Tweaking My Portfolio in a 'Substantive and Timely' Manner

Includes: GLD, SRS
by: Matt Callow

Last week, Fed Chief Ben Bernanke promised to make "substantive and timely" interest rate cuts to deal with slowing growth in the US. Although I hate to act on rumors, there are plenty of traders that think the Fed may make a move early next week, to cut the interest rate. This would be an inter-meeting move and could have a big effect on the market.

With Bernanke scheduled to talk to Congress this week, a pre-meeting move would not surprise me. If this does happen, the dollar could be heading further south quickly. Even if it doesn't happen, speculation will build toward the next scheduled meeting at the end of the month, and the dollar will drift lower anyway.

So with these thoughts, I'd like to tweak my key investment themes for 2008 just a bit. Here's what I'm going to do:

Theme 1 (Long China): No change

Themes 2 & 3: (Long Yen and Canadian Dollar) No change. This could be a big week for these two themes.

Theme 4: (Short the British Pound) We are going to temporarily close this position out. It has been extremely successful in just two weeks, returning 71% Although I still believe the British Pound will continue to deteriorate, I believe the US Dollar will outpace the Pound lower at least through the end of the month. We'll look to grab a new position later. We'll close the put option BJF.OK at Monday morning's opening price.

Theme 5: (Long Gold futures). Historically, January has not been a good month for gold as holiday demand starts to die off. When I first mentioned this theme, gold had recently surged from around $790 to $835. I expected a pull back to sub $800, at which point I would enter. This pullback has not occurred. I think the world is starting to wake up to the current credit crisis and what effect that will have on the dollar.

Many people have been rebalancing their portfolios this month and gold has been the recipient of many new dollars. I was clearly wrong to hold back. Entering now may also be wrong, but I think if the Fed is going to be "substantive and timely" on their rate cuts, you need to be in gold ASAP. I am going to alter the theme a little though. Instead of going into futures, I'm going to keep it simple and put it all into the Gold ETF (NYSEARCA:GLD). We'll take Monday morning's opening price for our position.

Theme 6: (Short REITs). This play has been working out well for us this year (up 6.4%), but we can do better. We currently are short two REIT ETFs (VNQ and RWR). We're going to simplify this theme as well by closing out these two shorts and going LONG (NYSEARCA:SRS)...UltraShort Real Estate ProShares. This is an ETF that is double-leveraged. Don't get confused. By going LONG this UltraShort ETF, you are betting that the real estate sector will go down. For every 1% "real estate" goes down, you gain 2%. The flip side is that if real estate goes up 1% in value, you lose 2%. So at Monday morning's open, we will close the short positions in VNQ and RWR and go LONG SRS.

Theme 7: (Long Ag Stocks): No Change.

Theme 8: (Long Volatility) I've been waiting on the VIX to pull back below 20, and it just hasn't happened. We have gotten a slight pullback over the last two days, and I believe the next few weeks will be very volatile. I think this is about as good a position to enter as any. I previously said we'd use futures to play this, but I'm going to change that to options. At Monday morning's open, we'll buy as many contracts of March '08 VIX Calls (19.0 Strike Price) that the starting $125,000 will allow. Option Symbol = VIX.CT

This Aggressive Trader Portfolio has returned 7.3% since it started two weeks ago. The S&P 500 has declined 5%.

Author's Disclosure: Currently invested in Themes 2, 3, and 5 with Options, Futures, and Stocks.