Trade Update - UYG, SSO

The markets were up again, so I sold my UYG for a very nice 30% gain in 1 week. While that sounds sweet, I had such a small amount invested in it that it really didn't do much for my portfolio.

SSO finally climbed back up to my purchase price, and I exited my position. At one point on Friday I was down a whopping 40% on this trade, and that scared me enough to get out while I could today without a loss. I can't tell which way the markets are going to go. Is this just the beginning of a much larger rally? I'm too chicken to take any chances, especially after having being down so much, and now with the markets being up 4 days in a row. So I'm happy to get out now even if it continues to rally.

Trades (Nov.26):
Sold UYG @ 6.00 (bought on Nov.19 @ 4.62), a 30% gain.
Sold SSO @ 5.80 (bought on Nov.12 @ 5.65), a 2% gain.

P.S. I should note that with the current crazy commissions I'm paying, you can usually subtract about 5% off the posted trade gains to arrive at what I really made. E.g. I actually took a very small loss on the SSO trade. The variations in the CAD/USD exchange rate over the length of a trade also affects what I really make on these ETFs that trade on the american exchanges.

Bounce

Well the markets finally bounced, with big gains at the end of Friday and today, Monday. You could make a killing in this volatile environment if you could time the bottoms and tops. For example, UYG is up 50% from its lows 2 days ago (Friday), mainly due to bank stocks surging today. Unfortunately, since I bought back on Wednesday, I was already down about 28% by the time it hit the lows on Friday, so the huge +52% gain from there only brings me to about +10% as of today. So I need the rally to continue in order to actually make any reasonable amount of gains on it.

Ouch!

Ouch! The market plummeted again today. S&P down almost 7%. UYG down 19%. I should've known not to try to catch a falling knife. Oh well.

And Oil finally went below $50. I should've stuck to my plan to wait until oil went this low before buying more DXO, but even when blogging about it I couldn't force myself to stick to the plan.

I'm sure tomorrow will be interesting.

Trade Update - UYG, DXO

The market has continued to drop, and so has oil. I made a bit of a gamble trade today, buying UYG (2x financials) at 4.62 at the end of the day, after it had dropped 20% today alone, and is down 50% from 2 weeks ago. It feels wrong to me buying long ETFs when the market is crashing, and I may regret this (I feel like I'm starting to rationalize like I was in the dot-com bust). It could easily plummet a lot more this week as the DOW breaks the 8000 mark, but again, I'm still just looking for a short-term bounce to make a quick 20% after such a large drop.

I also bought some more DXO (2x oil) at 3.68 today while oil was down around $53, to add to what I bought at 4.85 when oil was $59. I don't know why I can't be more disciplined and wait for oil to drop to $50 so I don't spend all my cash too early... I got too impatient and gave in. This trade doesn't worry me at all though. Who cares if oil goes to $40 short-term. In a few months it will be back up. I won't lose money on this trade; I just may not make as much as I could have if I waited to buy in lower. I plan to make a minimum of 100% on this within a year.

I'm still holding my SSO even though it's down 15% now.

Trades:
-bought more DXO @ 3.68
-bought UYG @ 4.62

Trade Update - SSO

Yesterday I bought some SSO (2x S&P500) at 25.65. Why? The S&P was around 870, almost at the lowest point it had reached in recent times back on Oct.27. There has been a lot of recent market negativity and continued bleak news reports, but it was the 3rd day in a row of quite significant market losses. With that alone I thought/hoped it was due for a short-term bounce, possibly before the end of the day. Also, I noticed theMarketSpeculator was buying too, which gave me some confidence.

Well, it continued dropping yesterday after I bought. Then the markets dropped more today -- at one point I was down 10% on the trade. But the markets took off like crazy out of nowhere at 1 pm and finished up a whopping 6%. DOW ended +550 at 8835, the 3rd largest 1 day point gain. What's crazy is that from 1pm to the 4:30 close the Dow gained almost 1000 points from it's midday low! Talk about volatility. Within that time frame my SSO holding went from being -10% to +9% ($28.10 close)-- almost a 20% swing in 3 hours. crazy.

Side note: I never know where I should place stops. I didn't place a stop on this trade and I'm glad I didn't. If I had placed one at say 10% below my entry, or at a support level around $24, I would've been stopped out at the lowest point today right before it took off.

I may place a stop now around break-even, and don't know when I'll sell.

Trades:

Nov.12,2008 - bought SSO @ 25.65

P.S. Google Finance links are now broken for many ProShares ETFs that moved to another exchange. Yahoo Finance works. Hopefully Google will fix it soon.

3x Leveraged ETFs

I knew these were coming down the pipe, but my brother just notified me that eight 3x Leveraged ETFs from Direxion are now available -- the first of their kind. Crazy!

See this SeekingAlpha article for the details.

So for example, instead of buying DIG for 2x performance of an energy index, you could buy ERX for 3x the performance.

Since the 3x performance is applied daily, some weird, unintuitive behaviour can occur over multiple days (usually in a bad way)... but that's for another post. In the meantime, proceed with extreme caution! It'll be interesting to watch these to see what kind of volume these get and how they perform over time.

