05:43 PM

[NOWHEREMAN:]

Matt: thats the dif between being a good author and a great author.

Admitting that you are not perfect.

Jan 03 06:42 AM

[Lynn:]

Matt,
Hats off to you for reviewing your picks, right or wrong. Most of the ideas that you listed were on my list at the beginning of 2008, but I had the luxury of changing my mind. It's hard enough to figure out what assets prices will do in the short-term, but to have to predict what they'll do between January 1 and December 31 is even harder. Congratulations on beating the market.

Jan 03 03:42 PM

[nmelendez:]

And then people ask why their Mutual Funds and stocks are dropping like a rock. At this rate the US will go bankrupt before the Fed stops printing. The Fed printing vs VIX/Contrarian. Long live las Vegas aka the stock market!!!

Jan 04 06:13 PM

[dual cit:]

Matt, You stated "BUY THE LOONIE". You were dead wrong and anybody that covers the loonie could have told you it was a perfect short. It is a proxy for oil and always will beas they have nothing else to export and balance their budget with.

Mar 13 11:35 PM