Credit Crunch November Portfolio Review

Lots of fireworks over the past month

Another month passes, and it's time to see how we've done:

Closed positions:

Ultrashort Lehman 20+ Year Treasury (TBT) – bought at $62.70 (about £39.00), dumped at $62.70 (£40.19); sterling profit 3%! Yes, my failed speculation on falling long-dated T-Bonds actually returned a sterling profit, thanks to the plunging pound.

Ultra S&P500 (SSO) – bought at $30.74 (about £19.13), dumped at $27.91 (£18.65); sterling loss about 3%.

Ultrashort DJ US Real Estate (SRS) – bought at $129.65 (£83.06) and sold at $205.45 (£136.69); sterling profit about 64%

Open positions:

iShares Euro Government Bond 15-30 (IBGL) – my long-dated euro sovereign bond pick, average buy price £116.96, price last month £119.00, price today £134.06. So, that's profit of about 14.6% since purchase (13th September, 2008), or 12.6% in the past month alone.

Lyxor Gold Bullion Securities (GBS) – my gold bullion pick, added to the CCI portfolio at $81.38 (about £45.57 at the time – 18th September, 2008), price last month $74.52 (but £46.59 in sterling!), price today $75.39 (£50.68). That's a sterling profit of about 11% since purchase, or 8.7% in the past month.

iShares MSCI Singapore Index Fund (EWS) – following Dr Doom into Singapore, bought at $7.66 (£4.59) on 21st October; price last month $7.37 (but £4.60 in sterling!), price today $6.21 (£4.17). That's a sterling loss of about 9% since purchase, or about the same over the past month.

M&G International Sovereign Bond Fund – bought on 24th October at 60.61p; price last month 64p; price today 69p. So, a profit of 13.8% since purchase, or 7.8% in the past month.

Analysis:

Both SSO and TBT were inflationary plays; SSO in particular being a play on a short-term bounce in the S&P500, which I felt was justified by the technicals and general Obama euphoria. In practice, the rally proved to be a feeble affair, with the 3dma dropping below the 13dma again after less than two weeks, and the 39dma still trending down.

But, losing plays where I only lose 3% are speculations I am happy to make, especially when they are balanced by big winners like SRS. November's SRS trade was pretty much a textbook play of my favourite technical methods. I was certainly right to liquidate when I did, with SRS now trading at around $142.

Turning to my more fundamentally-based positions, it is interesting to note that IBGL has now begun to outperform the M&G International Sovereign Bond Fund (a 14.8% November gain, vs 7.8%, respectively). It's also interesting to compare IBGL against similar iShares ETF's for US Treasuries and UK Gilts, ie, the iShares $ Treasury 7-10 (IBTM) and the iShares FTSE UK All Stocks Gilt (IGLT). IBTM is up by 17% in the past month, while IGLT is up only 4.8%.

Gold continues to perform well in sterling terms, even though the US dollar price is still below the purchase price. In common with my bond plays, then, the lesson is “anything but sterling”, which is the market's verdict on the Zanu-Labour's economic mismanagement.

EWS is a bit of a sorry loser, with even the “anything but sterling” effect failing to save it. But, I'm hanging on in there for now.

Overall, the portfolio now consists of two deflation-friendly plays (IBGL and the M&G fund) and two inflation-friendly positions (EWS and GBS). I think that's about the right balance, although I still think a really substantial bounce is likely at some time. After all, there is a pretty universal consensus amongst governments as to what needs to be done (“keep printing money until asset markets start rising again”), so surely the medicine will take effect at some point, if only in purely nominal terms (ie, markets may rise, but only in an utterly debased currency – what von Mises termed the “crack-up boom”). On the other hand, I have no idea when, so a 50-50 split seems reasonable for now.

Oh, and if you haven't come across this yet, it says more about current US and UK government policies than I ever could. In the realm of “you couldn't make it up”, the Reserve Bank of Zimbabwe now writes:

As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.