Trade Update - DXO

Well, what people were saying actually came true for once: that when Europe cut rates today, that would boost the dollar, and oil would drop. I was a little worried with oil at $70 2 days ago, but sure enough oil has dropped to $60. DXO went under $5, so I bought a whole bunch. Unfortunately, now I have to sell a bunch of my Sprott funds to pay for the trade :(

Oh, and Please stay above $60, oil, so I can sleep the coming nights :)

Unrelated note: I plan to do a couple of posts on ETFs, ETNs, ETFs vs ETNs (now that I finally understand much better), some info on changes in the Sprott funds, as well as talk about something most people have never heard of: MICs.

Trades:
Bought DXO @ 4.85. Will be selling an equivalent amount of my Sprott Canadian Equity fund to pay for this.

Shift Investments to Oil? Part 3

In Part 1, I talked about the various leveraged commodity ETNs and their potential gains. It looked like the ETN for Oil, symbol DXO, had the greatest potential, since oil has moved by a larger amount than the other commodities. Going forward, it seems to me that this will continue. For example, it seems easier or more likely for the price of oil to double from $60 to $120, than for, say, the price of gold to double from $720 to $1440. While both may move up, it seems that the potential for oil to move up more is greater.

In Part 2, I talked about the argument for the price of oil going up, and why oil was such a great investment in the long run.

In Part 3, the last post on this, I'm only going to talk about DXO and its risk/reward to help determine if it is a good investment.

I put together a chart showing some observed values of DXO at certain prices of Crude Oil.




One thing that is interesting is that the DXO line is a curve, not a straight line that follows "y = 2x + c". After reading up on how the ETN gain is calculated (which appears to be monthly), it seems this effect is due to compounding over time. For example, say the price of oil keeps going up 10% each month, compounding, for 7 months. This ends up being a 95% gain (1.10^7 - 1)*100%. You might expect the 2x ETN to gain double that, or 190%. However, if the 2x ETN goes up double the amount that the price of oil went up each month -- that is, 20% each month -- for 7 months, this works out to (1.20^7 - 1)*100%, or a 258% gain in the end. Notice this ends up being over 2.5x the oil price's percentage gain over the same 7 month period. Because the compounding effect varies a lot depending on whether the commodity is trending or whipsawing back and forth a lot over the year, we can't totally rely on the chart above for a prediction of the ETN price based on what the price of oil is, but it should give us a rough idea.

Reward:

Looking at the chart, we see we can make HUGE gains if oil goes up even a small amount. For example, with oil at $64/barrel right now, DXO is around $5. If oil reaches $88/barrel, DXO should be around $10. That is a 100% gain. If oil reaches $105/barrel, DXO should be around $15. That's a 200% gain, or an increase of 3x in your investment! And imagine if you were to get into DXO at a price below $5? How long until oil is over $88/barrel again?

Risk:
The bad news is that a small drop in oil price is a huge drop in DXO. Extrapolating the price data, if oil were to go down from its current $65/barrel to $50/barrel, DXO could drop to around $2.70 -- you'd lose almost 50% of your investment right there. If oil were to go down to $30/barrel, DXO could be around $0.80 -- meaning you've lost... well, most of your investment. So you will lose a lot with any drop in the oil price.

The good news is that oil is not like the stock of some company, where the company could go bankrupt and the price goes to zero. Oil cannot go to zero. We know oil is going to be in demand for a while yet, and as pointed out in the last post, all signs point to an increased oil price in the long term. So as long as you're willing to hold on, the risk of losing any money in this investment seems extremely low, as oil will eventually rise above its current price.

So, can you handle losing 50% or more of your investment for a few months... a few years, in the unlikely event it takes that long?

I guess one other risk I should mention is the risk that the ETN could shut down if the price gets too low, and you'd end up losing most of your money. I read somewhere that this happened to some ETFs (I'm too lazy to find the links for this).


The question for me is really just how low will oil go in the short term? While it's hard to imagine oil at $20 again, you only have to go back to 2003 to see oil in the $20's. That's scary to me. Losing 50% of an investment with a small drop in oil is scary to me. So what's a good entry point? Should I really care, especially if I believe that oil is guaranteed to go over $100 at some point in the future? Imagine what will happen when we see some of the production numbers and decline rates from the big reserves a year from now?

Another random thought: What effect is the election result going to have tomorrow?

I don't really know how to summarize this post. DXO's risk/reward ratio looks great if you're planning 5 years out from now, but in the short-term the risk is quite high. But again, the type of risk is mainly that you'd lose money on paper, and only temporarily too, and as long as you hold on you'd be virtually guaranteed making money on the investment. There is still some risk of you actually losing money; this would happen if the ETN shuts down while at a low price, or if you are forced to sell due to some other personal financial situation. So I wouldn't put your life savings in something like this, but the risk/reward ratio is too good to pass up not investing in this.

So what am I going to do? I'll strongly consider selling some of my Sprott funds and buying DXO at $4, meaning oil has to touch below $60 again, which I think it could do this week. If it doesn't look like that will happen, I may buy at $5. If oil drops even further to $50 (and thus DXO goes under $3), then I'd probably actually borrow some funds and buy a whole lot more, as crazy as that may sound.

Shift Investments to Oil? Part 2

The main arguments for the price of oil going through the roof are:

1) Decreased Supply due to Peak Oil. If you haven't heard about Peak Oil Theory, read through the Wikipedia entry and Eric Sprott's Market at Glance articles.

