Bears in control early 2016

Period 1st half January 2016, written Jan 15th.

 

Asset Allocation

Physical cash mid-Jan was relatively unchanged at 35.6%, but this hides an extremely volatile (mainly to the downside) start to the year. The key change here has been covering the shorts on the indices a few days ago.

I mentioned last time that the rally on the ASX over December just felt like window dressing given the extent of outperformance and made it particularly vulnerable. This played out well as this was initially hit hardest in January. The short that was instigated at 5,250 was closed at 4992, and we actually saw the index go 150 lower than this for a while. The dow short instigated at 17,628 was closed at 16,160. This protection was like being cashed up an extra 9% of my portfolio. My derivatives record is back in the black which is a bonus. As I write the indices are trying to hold big support from August – October last year, and also stretches back to where it bounced after a big scare in October 2014. That, together with hyped “sell everything” headlines, I cannot justify holding index shorts at this point in time. However I will attempt to sell the Dow for 9% in 2 stages, the futures around 16,800 and 17,100. That would be about a 5% and 7% spike off the lows. The stop will be about 1% above the 200 mda which wouldn’t cost much. With the indices spending nearly a couple of years going nowhere around that level there will plenty of late newcomers to the rally tired and wishing to just exit and break even on their stocks on any bounce I feel. My commodities percentage actually a dropped a percent through some stock specific decisions only which I refer to later on below. Of course the market may well not bounce off these supports! In this scenario I still have nearly 36% cash equivalents so I don’t mind this. Until the S&P indices drop at least 20% of the highs I don’t particularly want to get excited about actively buying. If such a fall occurred I am guessing the AUD gets to 65. I may well look at taking off the USD o/w through the likes of CEF, WIA, GVF in that scenario which would also extinguish any equity manager loan facilities which can be a positive.

Currencies

I am 5% overweight in foreign currencies. I mentioned last time I was looking for opportunities very soon to sell the AUD at 73-74. Unfortunately I only got hit on one off my 3 levels there. So my overweight did stretch from 6% to 8% during the month. I covered a short that I got hit on at 73.3 at 70.6. Also I held the USD ticker in my SMSF which I covered effectively at 69.4. Finally when the AUD was about 70 I had some HKD dollars in a brokerage account I converted back to AUD to be about 5% o/w in fx right now. I have read with interest Platinum funds management who I highly respect have bought 10% of their portfolio in AUD, first time for a long time, and they have also added some Yen. This still means they are bearish on the AUD but not as much as last year like myself. Pretty much saying the easy gains from shorting AUD are probably behind us as we fall through 70 cents, but that there should be still some gains to be had. I did write last time the universal bullishness of the USD in particular for me was an impediment for me to have a huge o/w in foreign currencies that I have had for a few years now since parity. However I have looked at some charts on some fairly basic PPP analysis that suggests the AUD is very expensive versus the Yen, but only modestly against the USD. As the Yen is certainly a “risk off” currency this interests me. Combine this with the fact that the stock markets look to have huge overhead resistance, and Platinum also adding some Yen I have given this more thought. The AUD looks oversold and quite possibly can bounce off good support levels at 69 cents. The AUD/JPY hit a low of around 80.5, I am looking to short at 84 and 86 for total 5% of the portfolio with a stop of 88. I am also giving GJT some thought (refer below).

Individual Stock Decisions

S32 – I have taken a quick sharp loss here in the order of 25%. I didn’t like the look of it as it fell through the $1 mark so easily. Whilst spinoffs in general are usually a good strategy, in hindsight my normal rule of avoiding stocks falling sharply would have been a better rule to use. It has otherwise been very wise hence how I have never been tempted yet to buy the likes of BHP, STO, WPL etc despite countless in the investment community calling a bottom. One day I will probably gravitate to these and more likely after they have based for many months and without trying to get them at the all-time low. But if that occurs I am sure the level will be lower than where 90% of analysts stepped up and called them a buy! This served me well as I weighed back into some gold positions early last year, not necessarily the low point though. The portfolio benefited significantly.

 

NUF – This traded to my level and I purchased at $7.61, has started off by going lower than that in this weak market.

HKDCASH – When AUD was around 70 this was converted back to AUD. It had been parked there initially for potentially some overseas stocks in HKD, but at the same time liked more of my assets in non-AUD.

 

USD – As mentioned above the USD ETF was sold in my SMSF.

 

GDXJ – I was targeting this as a switch because quite simply RMS got too large an exposure from a risk management point of view. Many other gold miners have not done aswell as RMS, and some of the Canadian and US miners in GDXJ have lagged Australian miners significantly. This was purchased at $20 and started by drifting lower.

 

RMS – I have sold more than half of this after holding greater than a year for CGT purposes. It has been one of my better investments after purchasing one parcel at 8 cents and selling this week for 23 cents! This still remains a significant and important position that I have left in it and note the production figures for December quarter were very pleasing.

 

AAC – I am trying to pick this up at $1.26

 

GJT – I am trying to pick this up at $1.86, I may pay a pit more if the AUD/JPY goes to 80.

 

Individual Stock News

AIK – Completed the rights issue which I subscribed to not be diluted at 10 cents, the significant investors took up the retail shortfall as expected.

RNY – Refinanced its debt which I see as positive. It means some properties as collateral for certain financing switch pools. This can better enable them to find buyers of assets. For instance previously they may have had to sell 3 properties to a buyer when 2 were very different properties to 1.

WMK – This absolute return fund is producing excellent figures in a very weak market which is pleasing.

NST – Pleasing Dec qtr production figures.

RMS – Pleasing Dec qtr production figures.

HHY – Surprised here by the very good NTA figures released for December.

GVF – Announced to pay a 3 cent fully franked dividend which boosted sentiment. They are getting a reputation for a very good dividend payer and performer. But as discussed this is one of my biggest positions and I may lighten up given the strength of the USD which GVF has benefited from.

 

THINGS I AM WATCHING

 

  • Looking to effectively short AUD exposure for Yen if it continues rising above 84 AUD/JPY.
  • As I am even slightly underweight ag stocks happy to buy AAC at 1.26 I am working. GNC at 7.50 would consider.
  • Looking to short the DOW on a bounce of 5-7%, would be a bounce in context of what looks like a downtrend in the index.
  • If gaps down be patient until US indices are at least in bear market territory. In meantime perhaps could reduce USD o/w at towards 65 level and pay down any leverage facilities.
  • FSA after looking at this last week I am concerned how they would go in a recession in Australia with potential arrears from their lending, so not prepared to step up to the plate here.
  • To finish off my comments that I was doing some research on OGC. It doesn’t seem super cheap. But looking at the company closely it is interesting what they paid for recent acquisitions. That has made me more confident that RMS is still cheap.
  • GJT working 1.86. Refer to the spreadsheet for buy reasons.

 

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