Thursday, December 18, 2008

Inching up my % allocation to commodities after being at 0% for almost a year

According to an article online at Fortune magazine, Madoff's accounting firm that audited his financial results told the American Institute of CPAs for 15 years that it did not conduct audits.  Wow!

This article from Marketwatch about corporate bonds is worth a read. MarketWatch

Before starting my hedge position on my over-weight long term corporate bond position, I going to allow the long term treasuries to continue surging in reaction to the fed rate cut and the ceaseless gloomy data.  MarketWatch

The Philly Fed report on manufacturing activity in its region came in at a negative 32.9, better than expected, but hardly worth a cheer. MarketWatch

Winter is starting to take a toll on natural gas inventories with a 124 BCF decline from last week and 41 BCF less than a year ago at this time. Weekly Natural Gas Storage Report
Excluding my constant allocation to gold and silver, my first buy in the commodity area in a long time was UNGValue of Real Labor/Buy of UNG

With increasing pessimism starting to become rampant on the price of oil, I am starting to consider increasing my allocation to commodities from its currently almost nil percentage.MarketWatch Yahoo! Finance
My previous foray into buying oil was via the ETF OIL which is currently hitting all time lows daily, since it was introduced in August 2006. OIL: Summary for IPATH ETN CRUDE OIL - Yahoo! Finance  You know, it was not that long ago, just a few weeks actually, when oil was at an all time high, but then the consensus was that the world was running out of oil.  Now, apparently, we are awash in the black stuff, tankers are being filled with the stuff and anchored off shore,  and you would almost half expect filling stations to start offering free toasters in exchange for a fill up.  The pessimism is so thick that it can be cut with a knife.   My choices are OIL and USO,  and I will probably end up buying 100 shares of one or the other next year.  I started a small position by doing a odd lot buy today of the double long ETF for oil, which gives me more bang for the buck.  I just did it when the ask price fell to below 14.  I can hold this small position for a long time without worrying about it,  just waiting patiently for all the smart people to decide the world is running out of oil again.  It has something to do with peak oil theory and demand in emerging markets including  China and India. The futures contract for January expires Friday and that may have something to do with the recent decline which has occurred in spite of the OPEC cut in production. Yahoo! Finance
As you would expect, the double long ETF for oil has not fared well lately which is okay for me since I have not owned it before today.  ProShares ETFs – Ultra DJ-AIG Crude Oil – UCO – Overview
The expense ratio is high at .95%, and a continued slide in oil prices will not be a good thing for UCO.  It is supposed to go up twice as much as the price of crude.  Yes, that is what Proshares says about it, but I will add what they omit, it will also go down twice as much as the price of crude goes down. So I have heard the phrase "have your cake and eat it too" more than once in my life, but it is not apropos for UCO-for a continued fall in oil prices will mean no cake will be left to eat for this one.  So I am now back with a small allocation to oil using UCO rather than Oil for a couple of reasons:  (1) I can secure a starter position using less money with a Double Long ETF, and I can consequently hold it longer even with a significant unrealized loss.  Since this kind of buy is purely by the seat of the pants, I do not want to exit it prematurely due to a continued slide in its price.  For something this volatile filling a niche in my asset allocation, I am not going to do a stop loss.  (2)  I have no idea when the fall in crude prices will stop but my gut tells me that it is starting to be overdone on the downside just like it was on the upside.  This kind of commodity seems to be more dependent on trading by hedge funds than others and the whim now is to sell it by sheer herd mentality.   So I will take a small contrarian position to the smart money crowd.   And, unlike many talking heads, I do not have the luxury of saying basically the market may go up or down or stay in a trading range, and be called a pundit for that observation.

 I  do include commodities in my asset allocation mix.  Under my dynamic asset allocation approach, I will however take the percentage down to zero rather than keeping it at some fixed level.  I did that already this year.  Now, I am starting to build it back up.  My normal allocation might ultimately max out at about 2 to 4% of the total value of my portfolio as I define it, explained in this postVANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD which excludes a lot of assets including hard assets. 

I mentioned earlier that I was considering a buy of Baytex (BTE), a canadian energy trust. I did sell out of my position in it in February of this year at over 21.  While my main reason for selling my oil and gas stocks earlier in the year and last year had to with my views on parabolic moves in an asset class, my reluctance to buy BTE back now has nothing to do with the negativity currently surrounding natural resource stocks.  It has more to do with the fact that we are now closer to 2011 when the tax rules change for these canadian energy trusts.

 I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   

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