2) Increased Demand. World demand for oil is expected to increase about 35% by 2030. China's consumption has been increasing about 8% a year.

I was going to post a few choice quotes from Eric Sprott in regards to oil from the recent Sprott Webcast, but since everything he talks about is quite interesting and you probably won't watch the webcast, I'm just going to post the whole transcription of the part of his speech on Oil here and bold some notable parts.

Sprott Webcast, Eric Sprott from 30:30 - 36:30 :

Peak Oil. Okay. I just like going to this chart, which shows the rate of discovery and the rates of production. As you all know, M. Hubbard King back in 1956 was working with Shell Oil, said that in 1970, U.S. conventional production lower 48 states would peak. Sure enough, 14 years later after making the prediction, it peaked, and it's gone down ever since. And the same petro-physicists... have suggested that in this decade, oil peaks and forever goes down. And the data on conventional oil production -- when I say conventional, I'm excluding tarsands and ethanol and other forms of energy that don't come from normal hydrocarbons... -- but the data tends to suggest that in December of '05 we *have* peaked: that conventional production of oil in the world is going down.

I wanted to give you some examples here. And probably the most glaring example: There's a field in the gulf of Mexico called the Cantarell, and in 2004 it produces 2.4 million barrels. It was just announced that their production in August (2008) -- I've heard 2 numbers, either 974,000 or 950,000. It doesn't matter much. But from '04 to '08 it fell by 1.4 million barrels.

Now, you live in Canada. You know what it costs to produce a tarsands plant to produce 100,000 barrels a day. It probably costs at least -- It's $10 to $15 billion -- to get 100,000 barrels a day. And it takes you 5 years and stresses the system out. Imagine if we were building 15 plants today just to offset this one field. And that is going down *so* fast.

And most of the prognosticators on oil that the general public is forced to listened to have massively had their head in the sand on oil production and what's likely to happen. And I will forewarn you, that the International Energy Agency back in May said, "Uhh, we're going to look at our formula again on oil production. In November, we'll probably come out with a new forecast, because we may have the depletion rates wrong." And I know what the forecast is going to be, because they do have the depletion rates wrong. When you see a field like Cantarell falling 36% year over year... Imagine if all fields fell at 36%. But even that one, because it's one of the biggest in the world.

And of course one of the bigger fears is Ghawar field [the largest oil field in the world] in Saudia Arabia that produces over 4 million barrels a day. And the same guys who predicted -- I can tell you they predicted back in 2001-02 -- they all talked about Cantarell. I talked about Cantarell back in 2004 and said it's likely to be a problem. But they all talk about Ghawar too. Ghawar's 4 million barrels a day. And they sustain production by pumping in 6 million barrels of water every day to keep production up. Well you know what? Someday that water's going to get up there and you're going to be producing water, not oil. And when it declines, I'd predict it'll decline real fast.

And we all know how difficult it is. We have investments in oil and gas stocks in Canada. We don't use the word 100,000 barrels a day. We're happy if -- If a guy has a well in Canada that produces 1,000 barrels a day, we're kind of happy. A thousand. What does *that* do for you? We have 86 million barrels a day of [worldwide] production, and I think the accepted decline rate today is around 8%. So we have to find 7 million barrels of oil -- new oil -- a year. Well hey, I would certainly predict that we won't.

We have other charts of different countries and their production, and you can see most of them have [gone down] -- Oh hey, there's one that's going up! [said with mock surprise]. Oh, that's 'cause it's consumption - sorry! (Laughter from audience). [Displayed is a chart showing China's consumption over the last few decades, which looks like it has been roughly doubling every 10 years, 4 million barrels per day in 1998 vs almost 8 million barrels a day in 2008].

I don't often talk about consumption. I really don't. I just look at supply and say it's a problem. God forbid that *that* [pointing to China consumption] keeps going. I mean that is a big problem. I don't even talk to it, because I just don't think it can. In fact, if I had to make a prediction, U.S. consumption has to fall by probably 50% in fairness to the world. I mean, here we have 4-5% of the population and it consumes 30% of the world's energy? I mean, it's just anomolous. It's ridiculous. And I'm sure you're going to hear some thoughts about that from some people who need oil, who have bigger populations. And I don't know, maybe the mechanism is just jacking the price up by -- I have no idea what it is -- but this is a problem.

So, we are great believers in peak oil, and that the price of oil, certainly over the longer run, will do *nothing* but go up. Forever. It's a forever trade, trust me, [at least] in your lives. See, I'm probably the oldest guy here...
But it's going to be a problem. I mean, you go and try to find some oil. Look at Pearl Petro-Can in their UTS project, when they said that the cost, which was estimated at $19 billion last year, against which they've already spent something, has now gone to $28 billion. That's what it costs to get oil out of the ground. They probably won't even break even at $100 oil with those kind of costs. And that is just this year's estimates, don't forget. We [still] have next year's estimates.

I like near the end when Eric says that over the longer run, the price of oil "will do nothing but go up. Forever. It's a forever trade...".

