Wednesday, 23 January 2008

Portfolio thoughts:

Some of my thinking on the portfolio so far:
  • The interest rate trade has been disgusting. I'm not sure if I can take anything away from it, other than maybe I should only trade in the direction I fundamentally believe in. Since I believe that the unwinding of leveraged credit will be deflationary, I need to position for lower rates. Trading the other way just because the price makes it look like a good trade will do me no good, as I can't just sit it out easily, confident in my position.
  • Taking profits at the right time, and having patience to wait for good entry points, is key. Just look at some of my shorts that I covered, Carmax is up 14% since I covered it just over a week ago, and 21% from the lows, Staples is up 15% since I covered my short last Tuesday, etc etc.
  • Having said that, I definitely took off my FTSE and DAX Options short, the DAX one alone I booked about $8,000 in profit, but that trade would be up $60,000 if I'm kept it on! So being patient until a trade is at least close to the levels I think it can reach is important.
  • Sizing my trades; I don't want any particular trade to overly dominate the portfolio, especially if it goes badly, so making sure I am not too big in some trades as well as being large enough in other trades where I believe in the position. I think I've been OK with this so far, although spending the $6,400 on the Dow Call premium was too much given the short term nature of the trade and the P+L so far.
So, although I feel I could have done better so far this week, the P+L is doing OK. I like pretty much all the trades I have on, and am not in a hurry to close out any of these at the moment. I think the next trades I'll be looking at will be once again shorting Staples, Carmax, US Steel, etc. I could really do with finding some longs to put against it, as the single-name equity bit of my book is short about $100,000 notional.

Also I think there is more to do in FX. The Fed has shown its hand, being willing to slash rates as much and as low as necessary. The ECB and BoE look unwilling to bail out the markets to the same extent. Initially this should help the Euro and the Pound, but at some point the markets will focus on relative growth rates, and if the Fed is doing enough to cushion sme of the blow of this credit deleveraging debacle, then maybe the dollar comes into favour. So I still plan to sell strength on the Euro and Pound. I also still have an eye on selling Hungary (HUF) and maybe Czech Krona (CZK), any economy running a large deficit is bound to see its currency get crushed this year.

Finally, commodities seems to be in a playoff between a slowing global economy reducing demand and hence the price, and a lack of faith in fiat currencies driving money into hard assets, taking commodities higher. I think ultimately the demand side wins, taking prices lower, so I plan to be mostly short. Reading any blogs about Peak Oil definitely makes me nervous on my oil short, but I think that long-term trend will still be beaten by demand. Hell, we might even see a supply increase from the oil producers if the price drops enough, so that they can maintain their income...that could really bring an accelation lower.


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