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Selling coal, buying Proshares S&P 500 ultra-short [ClearOnMoney]
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Selling coal, buying Proshares S&P 500 ultra-short

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Investment

Selling coal, buying Proshares S&P 500 ultra-short

7 May 2010 by Jim Fickett.

As detailed on the main commentary,

  • The underlying problem of a sell-off in the bonds of many countries continues
  • The effects on the market are beginning to spread, via bank exposure

To me, this is starting to look quite serious. And none of the options the EU has look very good. The only thing that might stop the crisis out of hand would be the ECB buying up the bad bonds. At present, at least, this looks quite unlikely. Even if it happens, having Europe generally take on a lot of bad debt would cause negative reactions of its own. Emergency liquidity measures might restore market confidence temporarily, but they would not address the underlying issue.

The S&P 500 is down almost 10% now; this looks like more than a blip. And rightly so. Europe is the US's biggest trading partner, the global financial sector is highly interconnected, and US banks are exposed to European sovereign debt. So I bought some SDS again today. Only 1% of the portfolio, for now, and I am still net long. But time to lighten up on equity exposure.

The second decision was a little harder. I had bought into a somewhat larger position, 3% of the portfolio, in Peabody Coal (BTU) over the period Oct 2007 to Dec 2008; I sold it all today. It is not that I have stopped liking energy as a long-term investment. But BTU has been more or less on a plateau for a while, any serious worries about the global economy will hit commodities hard and, again as described in more detail elsewhere, I think the European crisis will cause a significant hit to global demand (Europe is the largest trading partner of China, as well).

I have thought for a while that the enthusiasm in commodities was temporarily overdone, being based on the idea of a V-shaped recovery. I expect it to become clear rather soon now that many economies will not be growing quite as fast as investors were hoping, and that will take the enthusiasm for commodities down a notch. I hope to be back in later at a lower price.

My total return on BTU, including commissions and dividends, was 19%. Certainly not nearly what it could have been, given the opportunities, but an ok return.