"Hold on," you say. What about the decrease in demand with this whole world recession we're entering, which has already caused the price of oil to drop from $145 to $60? Eric gets asked that question later on, and this is what he says (at 47:45 - 49:00):

That's a great question. The question was, "How does demand destruction affect the oil price". You know, we're not naive. We're the guys predicting the economic contraction, so we all know there will be some demand destruction in energy. One of the great things about energy though, is demand is incredibly inelastic. You know, we all have to heat our homes, we all theoretically have jobs and we have to work, the subway has got to run. There's only so much you can cut back on. So I think that energy is one of the most inelastic demand cycles you can be involved in. There is some demand destruction going on now, and I've always imagined that we will see that, but ultimately when this Peak Oil cuts in, it will way more than offset any
demand destruction. So that's our thesis.

Makes sense to me.

I feel like I'm reading too many articles that make it seem obvious the only way for oil to go is up. Long-term, there aren't many people who see oil not going up. Criticisms of the Peak Oil Theory are far and few between (there's one small section on the Wikipedia entry). Am I being deluded by Peak Oil proponents? Could oil drop to $20 due to new discoveries and weakened demand in this recession? I can't really find any articles from this year predicting that oil would go that low and stay there for very long. So with oil being around $65, it seems like one of the best 'guaranteed' good investments in a long-term horizon -- something that would be good for an RRSP.

So we now see that Oil is a great place to be long term, and next post I'll show how an investment in DXO can reap huge rewards with even a mild increase in the oil price.

Shift Investments to Oil? Part 1

I've been thinking a lot about what to invest into next, from the point of view of "where can I make the greatest amount of money (both short-term and long-term), with minimal risk." And I'm coming to the conclusion that the place to be is: Oil.

Commodities vs Stocks:

From the risk perpective, I've been looking at ETFs comprised soley of commodities -- that is, the commodities themselves (e.g. oil, gold, corn, wheat) that trade on the futures exchange, not stocks of companies that are involved with such commodities (the latter of which most commodity-related ETFs actually hold, e.g. DIG). The risk of a further drop in the stock market is quite possible, and it's even more possible that after a brief rally, the recession/depression in the U.S. keeps the markets from gaining that much for the next few years. We've already seen gold stocks lose 50% of their value while the price of gold has gone up, so in a volatile market in the middle of a recession, stocks are a risky place to be. The prevailing consensus is that most commodities can only go up in the long term, especially energy and agricultural related commodities due to the double-whammy of increased consumption (due to world population increases and the rapid development in countries like China and India) and declining production (running out of resources, getting harder and more expensive to grow or extract resources).

Now, unless you're buying actual futures contracts, which often have a leverage of 10:1, it used to be that stocks related to the commodities would go up by a much larger percentage than the percentage increase in the commodities themselves. So while I'm interested in commodities, I still want something that will increase a lot when the commodity goes up. We'll get to this later...

Which Commodity?

While Sprott and others believe gold will go to $2000, there seems to be some risk that that may not happen, or it may take a while. I've noticed the guys at Sprott seem to talk more about energy and oil than gold. I'll be pointing out some quotes from the recent Sprott Webcast that talk about the Oil situation a little later in this post. There seems to be less downside risk in Oil to me, but maybe I just haven't read enough views about how bad the current and upcoming (short-term) decrease in demand could affect things and how low oil could go. Then there are other commodities, such as agricultural ones, which don't get much attention and which I honestly haven't looked into that much. World population and increased standard of living in China in India are going to mean we'll need more and more food (whether to feed the people or to feed the animals that the people will eat!). It's hard to say which commodity has the most potential and least risk, but lets see what's happened with some of the commodity ETNs the last little while...

Commodity ETN potential performance:

The only 2x leveraged pure commodity ETFs I know of are the ones from from Deutsche Bank (who is known for their PowerShares series of ETFs). Their pure commodity plays are actually ETNs (Exchange-Traded Notes), which don't seem much different from ETFs to me. Their list of commodity ETNs can be found here. They haven't been around that long, but most began trading just before the peaks in commodities that occurred around March 2008 or end of June 2008. Let's look at the difference in price now from their peak, in order to see the potential gains we would make if they went back to their peak price...

Gold 2x ETN: DGP (comprised of Gold futures):
- Current price: $12-14 Peak Price: $28 Difference: 2x

Agriculture 2x ETN: DAG (comprised of corn, wheat, soybeans, and sugar futures)
- Current price: $8-11 Peak Price: $29 Difference: 3-4x

Base Metals 2x ETN: BDD (comprised of Aluminum, copper, and zinc futures)
- Current price: $7-8 Peak Price: $28 Difference: 4x

Oil 2x ETN: DXO (comprised of Oil futures)
- Current price: $4-6 Peak Price: $29 Difference: 5-7x

Commodity 2x ETN: DYY (just a mix of everything, specifically: wheat, corn, oil, heating oil, gold, and aluminum)
- Current price: $8-10 Peak Price: $35 Difference: 4x

So any of these look pretty good -- a chance to make 2 to 7 times your investment if the commodities go back to their peaks. Now you could argue that that scenario is unlikely, as the commodity boom was fueled by a lot of speculative traders. However, Sprott and others are arguing that the commodity boom will continue, especially with oil and gold having nowhere to go but up.

