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

[ferdi]

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.

2008 May 02 12:20 PM

[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?

2008 May 02 12:23 PM

[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.

2008 May 02 12:55 PM

[Peter Jackson]

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

2008 May 02 01:02 PM

[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.

2008 May 02 04:00 PM

[Everyday Finance]

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

2008 May 02 04:50 PM

[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!

2008 May 03 08:33 AM

[couldashoulda]

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?

2008 May 03 09:26 AM

[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.

2008 May 03 09:32 AM

[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?

2008 May 03 09:50 AM

[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~

2008 May 03 10:14 AM

[Everyday Finance]

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.

2008 May 03 10:17 AM

[cocomurph]

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!

2008 May 03 10:30 AM

[Everyday Finance]

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

everydayfinance.blogsp...

2008 May 03 11:40 AM

[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!

2008 May 03 02:50 PM

[Tony Daltorio]

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!

2008 May 03 04:58 PM

[NOWHEREMAN]

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.

2008 May 03 05:08 PM

[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.

2008 May 03 06:32 PM

[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.

2008 May 04 12:16 AM

[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...

2008 May 04 06:03 PM