Monday, May 25, 2009

Notes, Bonds Surge to Continue?

Interest rates surged this week reportedly on investor nervousness regarding the potential credit downgrade as well as the mounting debt that the US Treasury is issuing. Neither story is new. If you have been following the Asset Design Center blogs all year, you will have noticed that we have been positioned for such market turmoil from the very beginning. Just like the laws of nature, economic and finance laws are universal and are bound to eventually catch up with the marketplace.

The above chart is a weekly chart of the ProShares Ultra Short 20+ Year Treasury Bond (TBT). It is the instrument that we have been using in our stock portfolios as a core holding. While the chart is weekly, notice how powerful the three-period idea can be. After making lows in December, TBT came back down in March establishing a three-month test of the low.

SPX Making a Different Pattern

The stock market also tried to test the lows in March but failed. While the market has rallied since then, it has not risen above previous lows and my feeling is, an untested market is an unsafe market. Our stock portfolios have been 35% in cash and many investments have been in equities that are sensitive to the decline in the dollar such as gold, oil and the Pro Shares Bearish Dollar Fund (UDN). Other stock positions have been established as buy/writes at the beginning of the year. Volatility was so high at that point that almost all of our stocks would be able to weather a 35% decline in the stock price without our position losing money.

I've got to admit, reviewing stocks this weekend in preparation for possible actions at the end of this new week, I was surprised that so many stocks are still on a run.

Potash (POT) is one example of a stock that is powering ahead. Notice how this stock also made the important three-month test of the low. The stock has nearly doubled from the testing point. It demonstrates the validity of the basing process that I have been discussing over and over again. You don't need to pick the absolute bottom to make a ton of money. I can sleep much easier when I see such a test of the lows be successful. And when I have doubts, I sell a long-term call option against the position. Most of the buy-writes that we put on at the beginning of the year stand to make a 50% profit should the stock price rise or do nothing. Those kind of returns are pretty good. And the option sale gave us extra income to hedge ourselves on the downside should the market go against us.

Potash was one of such holdings. We purchased POT at 73.22 and sold the January 09 call at 22.70. At this point, our net profit on the position is greater than 30% for a five-month holding period. With only 3 points of premium remaining on the position, we may close the position out and build up some cash in the event that the market will decline. There are many, many stocks that appear ready to fall apart and I would like to have cash on hand and be ready to pounce when the opportunity is right

Don't Need To Be Greedy

Asset Design Center clients know that our format is to build portfolios that provide you with the required rate of return with minimal volatility. It is not our goal to make 100% on your money each year but to achieve your financial objectives through consistent year-to-year steady growth with minimum volatility. If you have extra money available that isn't in your goal saving plan, you can use it to "rock and roll." Our relatively conservative options on futures accounts are up nearly 30% this year. There is always room to "rock and roll" after all of your important objectives are met. Even though we like to think that our futures ideas are conservative, just as the realities of higher levels of debt are sure to cause a lower debt rating and higher interest rates, earnling 5% to 10% each month is also beyond the realm of normal expectations. There is always that once or twice events in a year that can destroy your gains if you are not experienced enough to know how to work our way out of it. .


While the wonder as to what North Korea's nuclear gamesmanship will have on the world markets tomorrow, the day will be set aside for enjoying the day. As a Viet Nam era veteran, and a disabled one as well, I choose to spend the day with other vets and friends before returning to the real battle when electronic trading begins tonight! Have a great day and enjoy.

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