Looking at the above numbers, we can see that oil has had the greatest drop, and maybe the greatest potential to reach it's previous highs again. Can you imagine making 500% (6x) your investment in a few years if oil hits the $140's again? What is the risk? Could Oil go back down to $30 or $20 again?

Anyway, that's all for this post, which just touched on the potential for gains in the commodities -- specifically oil. In the next post, I'll mainly talk about what Eric Sprott talked about in the latest webcast, and then look in more detail at investing in DXO.

Trade Update - DIG

Guess I didn't need to worry. Sold a lot of my DIG off today at $36 and $37 today, for about a 37% gain on those trades!

Trades:
Account 1: sold all the DIG bought at 26.07 for $36.02 (+38%). So I need to start looking at what to buy next.

Account 2: sold another 1/3 of DIG (bought at 27.20) for $37.00 (+36%). I'll probably hold onto the remaining 1/3 longer term, maybe selling off around $50.

too busy

I wanted to sell off some DIG today, but I'm starting a new project at work and have been too busy to monitor the markets. When I was able to briefly check near the end of the day, I thought about putting in a sell order at $35 (which probably would have gotten filled), but then I got pulled away with work anyway. Tomorrow things will likely pullback, and of course I'll regret not selling once again :)

Today

The markets were up again today -- especially energy stocks. I wasn't able to watch the markets at all today, so in the morning I just put in a sell order for DIG at 36.00, hoping it would get hit, but it didn't quite make it. It was up to the low 35's, up over 15%, near the end of the day, and then everything dropped in the final few minutes, with the DOW and S&P actually ending up in the red.

Tomorrow, Exxon Mobile (XOM) has it's 3rd quarter earnings release. XOM makes up about 30% of DIG, so it could really have an effect on it (and all energy stocks)... which is why I wasn't sure if I still wanted to be holding lots of DIG at this point. The earnings are going to look stellar because oil was between $100 and $150 during that time period; however, everyone is expecting this and thus the price has been pushed up in advance. After the last 2 days of great gains, it could easily be sold off tomorrow. I'll just have to wait and see what happens.

Sprott Webcast

There's a new Sprott webcast from Oct.1 here.

The first 52 minutes are Eric Sprott. I love listening to him talk, especially when he gets fired up a couple of times about a few things that drive him nuts (like talk of 2-5% inflation when he says it's more like 20-25%). In the talk, of course he speaks to the incredibly poor performance of the funds, even though they completely predicted what was going to happen. He's quite convincing as usual in conveying that they are in the right positions, know what they are doing, and it's only a matter of time before they're proven right. He paints a pretty scary picture of the US financial system, and makes a convincing case for energy and gold/silver (their 2 main holdings). His opinions seem a little extreme sometimes compared to what everyone else is saying, but he's a contrarian, right? And how can you not believe this guy when he's always right... eventually. And thats just the problem -- he seems to predict things about a year or two early, and so you never know when the predictions are going to come to fruition.

The next 8 minutes are John Embry (who I love listening to as well), who makes very strong accusations about the gold market being completely manipulated by the government and banks. It will sound very conspiracy-theoristy to most people, but the evidence is quite clear. He makes bold predictions about gold going over $1000 shortly and never returning below that... ever... ever. The new gold guys at Sprott are saying gold at $2000 and silver at $40 within 4 years. It's just very hard to reconcile these views with what's been happening, but you feel the breakout in gold/silver is indeed about to occur, especially with the disparity between the lagging paper market and the current physical market that has the crazy demand and prices we're hearing about. I don't want to miss out on the ride up, so how can I not hold on?

I didn't watch the next 1.5 hours or so.

In sum, they've done a good job of convincing me to hold on to most of my Sprott holdings. I say "most" because I'm considering selling some, after what I saw today. Check this out: Today, U.S. indices up 11%, TSX up 7%, HUI/XAU (Gold stock indices) up 12%, gold & silver bullion pretty much flat. How did the Sprott funds do, you ask? They should be up at least 5%, right? Here are the results... Canadian Equity Fund: -0.1% . Energy Fund: +2.7%. Gold & Precious Metals Fund: +1.07%. What. The. Heck. How is that even possible? I'm too lazy to lookup today's performance of their individual top 10 holdings to see what happened (e.g. one stock down -20% or something). My first thought was that they must have freaked out and have gone to 30+% cash in their funds, but after listening to the webcast today it seems pretty clear they haven't changed their strategy in any way. So I don't know what happened. Today's pathetic, unexplainable performance alone makes we want to sell some to put the money to better work myself... I mean, they can't even make money in their gold & energy funds when the HUI/XAU and energy stocks go up 12%, come on. I don't want to sell too much though, thinking I can invest better than Sprott, because I'm sure I'd be proven wrong within a year.

Trade Update - DIG

Monday was a bad day, with DIG down 10%, but today (Tuesday) the markets took off in the last 2 hours of the trading day, with the DOW having it's 2nd biggest point gain ever -- 889 points, almost 11%. DIG followed suit, although 2x the gain of course, closing up almost 22% at 30.10. I decided I would take some profits near the end of the day. Since it was skyrocketing towards the close, I just waited and waited until the final 2 minutes, before finally selling my portion at 30.27, pretty much the day's high.

If DIG continues to rise, I'll probably look to sell at least 1/2 around $36, and the remainder at $40+, if it looks like it will get that high.

