Safe Trading Blog

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Short position on RENAULT (Euronext Paris) : Gain +4.5%! (with a corresponding decline of the Stock)…

Book Profits at these levels.

Overview: Two major gold indices dominate the market–the Philadelphia Stock Exchange’s XAU and the AMEX’s Gold BUGS Index (HUI). The major difference between the two is that the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. This makes the BUGS Index much more profitable than the XAU when gold prices are rising, but can also compound its losses when gold declines. BUGS is an acronym for Basket of Unhedged Gold Stocks. The index was introduced on March 15, 1996 with a starting value of 200.

Composition: The AMEX Gold BUGS Index is comprised of 15 of the nation’s largest “unhedged” gold mining stocks. It is a “modified equal-dollar weighted” index. As a result, most of the index’s component stocks are equally weighted, yet the largest stocks still carry a greater weight than the smallest.

Positives: When gold prices are on the rise, the Gold BUGS Index provides an excellent way for investors to capitalize on that increase. The index has a high correlation to the spot price (current price) of gold.

Drawbacks: When the price of gold declines, the Gold BUGS Index tends to fall much faster than its hedged cousin, the XAU. In addition, the firm’s unusual index weighting system can be difficult to understand.

Simple hedging HUI/GOLD:  The value of the HUI index is fundamentally based on the price of gold, everything else is just noise. One should be able to determine a theoretical “correct value” for the HUI index, depending solely on a ratio of the HUI to the price of gold. Any advance in the HUI index far above an idealized HUI/gold ratio should be sold. Any decline of the HUI index far below the HUI/gold ratio should be bought.

IT has been a time to worry even the savviest investors. The credit markets have been in a crisis, the domestic stock market has been shaky and overseas markets haven’t been much better.  

Alan S. Orling for The New York Times
David F. Swensen manages investments for the $22.5 billion endowment at Yale.

What should an individual investor do?

Don’t try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals. That is the advice of David F. Swensen, who has run the Yale endowment since 1988, relying on a complex strategy that includes investments in hedge funds and other esoteric vehicles. The endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion.

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”

For most individual investors, he said, copying the strategies of institutions like Yale is virtually impossible: big investors have access to fund managers and arcane strategies that are beyond the reach of most people.

“The only people who should get involved are sophisticated individuals who have significant resources and a highly qualified investment staff,” Mr. Swensen said.

“Most people do not have the resources and time to pick market-beating managers” of hedge funds, private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds often result in higher taxes than those of index funds.

So he advocates another approach, which he outlined in the book “Unconventional Success: A Fundamental Approach to Personal Investment” (Free Press, 2005). He proposes a portfolio of 30 percent domestic stocks, 15 percent foreign stocks, and 5 percent emerging-market stocks, as well as 20 percent in real estate and 15 percent each in Treasury bonds and Treasury inflation-protected securities, or TIPS.

The real estate investment can be made through real estate index funds. Though the real estate market has declined and your portfolio is below its target allocation to it, he said, don’t try to time the market. Go ahead and rebalance because no one really knows where the market’s bottom is.

Diversification will buffer a portfolio from declines in specific asset classes. For example, he said: “If the dollar declines dramatically, you have foreign and emerging-market equities. And a declining dollar may well be associated with inflation, but a diversified portfolio would include TIPS,” to provide a hedge. “That means if any of these scenarios play out, an investor has sizable chunks of his portfolio that protect against them,” Mr. Swensen said.

When possible, he said, rebalancing should be done in a tax-sheltered account, like an I.R.A. or a 401(k), to avoid tax liabilities. “When you are putting fresh money to work,” he said, “you put it in an asset class where you are underweight and take money out of a class that is overweight.”

He says it is fruitless for individual investors to pick stocks. “There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals,” Mr. Swensen said. […]

Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, he said, “but it should be disciplined.”

When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

With stock prices in the headlines and everyone yammering about a crash, odds are high that for now the market is near a low and that a snap back recovery rally should get underway. If the Central Banks COULD build on Fed Rate cutting momentum, with more cuts coming from the Fed and cuts coming from the ECB, the sentiment could mean revert and get back to more optimistic than the crash psychology?! A bounce would lift prices back toward 13,000, 1450 on the S&P, and 2580 on the NASDAQ; It gives a move entirely consistent with a bear primary trend! On the downside, if the S&P breaks the jan. low, the trigger is obvious…

Many operators believe we are currently operating in a bear market that will take more than a quarter or two to work itself out. The economy did not create this difficulty over the last few quarters, but rather has increased its risk level over years of easy credit and abundant liquidity. It seems foolish to believe that such excesses could be wrung out by a few short months of relative volatility. The market as a discounting mechanism will most definitely turn higher before the economic difficulty ends, but it seems very pre-mature to think that a four month decline will compensate for four and a half years of steadily rising equity prices. Bulls will state that valuation levels have fallen to “normal” levels, but they often forget to consider the fact that in a bear market these valuations fall below “normal.” Simply put, if an average price multiple on equities is around 15, then one would expect the market to spend just as much time below that average, and for valuations to be as far below the average as bull markets show valuations above that average. The best would be to manage the market risk at a low level and wait for a better evironment to catch high returns…

SAN FRANCISCO (MarketWatch) — The dollar was lower against major counterparts Thursday, pressured by worse-than-expected manufacturing in the Philadelphia region as reported by the Federal Reserve Bank of Philadelphia.

Car manufactures dropped in the Asian session on the concern that the expected demand for new cars will slow down. This will impact directly the US and European carmakers with a large proportion of their total sales in the US…

Good opportunity to short RENAULT (RNO) Euronext.

He initiated purchases in Kraft (KFT) and Glaxo Smith Kline (GSK).  In addition he added to positions in Wells Fargo (WFC) and CARMAX (KMX). 

http://www.economagic.com/

&& of course http://www.federalreserve.gov/ 

(http://www.federalreserve.gov/fomc/fundsrate.htm)

Market data: http://www.tickdata.com/html/futures.html