Calling It Quits on Gold, Platinum - It's Time to Go Financials!

Well, the trend is your friend and the trend I've been seeing is a bubble deflating in some commodities, especially gold and platinum. After continued weekly declines in my 2X Gold ETF (DGP) and the Stillwater Mining (SWC), which derives a substantial portion of revenues from platinum, I decided to throw in the towel. I do believe that we are in a long term trend upward for several commodities - oil, gold, soft and hard, but I think some of them have gone so far so fast, that there's more downside than upside in the short term.

I still hold Suncor Energy (SU), a Canadian tar sands company, and I will likely buy back in on a dip on a 1x basis, but the leveraged 2x funds should really be for trading, not long term investing, given the added pain they can bring on the way down.

A few weeks back, I entered into some synthetic options plays on oil and I started to get nervous as it approached $120 per barrel that I was going to get toasted, but at $112, oil's actually below the price where I started the position ($113), so things are moving in the right direction there.

To capture some gains, I sold a few shares of Google (GOOG) after a nice run-up and my oil play of banking on a downward move has paid off.

Financials continue to perform well. My only regret is that I didn't buy more. The 2X sector ETF, Ultra Financials (UYG), was up another 8% Thursday to previous highs. Alesco Financial (AFN) in the self-directed IRA is holding up as well. Citigroup (C) preferred shares would have been nice, but I didn't make the move in time.

Next up: High Yield Munis. Deal of a lifetime in some of these. Some of the ones I posted on recently have paid off nicely already but I think there's still room to catch the runup, plus the tax free 6% yield to boot. I will likely be buying some in the coming weeks, as that nice stimulus check and tax rebate will be timed just right.

Comments

[potipeuf]

Are you insane? With inflation at 12% buying financials? The rate cut by Bernanke is the most irresponsible reckless move ever made by a central banker. When reality will hit the morons who run the market the dollar willbecome awothless piece of paper, financials will start to go bankrupt one at a time and gold will be higher than $2000.

[User 187376]

You mean I have been reading investment advice from someone who is actually entitle to receive a stimulus check? Kind of like taking advice from a broker who rides the subway to work, don't you think?

[rcwill]

Kinda goes against what Noriel Roubini said in a CNBC interview yesterday that the banks have only written down 200 billion which is the result of the sub-prime mess only. The collateral damage soon to be accounted for will be from the prime, commercial, credit card debt, student loans,auto loans, and defaults in corporate debt which will add up to over 1 trillion in bank write downs. But...what does he know, he only manages a 47 billion investment company. That's gonna take a lot of printing in my estimation.

[peterjackson]

Well, the incidence of subprime problems does seem to have peaked, oil prices seem to have peaked, the euro has surely peaked, and gold and silver prices appear to have peaked. Obviously, the property market peaked some time ago.

I feel that world stock markets and the US Dollar are the 2 obvious 'buys,' in the short term and probably the longer term. Following the principle that we should buy that which is cheap and shun that which is now overpriced, I think we should turn away from precious metala and most commodities,

Peter Jackson

[tomcat16]

Very bad advice... This is exactly what the Fed et al. is hoping people will do so they can stall and - in their mind - prevent the correction that is going to happen from their reckless financial policies. All it's going to take is a major creditor (e.g., China) to say 'enough is enough' and cut us off... and the dollar will plummet, taking financials into the dumper with it.
The Fed has been playing a very dangerous game in trying to manage the devaluing of our currency. It comes down to who do you trust? Our government? LOL... The Fed or the central bankers? (again laughable)... Or commodities that are all becoming scarce?
Personally, I'll take gold.
Reader beware: follow this article's advice at your own peril.

[EverydayFinance]

The results speak for themselves. UYG has more than tripled since my entry on 3/17.

We all know markets over-react and in financials, they have done exactly that. On March 17th, I entered the Financial sector with the UYG 2x Leveraged ETF (everydayfinance.blogsp...) . SA neglected to include some of the links in my initial article from my site which further outlined the rationale and background. Regardless, since 3/17, that stake has returned 35% vs. 10% for the S&P500.

I played the commodities boom for over a year now (granted, missed some initial upside but still enjoyed market-beating performance), captured some gains and still have some exposure to tar sands (SU), copper (PCU) and Australian commodities (IAF). My point was that I'm no longer ultra-heavy and/or leveraged on Gold and Pt.