Trade Status:
Sold 1/3 of the DIG I recently purchased at 27.20, sold at 30.27 (+11% gain).
Note: Still also holding the original DIG I bought in another account at 26.07.

The Market Speculator

I stumbled upon a great blog by a seemingly very succesful trader here:

http://themarketspeculator.blogspot.com/

Very detailed, informative posts, updated daily.

Freaky Friday

Well today was interesting. I woke up early only to find that the overseas markets had plummeted again, oil dropped from $68 to $63 after OPECs decision to cut 1.5 million barrels per day -- about the expected amount (so I guess it was buy on rumour sell on news... bah!) -- and Pre-market futures had dropped so low they hit their max limit for the day (-550 points for the DOW), and of course another load of bad news was released. People were panicking and there was speculation of the DOW opening down 1000 points and how it was going to be complete anarchy. It turned out to be not so bad, considering the oversees market performance and dismal news, and the DOW ended down only (yes, "only") 300 points.

On open, Energy stocks were down the most at about -10%, meaning DIG opened about -20% in the $23-$24 range. The markets didn't open as low as everyone expected and started rising. I was a little freaked out of course (I shouldn't have woken up early to see the news) and I had my finger on the trigger to sell. As I saw the market rising a bit, I was considering just trying to get out of DIG at a small loss around $26, especially when it finally hit that. I was nervous about the market tanking mid-day.

But then I imagined I wasn't invested in anything right now and thought about what I would be doing in that scenario. And I realized I would probably be wanting to buy DIG immediately while it was low, and I wouldn't be that nervous about it. After all, oil was down to $63 now, the markets were way down and starting to rise, and it was at the same price I had previously purchased it at when everything was higher. I realized that I quite commonly tend to freak out when I've bought something that goes up and then comes back down to the price I bought it at, even if I would be happily buying it again if I had never bought it.

So I decided to hold on. DIG rose quite a bit (thanks to Exxon Mobil doing a little better than the average energy stock) and finished -8% today at 27.56, above my average purchase price.

Gold also hit a low of around $680 and then shot up to $740, ending up in the 730's. I really think $680 is the bottom for gold. I'm hoping that with it so low and people finally being spooked enough with the continued selloff of the markets and bleak outlook, they'll finally start to flock to gold again. I don't think the rise in the US dollar will last much longer, and then gold should shoot up to the $800's.

Trade Update - DIG

With the cash from selling SSO, I loaded up on a lot more DIG today at 27.20. Oil is sitting around $68. This is somewhat of a gamble if I'm not willing to hold long-term, because it could move way down tomorrow depending on what OPEC does tonight. But again, the potential short-term upside is huge too.

Edit: DIG shot up 10% at the end of the day, closing at 30.00, on expectations of OPEC's cut. Let's just hope this isn't "buy on rumour, sell on news".

Trade Update: SSO, DIG

The market plummeted today, and energy and gold stocks got hit the worst. I got stopped out of the rest of my SSO at 29.02 today, which was right around my break-even, for an average of +7% on that trade. I never did end up placing a stop on DIG like I said I would to lock in 30% gains, and now it's only about 3% above where I bought.... oh well. Stops are great, and I really should start using them on all my trades since I can't pay attention to the markets throughout the day, and even if I could, I have a tendency to not be able to force myself to sell :)

I have no idea what's going to happen tommorrow, but I'll probably hold on to DIG even if it drops more, because I don't have too much in it, and I believe the upside potential to be huge.

Trade Status:
SSO - stopped out of the rest at breakeven, with first half +15% = +7% average gain over 5 days.
DIG - holding on...

OPEC's tough decision

Two articles on OPEC's upcoming decision on Oct.24th:

http://www.nytimes.com/2008/10/22/business/worldbusiness/22oil.html?ref=worldbusiness&pagewanted=all

http://seekingalpha.com/article/100839-opec-expected-to-decide-on-production-cuts-friday?source=article_lb_themes

I'm curious what they're going to do and how much it will actually affect the oil price. I'm betting they'll announce a significant production cut and oil prices will rebound a bit to $80, unless the markets drop more this week + U.S dollar rising, which will just bring oil down. But that's just a wild guess -- no one really knows.

Up-to-date

Okay, I'm finally caught up on this blog. I've given a brief overview of my investments over the last 5-10 years or so and can now finally blog "real-time".

It's Monday, and 3 days after my purchases of SSO and DIG, things are looking pretty good. DIG is up an astounding 41% and SSO is up 17%. Today I sold half of my SSO at a 15% gain. I just wanted to lock in some profits in case things take a turn for the worse tomorrow. I'll be setting a stop-loss order to make sure I at least break-even on the remaining half; but otherwise, I'll let the profits run for a bit if the rally continues.

The reason things could take a turn for the worse is because, as my brother brought to my attention, all the CDS's are being unwound this week from the Lehman bankruptcy. As my brother puts it:

All the people who sold credit default insurance on Lehman now have to pay up because Lehman defaulted. Most of the people who sold this insurance are other financial companies, so they could take a huge hit. This is how it cascades. If even one of these companies can't pay out on the insurance, then they go bankrupt, thus defaulting, thus causing all the companies that wrote insurance on them to pay, on top of what they already have to pay for Lehman, which causes others to default, etc.

