A Portfolio Update and Some Thoughts on the Market

Click here to view the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc.

THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: +2.5% YTD (including dividends)
• DJIA: -8.8%
• Nasdaq: -6.4%
• S&P 500: -8.6%
• DJ WIlshire 5000: -8.3%
• Russell 2000 (smallcap): -11.2%

For the first time since I started this website, my posted portfolio shows higher returns than my actual portfolio. This is due to the equal-weight calculations I use for the website; in my actual portfolio, certain positions are more heavily weighted than others are. My actual port is down less than 1%, and I may consolidate some of the multiple positions for next month’s update.

In either case, the outperformance of gold and gold miners accounted for the higher returns (anticipated in the October and November commentaries). Of course, these returns can quickly become a mirage, especially in the crazy, volatile world of precious metals. As such, I’m considering reducing some of my less appealing positions in this sector.

A summary of portfolio activity last month:

• Two covered calls in Intel (INTC) and Applied Materials (AMAT) expired, out-of-the-money (OTM), so I promptly opened new covered calls - INTC April 09 $15 strikes and AMAT July 09 $9 strikes. Both companies released dire forecasts for 2009 but Intel is so dominant in its space, I’m comfortable riding out the cycle if I’m not bought out on the call. More on Applied Materials below:
• Note the AMAT calls were in-the-money (ITM) when opened, which reflects my intention to unload the position while collecting a small premium on the option. AMAT was a “ready-fire-aim” position. I spent the better part of a week researching the company and realized I still lacked the knowledge base to form any educated opinions on the industry or the company’s position in it, thus time to sell. Though there’s every chance AMAT will close below $9 by expiration date, the $1.60 premium is equivalent to hedging any drop, down to about $8.
• I sold Nam Tai Electronics (NTE). I discussed the reasoning in a previous post. On a tactical note, I probably would have sold an ITM call at $5, similar to the AMAT call above, if I could do it over.
• The Yamana Gold (AUY) $10 and $7.50 put options were assigned to me in January. The stock promptly moved toward $8 by the end of the month and I took the opportunity to write a few April 09 $9 calls and a big slug of Jan 10 $17.50 calls. The Jan 2010 calls are the equivalent of locking in a 6% yield on the current stock price or getting a 3% yield at the strike price, which is more than double today’s prices. In both cases, I’ll be collecting the 1% dividend as well. It looks like a win/win situation to me.

Readers will notice that I opened a position, which is redacted on the spreadsheet. I will be moving toward a more selective disclosure, especially as I venture into more illiquid markets and for other reasons to be announced later. Rest assured, any redacted position, will NEVER BE PUBLICLY DISCUSSED ON MY SITE. To compensate for this, I will be implementing a new feature: bi-weekly stock screens. Expect the first one next weekend.

Enough with the past, prospects for good market returns seem murky at present. Many market watchers were anticipating an Obama rally, which you probably missed if you blinked, as it was pretty limp. The punditry appear to be split between those who think markets have discounted the worst and others who feel the worst is yet to come. Unfortunately, most of the latter camp is the folks who foresaw the current crisis we’re in (Nouriel Roubini, Marc Faber, Mish Shedlock, to name a few).

However, as this recent WSJ article on Peter Schiff [subscription required] illustrates, correctly predicting the macro outlook doesn’t necessarily lead to making the right moves to preserve and compound capital. So take any market predictions in stride and I’ll leave readers with a few points to consider:

• Analysts keep mentioning TIPS as an attractive play against inflation. I’m not sure I concur. If investors are anticipating inflation, TIPS are an imperfect vehicle to make that bet, as one of the likely scenarios leading to such an outcome would be U.S. dollar debasement. For me, the attraction of TIPS comes from the deflation protection with inflation kicker but I’ve not yet opened a position due to concerns on currency and interest rate risk. In any case, the breakeven point has improved.
• Everyone’s supposedly a contrarian, but it seems as if analysts en masse are shying away from debt-laden companies and emerging markets. Perhaps these may be fertile areas to examine.
• Some strong franchises are selling at fairly cheap levels. Are companies like Intel never going to make another profit? Over the long term, identifying these types of bargains may be profitable.
• To expound further on my “Blogging the Bears” posts on the 1921 and 1929-32 bear markets, I direct readers to the curious case of Martin Armstrong. His brief Wiki page does little justice to just how bizarre his tale is, so try this New York Times article instead and realize that the deeper you dig in, the more surreal the story becomes. In any case, the main point here is not his plight, but a book he wrote some years back called “The Greatest Bull Market in History,” which is a tome on the bull market of the 1920s leading into the Great Crash (this book is available free online). Besides an obvious admiration for Jesse Livermore, Armstrong delivers an interesting insight that the house of cards didn’t come crashing down until the global center of capital (the U.S.) stopped supporting other countries struggling with war debt and economic troubles. The U.S. discontinued its support due to having its own issues at home and redirected its capital domestically. Could we face a similar situation today, with China playing the role the U.S. did back then?

Disclosure: Author holds a long position in AMAT, INTC and AUY; is short AMAT July 2009 $9 calls, AUY April 2009 $9 calls, INTC July 2009 $15 calls,and AUY Jan 2010 $17.50 calls and holds no position in NTE.

Comments

[PeteK:]

Seems everybody likes AUY.
No doubt it is a great company.

Feb 04 01:31 AM