Regarding stimulus check, many of the experts in the field that make too much for the package are pushing actively managed funds that fail to even meet the performance of the major indices, so I don't see how income level has any bearing on investment ideas/advice. I am not certified in financial planning or investing, which I make clear in my profile/site, but it's not uncommon for me to educate my friends and family that majored in Finance and Economics and/or currently work for major brokerages. (Over-generalizing, but) many generally know what their firm is pushing and aside from that, they don't have much interest in alternative investments and the market in general. I'm sure you'll learn something on the site you didn't already know, whether you agree with it or not.


Have a good weekend; off to go spend some stimulus on vacation!

Dan at EverydayFinance

[Tim Plaehn]

Nice article with specific thoughts on the direction of several sectors. I tend to agree the party is over for precious metals for a while. With so much negative sentiment against financials, the contrarian play makes huge sense.

I am sure all the gold bugs are happy with their gold going from $1000+ to about $860 while financials and homebuilders have gained 30% to 50%. At least they are passionate about losing their money!

[rnrnry]

Dan. I have uyg at 26 or so on 3/17 and under 36 today - not a triple. What did I miss? are you still in it?

[loaddown]

Oh yea, the trend is your friend. What are you watching, a 5 minute chart. Anyone that can ignore all fundamentals and put their money on government subsidized entities needs to read some history.
A quote of a quote from jsmineset.com just yesterday: "One commentator on financial news said another financial institution could be near bankruptcy and that it could possibly occur this weekend. He followed up quickly with the comment that "We are not supposed to say that.""
Get real!
Thanks for your contrarian support.

[barnburner]

I think Dan is talking about his trading portfolio not an investing portfolio so, yes he is looking at "5 minute charts" and apparently making money-isn't that what it's about?

[Xyrus]

The rally in financials are investors speculating a bottom.

It seems that many people are breathing a sigh of (semi-relief) because the sub-prime mess seems to have peaked. But sub-primes were only a part of the problem.

Defaults in everything from credit cards to car loans have been increasing, even with prime rate borrowers. A good portion of homeowners cashed equity for credit and spent it. Now the bills are coming due and people don't have the resources to pay them.

All you ever hear in the news is sub-prime this and sub-prime that. But the real problems are of a much larger scope. It's credit in general causing issues with financials. The extent of the problem won't be known for awhile.

This is a short term rally, one which probably has some basis in the fact that people will be getting those idiotic checks from the government. In a couple of surveys, most said they would use the money to pay down debt. That's good for financials, except for when you consider US consumers owe a trillion dollars to credit cards, and over 3 trillion in total debt (search around on the web, it's absolutely amazing how much credit we tapped). Those checks will hardly make a dent in that.

I think the financial sector is still in for some pain.

~X~

[EverydayFinance]

rnrnry, sorry; tripled the return of the S&P500. I had reiterated the 35% vs 10%, but mangled the first line there.

On trends, I do believe we are in a secular bull market for commodities, which will continue to for several more years. However, for the next couple months, I think financials and some of my other holdings will outperform, so I sold out. I'm not short commodities by an means, simply highlighting where I think my money is best served. I mentioned earlier I do still hold some commodities shares, so I'm not trashing the class by any means. I was just too heavily weighted/leveraged for the near term.

I posted last night on some new moves I'm eyeing; Columbia and China.

[Murph]

Would love to find some of the 6% muni's you mentioned.....assume they are not rated A's or above, since the best I've found in my state ( SC ) are in the 4.5% range. Net/Net: If you know of a source for SC 5.5%+ muni's rated A or better, please point me in the right direction!

[EverydayFinance]

Here was the article. They're holding up pretty well:

everydayfinance.blogsp...

[User 30121]

Two comments: Potipeuf, please re-enter your commentary and hit the enter button about a DOZEN times so readers are sure not to miss it. You are spot on!

Dan Pritch: You are correct that there may be downside to gold in the VERY SHORT TERM, but over the next 6-24 months gold will be in four-digit territory and rising, and oil will be in the 140's. As for buying munis???? Anyone buying bonds better have a scheduled appointment with a SHRINK! Have a blessed day!

[TonyDaltorio]

This article is exactly what is wrong with US financials markets.It seems like 1 week is considered a long-term hold anymore.Your advice would absolutely bankrupt anyone is is investing for more than 60 days.No wonder people overseas are kicking the USA's butt.They think of investing for years,sometimes decades!Not for the next week or two!