The settlement for these payments is supposed to begin tomorrow, Tuesday. So who knows what will happen this week.

I would've sold some of my DIG, but I own so little that I didn't want the transaction costs taking away from my profits (since RBC still charges $29 per trade. I'm just too lazy to open up an account with a cheaper online brokerage and having everything in one place is nice). On Oct.24th, if OPEC announces only a 1 million barrel per day cut, oil could drop to $60, but if they announce a 3 million barrel per day cut, oil could go to $90. If oil continues to rise up to the meeting date, I plan to sell the day before as expectations could be too high, otherwise I'll probably hold with a stop-loss order in place to lock in at least 30% gains.

Trade Status:
SSO - bought 2008/10/16 @ $28.63, sold 1/2 on 2008/10/20 @ $33.00 (+15% return)
DIG - bought 2008/10/16 @ 26.07, still holding, currently at 36.83 (+41%)

Jumping in

So it's Thursday, October 16th and I've been itching to get into something. The markets have double-bottomed and all signs point to a temporary rally. Yes, Sprott still thinks we're just in the 4th inning and is still extremely bearish on the general markets long term, and bullish on gold and energy.

I don't want to borrow more money to invest, and I don't want to sell any of my Sprott gold and energy as I believe it's at the bottom. So what do I do? Well, lo and behold I happen to have some cash in my investment accounts that I was unaware of. I thought I was fully invested and never check my account details since I know exactly what I hold and roughly what is happening with it. But this last Thursday, I happened to look more closely and noticed the cash sitting there. It wasn't much money to trade with, but it was a start.

Since my brother believed in a market rally and was buying SSO (and call options on it), I bought into this 2x leveraged ETF too. I agreed it looked like a temporary market bottom.

Also, that day oil had dropped to $70 (from a high of almost $150 3 months ago). Energy stocks had come down so much and were sitting incredibly low this whole week -- about 60% off their highs! It seemed almost too obvious:

• Most oil predictions are around $80-90 for 2008, with Sprott and Merryl Lynch and others still predicting $150-ish oil in 2009-2010. Oil could go to $50 short-term due to lower demand, but that could not last long with the depleting oil reserves and continued increase in world-wide energy needs due to China and other emerging economies.
• OPEC moved their emergency November meeting up to Oct.24th as they are panicked about the crash in the oil price. They are predicted to slash production by $1-$3 million barrels per day to stabilize/increase the price. The market doesn't seem to be reacting to this yet.
• There are many energy companies that will be profitable even at $50-70 oil, and they seem way oversold right now.

I figured there was a potential for big gains here, but I didn't have much money to invest, so I looked for a leveraged ETF and found the Ultra Oil&Gas ProShares (DIG), which I bought on Thursday as well. The only thing I didn't like about this ETF is that Exxon Mobil makes up about 30% of the index; I don't like indexes that have such a large percentage in one stock.

Trades - Oct.16, 2008:
Bought SSO @ 28.63
Bought DIG @ 26.07

Eggs: meet Basket

So where was I... Sprott Canadian Equity Fund (SCEF) was making me incredible returns from 2003-2007. I had also diversified into their Precious Metals/Gold fund and Energy fund, which really wasn't diversifying because SCEF had basically had become equivalent to half of their Precious Metals fund and half of their Energy fund. In fact, I believe SCEF now has to be classified as a precious metals fund due to the amount of gold bullion and precious metals content.

Anyway, in late 2006 I was continually reading articles from Sprott and other trusted sources predicting the upcoming U.S. housing market crash, possible financial meltdown, and almost guaranteed U.S. recession (all of which came true). Sprott and others were going on and on about how gold and silver were the only safe havens, and how gold, then at $600, would soon skyrocket over $1000. I decided it was time to take another plunge to hopefully protect myself and make a killing in the process. So in early 2007, I borrowed a whole shwack of money again and invested it all in the Precious Metals fund.

So now I pretty much had everything in gold and energy. While all my eggs were pretty much in one basket, I couldn't see anything else worthwhile to invest in; diversification wasn't an option. But I also didn't want to sit on the sidelines in cash. And I was somewhat correct as it turns out, there weren't really any good investments the last year (as far as "long" positions go).

I was unprepared for what happened next. Gold did move according to plan: in one year the price of gold went from $600 to $900 (and at one point over $1000). However, gold stocks went down about 10%. I couldn't believe it. But that was just the tip of the iceberg. They gradually went down more, and then the whole recent subprime/financial crisis hit. So I thought, "good, my gold stocks will pay off now". But as the financial stocks started plummeting, eventually the whole market and world markets crashed 20-40% at the beginning of October. The gold stocks that I thought would save me came down even harder, and energy stocks even worse than gold. I thought I was prepared for this, thought I was protected. Looking back, I feel pretty stupid for underestimating what a market crash can do. SCEF is down about 40% YTD, and the precious metals fund is down about 50% YTD. I've lost a lot of eggs -- on paper.

