Moving to Cash

I made two big moves to cash today:

Sell 10% position in IAG @ $17.12, +4%
Sell 10% position in SDRL @ $30.31, +64%
Sell 10% position in SDRL @ $30.31, +73%

The run-up in equities just feels ridiculous, in my opinion. Bulls outnumber bears 2 to 1. In fact, there is a lot of sentiment out there calling for a "sell the news" event on QE2, which is expected to be announced early next month. In fact, I would not be surprised to see a drop before the event, since so many expect one after.

There are record levels of speculation in gold, oil, and many other commodities. Only two things are out of favor right now: the U.S. dollar and 30-yr Treasuries. So I've sold the commodities and equities and remain with a small net short position in commodities and long bonds. 

Momentum

The "risk-on" trade took it on the chin last Friday. Bernanke's comments succeeded in diffusing some of the sentiment on QE2. From the action in equities, it is clear that a very large and aggressive QE2 program is priced in.

In addition, speculative activity in gold, oil, copper, and platinum are ALL at record levels. This is becoming a very crowded trade. There is more speculation in oil today at $82 than there was at the peak of $145.

Momentum is the only thing driving markets forward right now. It's time for me to consider taking my IAG and NG positions off the table, and even SDRL. I will stick with my bottom-fishing expeditions in DJSP, GAP, and COCO.

I will stick with bonds, despite my fear that Bernanke is now more likely to disappoint risk markets on the extent of QE2. The reason is that there is still a net speculative short position in the futures market on the 30-yr Treasury, and if Bernanke disappoints on QE2, expectations may shift back towards deflation. In addition, the increased inflation/devaluation expectations have pushed down short-term yields at the expense of long-term in the last three months. If there is a QE2, there will be more dollars in the future. Due to increased supply, the 30-yr bond loses value, and yields appropriately go up. So despite what Bernanke said about not buying long bonds right away, QE2 would not do much to lower yields unless he does buy them. And does Bernanke really want to push up mortgage rates now? All of these considerations make me want to hold on to the bonds.

Somebody's Got to Do It

Everyone now knows about the foreclosure mess.

But somebody's got to do them eventually. Let's not forget that paperwork problems or not, these loans are in default.

So I bought a very small position in a clobbered company:

Buy 0.5% long position in DJSPW @ $0.23

These are August 2012 $10 warrants on DJSP, a Florida foreclosure paperwork company. These warrants become regular shares at expiration if DJSP is at $10 or more, so they act like a long-dated call option. There are no options on DJSP.

Lender Processing Services' (LPS) subsidiary, DocX, has a price list for banks that includes measures to "create missing intervening document," and "recreate entire collateral file." LPS is down to $27 from a 52-week high of $44, while DJSP is down from $13 to $2. Once (if?) the regulatory oversight is cleared up, I believe they could generate a healthy cash flow for years. Who knows, maybe fixing the document mess will raise the cost to banks along with DJSP's profit.

Trade!

Sell 1% position ORE.TO @ $1.663, + 316%.

Trade Alert!

Sold my gold bullion today:

Sell ~20%* position gold at $1344.45, + 9.65%.

Short-term, gold is extremely overbought here. Two of my advisors have confirmed the feeling I've been getting from the "sell the dollar and buy anything" trade. Dave Rosenberg says that gold futures are at the third highest bullish total ever. Jesse's Cafe Americain has a beautiful chart showing gold popping through its trend channel in a parabolic move.

Jesse has a $1,375 target on gold before a pullback, but even he achnowledges that the recent move is very strong.

I am holding on to three other positions for the moment: long NG Jan '12 10 calls (0.5%*), long IAG
(10%*), and long ORE.TO (1%*). IAG has not participated in the recent parabolic move, and the chart looks very boring.

I am looking to unload ORE.TO and the NG calls given the right opportunity. ORE.TO has doubled in the past couple of weeks, and the chart is clearly parabolic.

Since there is no news out and other small gold companies are also skyrocketing, it looks like the safe thing to do is sell the first day volume comes out below average. At midday today, we already have volume of 97k versus an average of 198k over the past three months. It doesn't look like I will sell today. The price is holding steady. The NG calls are almost in the money after NG jumped from $7.63 a month ago to $9.54 today. NG is now 29% above the 50-day moving average, and just like ORE.TO, no company news. Just a frothy overbought peak. Unfortunately, the calls have not kept up with the stock. When I bought the options, NG was at $5.98. The IV, which I use as a proxy for the time value of the option, was around 80, but is now down to 51. If the IV picks back up, I will sell these as well.

In the meantime, I will watch the risk on trade for signs of cracking. This is a trend that will have an ugly backlash against the shark-feeding-frenzy of the "sell the dollar and buy anything" speculators. Everyone participating in this trend is a short-term trader. Today, the dollar is down against the yen as everyone plays chicken with the Bank of Japan. As long as the dollar hovers near the $/82 line in the sand, everyone expects more money printing. But how long it lasts is anyone's guess.


* This number refers to the size of the position when bought, as a percentage of the value of my portfolio. This often changes due to price changes. ORE.TO is presently 4% of my portfolio, as it has quadrupled in price since I began holding it. Also, this number does not take into account leverage. If I have a $10 portfolio and use 1.5X leverage, I have $15 in positions. If I buy $3 in bonds, I would calculate this as $3/$10 or a 30% position.