[paultaut]

Let me count the ways, The Fed lowers rates and says the System is still under Stress, The Treasury says we are closer to the end...lets count 1+1=0...the Financials are waiting for another shoe to drop...it will be bigger than all the rest put together...

At the end of the first quarter...170 Billion in Level 3 Debt sitting on the Books of Goldman,Lehman,Morgan.... those three...

Level 3? Mark to Fantasy or we don't have a clue as to what they are worth, so we will hide it here and pray.

When this stuff hits the Fan, and it will, the only thing worth holding will be hard assets.

[lblaine]

Such a diversity of opinion makes the market! The only defense for investors is to be very diversified, including holding gold, with the majority of ones stock holdings. A small portion of ones holdings can be used to take on high-risk trades like the ultra-shorts.


The recent six-week uptrend has been largely due to (a) the Fed, (b) money looking for a better return than treasuries, (c) the relatively good earnings from multinationals, and (d) wishful thinking that the dollar has bottomed and a new bull market has begun. The market is overbought and will likely trend down in the next few days. So I bought SKF on Friday.

[EE]

See my reply to Macro Man (Gold A Dynamic Play) Friday I also started a put program on WB & WFC. The financial mess... just starting the 3rd inning I'm afraid but in a rain delay.

[deuxsous]

i've been trading them for 30 years. commodities are different. they don't just go up and up in low volalitilty walkups forever, as stocks often do. they tend to spike up in a matter of months and then consolidate somewhere just under the highs for long enough to establish that higher prices were justified after. but that's too long for today's short term bandits, so they are gone and into the latest spike somewhere else. then when everyone is bored with commodities in 3-15 months, they spike again. the average consolidation period after a spike in this commodity bull market since 2002 has been 4-5 months and we're not quite two months into this one. by the way, look at one or more of the CRB indexes which have most of the US and some London commodities in them. i prefer the CCI version (similar to the old CRB) which GCC tracks. DJP tracks another CRB version. gold alone doesn't cut it.

the commodity bull market has at least another decade to run, and if you're not overleveraged you can just hold and kick back and do nothing. but of course EVERYONE IS overleveraged these days. so we have to have these long consolidations so we can pick them apart......yawwwwwnnnn...

[bearfund]

You do that, dude. I'll be the guy on the other side of your trades. SKF is looking mighty tempting at 92. If we see 86 I'll have to get in. Anyone buying financials after a 15-20% rise is nuts, especially with most of the banks trading well above book value now (which itself is highly dubious). The time to buy financials for a short-term trade was the BSC debacle. Way too late now. Watch the cold, hard reality of dilution, endless writeoffs, and inevitable dividend cuts sink in over the next 3 months. Citigroup raised $4.5b and everyone acted like it was the greatest thing ever. To put that in perspective, that's enough to pay their ridiculous dividend on the outstanding common stock alone for all of 8 months. Of course, if they actually intend to use it as capital, they could gear up 10x on paper yielding 10% and make enough each year on the margin to pay their dividends for 73 days - and we all know that 10% paper is rock-solid; the ratings agencies said so! That strategy has worked so well, after all. Or maybe they think they can raise more capital and keep paying the dividends out of it forever? Hmm, Charles Ponzi tried that once; I forget how it turned out. Bottom line, these companies aren't going to fail, at least not all of them, but they're extremely overvalued today.

I don't blame you for staying out of metals right now, though I think there's money to be made on some short-term long positions in gold (I entered last week at 848). If we see 730 it will be time to start getting big again. But surely you can do better in the meantime than chasing hot money around 6 weeks late.

[PaulaJohnson]

The greatest mistakes are often driven by emotions or tendency to rationalize. For success to be repeatable, strengths must be be built into the process and Fed bailouts do not count. Suncor is splitting this month because it is a healthy and profitable company. Remember why your stimulus check was sent.

[oiley]

I think this author buys stocks 100 shares at a time.

[Healthy]

The author is obviously an amateur.

[EverydayFinance]

Wow, this one's certainly generated a great deal of opinions. I'll try to address a couple:

30121: As you'll see in the article, these are muni closed end ETFs, which actually have pretty diverse holdings. Since the post, they're doing pretty well, with the dividend to boot. I'll likely be buying soon.