Now, I don't blame Sprott at all. Their overall call was correct. In fact, Eric Sprott has always been so bearish that he's never recommended anyone investing in his long-only mutual funds! Seriously! Even though his mutual funds had performed better than his hedge funds to date, he always recommended the hedge funds, which could hold short positions, which he felt was needed to add protection in this secular bear market (and lo and behold I believe the hedge funds are anywhere from only -10% to break-even YTD). I knew that Sprott was short on all the financial stocks. If I truly believed what they were saying, I should've had some short positions. I didn't want to get into shorting or buying put options though, so never gave it a second thought. If I would have done my research though, I would have discovered that there are great inverse ETF products out there -- leveraged ones too (e.g. SKF or SDS), which basically allow you to short various indices without actually shorting. I already had plenty gold; I shouldn't have bought more. I just didn't see the other angle that I could attack from. Oh well, lesson learned, and now I know about all these great ETFs out there.

I still trust my holdings in Sprott -- they've had big losses before and have recovered. They know what they're doing, and their responses in conference calls to the recent horrible performance have been very re-assuring and encouraging. I do believe gold is poised to skyrocket again and that gold stocks shouldn't go much lower, so there's no point in selling now near a bottom.

With the markets having dropped so much and everything getting so crazy volatile (record one-day gains and losses in the DOW being broken every week), I felt there was a lot of opportunity out there that I didn't want to miss out on. Mutual funds are not nimble enough to be able to fully participate in some of the short-term opportunities. So the itch to begin some stock trading set in...

Starting with Sprott

What if I told you there was a fund out there that had a 25+ year average of making over 25% per year, and did it quite consistently (no wild 300% gains one year, -80% another, etc.) Some people get lucky for a few years, but this is a 25 year-history! Forget that it's hard to find any results that go back even close to that far, this track record was as good as or better than Warren Buffet's. This was not luck.

This nearly impossible feat is what Eric Sprott managed to accomplish in his private managed accounts at Sprott Asset Management. Click HERE for an archived PDF of this performance history. The graph on that page speaks for itself. This is what I had stumbled upon in 2002, and as I began reading articles by this man and seeing what he had done, I knew that this is where I had to put my money. I loved his insight and philosophy to investing. He and his team had (and have continued to) accurately predict what the markets were going to do and where money should be invested; they proved this with their brilliant articles and their stunning results.

Oh, one small snag though that I forgot to mention: you had to be a multi-millionaire to have a managed account. Luckily, Sprott had decided to open up a public mutual fund back in late '98, called the Sprott Canadian Equity Fund which was supposed to follow the same trading style as in his managed accounts, primarily investing in small-cap Canadian stocks. The mutual fund was already averaging over 30% per year for the 5 years it had been open. It made huge gains both during the dot-com boom AND through the bust. Unfortunately, even this mutual fund required a $25,000 minimum investment at the time (later dropped to $5000), an amount that I did not have.

I finally decided to take the plunge at the beginning of 2003, opening a line of credit and borrowing a bunch of money to allow me to make the investment. And I'm glad I did. From 2003-2007, the fund enjoyed the following yearly gains: 30%, 38%, 13%, 40%, and 14%. This is equivalent to about 26% per yr, which is what I had expected. hmmm... maybe I should write a post about the phrase "past performance is not indicative of future returns"...

Anyway, there is too much I could write about Sprott, so I'm not even going to start :) All I can say is you should read every single Markets At A Glance article on their site. And peruse the rest of their site at http://www.sprott.com/.

The early beginnings

I thought I should start off with a quick overview of my investing history...

I've always been a math/computer-geek guy, always have loved numbers and formulae and problem solving. I don't remember when I first got interested in the stock market, but I don't know what took so long. I don't think it was until around 1999 when my brother started telling me about all the money he was making (on paper) in cool tech stocks he was buying. Ah yes, the dot com bubble. I eventually opened an account in 2000, right when the bubble was bursting. Of course, after most stocks dropping 50% off their highs, it seemed like a perfect time to buy: how could they go any lower?! Long story short, we all know tech stocks ended up dropping about 90%, and yes, I held on for the ride down and lost most of my money.

Luckily I didn't have too much money at the time so I didn't really lose that much in hindsight, but it felt like a lot at the time. After that I just noodled around very little in stocks. I still always read financial news every day, read about stocks, was addicted to looking at charts, imagined what I'd invest in each day, but I was a little too scared to buy much.

I started thinking I wanted some good long-term investments, and in looking around, I was quite disappointed in the long-term performance of all mutual funds. I began a quest to find the best investment possible, the absolute best that was out there. I wasn't going to settle for some bland generic fund that averaged 5-7% per year. I figured there had to be something/someone out there that could consistently make huge returns long term. I searched and searched, weeding through shady products and scams, more boring funds, getting more and more depressed, until one day, I stumbled across the secret treasure chest that met and exceeded my wildest expectations -- it was almost too good to be true. It was *exactly* what I was looking for... and its name was Sprott. (to be continued)

First Post

I started this blog in order to:

(a) convince my brother to start up a similar investment blog, since he always has a million things to say about the market, options trades he's making, etc., which he always just emails me instead of posting somewhere.

(b) have a place to keep notes on what I'm thinking any given day, what I'm investing in, what trades I'm making, what my predictions are. Something that will be fun to look back on, and maybe something that will help me learn from my mistakes.

This isn't meant to be a public investment advice blog. I intend this to be more of just a personal investment diary for me and any family or friends who may be interested.