Monday, August 20, 2012

Updating the Alpha-D for August 2012

Today's changes in my portfolio come on the heels of an options expiration weekend that saw every single one of my covered call positions breach their strike prices and be sold away.  It is rare to see my call-writing strategy liquidate my entire equity portfolio.  The last time I can remember that happening was August 2007, just prior to the peak of the equity market that year.  I stayed in cash for quite some time after that.

Since my equities (actually ETFs) represent a minority potion of my net worth, I'm comfortable buying them back in a wash sale because they represent hedges against a broad unwinding of the U.S. economy.  I repurchased all of my positions in GDX, FXI, FXA, and FXC and renewed my covered calls.  The difference this month is that I added to my stake in FXA because I am increasingly confident that the Australian dollar is probably the healthiest currency on the planet (i.e., the least likely to hyperinflate).  I could be wrong, but having a cash equivalent in non-U.S. currencies is important for my peace of mind.

I renewed the cash-covered put position under FXF that expired.  If I were forced to add one more currency position, it would still be the Swiss franc.  I also sold cash-covered puts under FXC for the same reason; Canada's currency is almost as attractive as Australia's as an inflation hedge.

I may soon regret hanging on to FXI, as its value as a diversification play deteriorates with every new piece of bad news about the Chinese economy.  This is why I'm continuing to set my covered call strike prices close to the current FXI market price; this instrument is now little more than a buy-write strategy for monthly cash flow.  I consider myself fortunate to have unwound the much larger FXI stake I used to have when the China bull story still made sense.

I will stay away from U.S. dollar fixed income holdings until the U.S. passes whatever currency and insolvency crisis lies in its future, or until Helicopter Ben is no longer leading the Fed (whichever comes last). Holding as much cash as I have right now is completely contrary to the conventional wisdom of most portfolio managers and financial advisers, but those people will be out of work en masse when the house of cards holding up the developed world's economies gets knocked to pieces.  My cash will be useful immediately after a stock market crash when equities will likely be at generational lows.  I'm betting my net worth that much of Wall Street is insane.

Full disclosure:  All positions as described.