Tony - this is no longer the same market of our parents' generation. Buy and Hold was disasterous for me as a new investor, getting crushed on Lucent, GE, internet stocks. You need to actively manage your investments if you're buying stocks individually. I would say that for most investors, index funds are the way to go; for more sophisticated investors, you need to hold a few stocks you can track and stay on top of them. With this post on financials, I'm exploiting a near term overreaction on the downside.

To the last couple posters, not sure how the number of shares you buy is relevant; 100@20 a share is different than 100 shares of Google, but anyway, I've made it clear that I'm not a financial analyst or trader; I'm a guy that's been investing since I was in college and have plenty of mistakes and success to share with readers. Regardless, I have skin in the game. I'd just say to judge me based on my performance and you might be surprised. I was able navigate in and out of the trends last year like Garmin, Crox and China, profiting handsomely from each. This year, I made a few mistakes and publicized them. I think the call at the bottom (day of) the financials is one that deserves some credit, given the pundits, investors and talking heads on tv didn't come around for about another week or two. Now, they're primarily saying it's a good time to buy financials...so maybe it's time to sell soon?

I'll keep you posted.
Dan at EverydayFinance

[fxtrader07]

the bull trade in financials is more or less over. Tom Plaehn actually is stating it: HBs are up50% and banks 30% while PM stocks are down 30-50% . The conlcusion by him and by the author, to NOW go long financials as a CONTRARIAN (Helloo???) trade is therefore, absolutely stunning and, imho totally nuts.
it was a contrarian trade a few weeks and months ago. now it is mainstream - as can be seen from this article and various comments.
good luck buying financials near the top and swapping for them Pm stocks near their bottom.
talk about cyclical investing and herd mentality!

[EverydayFinance]

The past two days have not been pretty. Admittedly, the Financials have moved far, fast. I had sold 1/3 of my UYG position at ~35, but still hold the remaining stake. Given where they've come from (their prior levels) and the eventual cessation of horrendous writeoffs, I think they'll gradually approach the old highs in the intermediate term, which are quite a nice gain from today's levels (unlike say, the Nasdaq bubble which has yet to reach prior levels close to a decade later).

There are still some incredible bargains out there. While I think the easy money's been made in UYG, there are some individual investments out there worth checking out. For instance, since I bought in to AFN, it's up close to 20% and sported a 30% yield at entry. Seemed unsustainable, but they paid it!

Then, there's LUK, which isn't a pure financial, but essentially a vulture investing outfit, is breaking new all time highs/ post here:

everydayfinance.blogsp...

So, bottom line is there are still some real interesting prospects out there; feel free to add yours here if you have any in mind.

[philzuco]

Dan, you obviously have no clue. Your article on "going long the financials" was essentially the PIVOT HIGH in the financials. Gold and silver are the place to be right now. The Summer months are a perfect time to pick away at weakness ahead of what will certainly be an explosive 2H 2008 for precious metals as global inflation starts to explode. Double-digit inflation is no longer a prediction by doom-and-gloomers. Upcoming price adjustments are making the news everyday. DOW Chemical recently announced that it is planning an across the board 20% increase in its prices. 20-year Notes have recently broken down from a multi-month head-and-shoulders pattern. Yields are beginning to spike as the bond market begins to price in a future of higher inflation. Also, check a chart of the US Dollar Index -- it is literally at resistance in a very long downtrend. And there is no fundamental reason why that should change. The risk-reward right now is very good on a bet against the dollar (or, namely, a bet in favor of gold).
Gold has still not responded given that it is in its traditional "Summer dolldrums" basing period. Come August, however, we should begin to see an explosive move higher. I want to be long DGP right now just in case we happen to start drifting higher ahead of August.

[EverydayFinance]

I disagree. Since the post, gold is essentially flat and the dollar is recovering. There's still risk in the financials and I say they're oversold. If you sit here and tell me you think in a year the financials will be where they are now or lower, I wouldn't think you were serious. They should clearly outperform when the dust settles (which will happen, this isn't a 5 year downward spiral like airlines or big auto). With the Fed approaching closure on rate cuts, they're going to have to move into inflation fighting mode and strengthen the dollar. Notice oil has dropped dramatically of late? I have a clue; we disagree. Let the portfolio speak for itself, it's 8 for 9 now on weekly beats on the S&P as just posted. Where's yours at?