Monday, April 07, 2008

Portfolio March 2008

In start contrast to the first two months of this year, March turned out to be one of the worst on record. The actively managed (AM) and asset allocation (AA) accounts lost 7.71% and 2.51% respectively. The total portfolio saw a set back of 5.44%. Both AM and AA portfolios are now negative YTD (-3% overall), although still doing much better than all the main stream indexes I track.

The culprit was clearly a severe sell-off in the commodities which were the key driver of the outperformance in months earlier. Live by the sword and die by the sword, as they say. Anyway, my current view is that the Mar 17 low in the S&P (1257) was a meaningful interim bottom that should last at least a couple of months. I view the rally in financials as an oversold rally precipitated by unprecedented actions by the Fed which is providing a backstop to the toxic mortgage backed papers. That is not to say that they can't or shouldn't go higher as the MBS market becomes more rational. Over the long term, I would avoid all but the strongest firms in this space, such as GS, WFC or BAC.

Despite the set back in commodities in March, I continue to be a strong believer in them and the global growth story. The notion of decoupling has gotten a black eye this year as financial markets world wide declined in concert. However, decoupling is probably best viewed in the realm of the real economy rather than financial markets. At the extreme, when it comes to central bank policies and latitudes in government fiscal policy, diametrically opposite is a better description of the gulf between US and the emerging markets. Hence, it's no surprise that oil prices remain stubbornly above $100 and aginflation is still unabated.

In the mean time, precious metals have come under pressure. Gold has dropped below the channel I drew here. It has held $900 which is the first step towards repairing the technical damage that has been done. However, I don't expect a new high any time soon. The more likely scenario is that it will retest $1000/oz soon but would fail again. I have previously describe how gold tends to take three to four tries before overcoming a significant milestone -- $1000/oz certainly qualifies here. My PM trading account dropped to 37k from 45k last month. I only took partial profits even though I was looking for a correction. I can't make any excuses for myself. I took my eyes off the ball, simple as that. On the brighter side, I now believe the current wave (iii of 3 of III) has quite a bit further to go. I'll go into more details in an upcoming post.