SURVIVING THE GAME

APRIL 14, 2009

2009 - 26

MARKET COMMENTARY

Sideways action. After topping out at 865 or so the S&P is now pulling back. I think it is the classic buy the rumour, sell the fact. Intel is a good example. Strong rally into tonights earnings, they beat by a mile but still selling off after report. I feel that the market has just overdone it and needs to rest. I will still get long on a strong pullback to 750 or lower but that might not happen. Will see what happens and assess getting long in the future if we simply consolodate.

Many commodities have done the same as the stock market. Big rallies. Look at Copper and Soybeans as an example. I expect those markets to pullback as well and consolidate.

Natural gas has been beaten to death. You could consider starting to get long at these low prices. Remember to allocate, divide and enter in stages.

TRADES

I closed a trade in the CDN$ today. I sold the CDN$ MAY 8050 straddle at 348 on March 31st. Closed it today for 295. Small gain of 53 pts ($530) per straddle. I did 10 for the portfolio.

Still holding SPY straddles, SU, USO and uraniums.

Uraniums showing the first sign that they can uncouple from the general market. Up today despite market correction. MGA and PNP doing really well. Even DML coming back. Up about 20% on basket since getting in March 16th. Hold.

Portfolio up about 35% since October.

ETF'S

I thought I would talk a bit about ETF's. They have become a popular investment tool. Some are outstanding, others not so.

The grand daddy of them all is the SPY. Yep, the one we have been doing some straddle trades on. It is the largest, most liquid of all ETF's. It tracks the S&P 500 exactly. Great tool for trading a large basket of stocks.

At the other end of the line are the leveraged ETF"s offering 2x or 3x exposure to their underlying. An example is UYG (2x) or FAS (3x). Both these track a basket of financials. We traded some UYG back in October and made a few bucks doing so. The risk of these is that they don't always track their underlying well. The best example I know of is the Horizon BetaPro ETF's. eg. The HBU in Canada tracks gold 2x up. In the last year gold is basically flat. The HGU is down 23%. The HBD which is supposed to follow gold down 2x actual movement is down 15% in the last year while gold is flat. How can that be? Both should be even. The truth is very hard to explain but simply put, the tools used to lever your investment 2x cause losses over an extended period of time. Poor management by Horizon has a lot to do with it as well. The point is, you need to know what your getting into. These funds are designed to move 2x the movement of gold BUT only on a daily basis, not over a long period. As seen, if you bought either, you would be down 15-23% in a year while gold is flat.

There are numerous examples of ETF's that perform just as poorly. Just be careful!

ETF's are great for following sectors. eg financials, energy, gold. You just need to use the right ones. For gold, use the GLD, for financials use XLF. These are liquid, non-leveraged ETF's with low expenses and good tracking to the underlying. Avoid the crazy ones like FAS and all the Horizon funds, they are not worth it. If you want leverage, buy on margin. You can purchase most liquid ETF's with 30-50% margin. This gives you 2-3x exposure without the nightmare of being involved with the leveraged ETF's offered out there.

Options Guy
optionsguy@shaw.ca