Disclaimers: Dan Plettner owns GCS and VXX in his Covestor Core Model.
The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic,Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
August 2, 2010: As the close of July draws near, I believe the equity market has been moving in the direction of valuation merit, but I also find continuation of a trading range to be likely. On, July 2nd the New York Times actually lent credibility to Robert Prechter’s “likely” assessment of the Dow Jones Industrial Average breaching 1,000. I perceived the credibility granted to such extreme talk as indicative of at least a near term bottom. I have not had the extensive conviction and opportunity necessary in any Market assessment to either detatch from, or fully embrace concentrated equity risk since contributing a newsletter to Covestor.
I would have liked for more of my underlying risk assets for much of July to be tied to equities and floating preferreds. The June 28th announcement that DWS Enhanced Commodity Strategy Fund (GCS) had adjourned a shareholder meeting that stood to afford liquidity to shareholders affected my choices. My written thesis has been that shareholders would achieve liquidity via a merger into an open-end fund, because Deutsche Bank and DWS have already maximized the duration and magnitude of pain they can tenably inflict on shareholders (SeekingAlpha). After reading an available open letter from the Activist and contacting Deutsche Bank (DB) myself with the opportunity to clarify, I believe Deutsche Bank chose a delay for self-serving reasons.
I am happy that Western Investment LLC through its Activism campaign has achieved a benefit for all the public shareholders of GCS. When Deutsche Bank holds true to its press release, I look forward to seeing the value inherent in the market price discount being unlocked. I have had plans to deploy my capital, once fair value is unlocked. My plans adapt with changing profiles of available opportunities, and the broader market environment. My choices here will depend on what I perceive to be appropriate, on a risk-adjusted basis.
While July 2nd happens to currently be the year’s closing low point for the S&P 500, such does not make me “right” in assessing the relevance of the credibility granted to Prechter. At the end of June, I contemplated “whether June really was so awful, or if it concluded on the downside of what remains a volatile market”. I continue to contemplate similar questions. Has anything changed, or are we emotional observers of a trading range that reflects Mr. Market’s continuing bout with bi-polarity?
Consistent with my risk-adjusted performance goals here, I bought VXX on July 27th. Shall the trading range persist, my belief is that the VIX will move higher before the S&P revisits recent lows. Such a tool has not been available to me at a more reasonable price since early May and was significantly more expensive during the market’s ascent in ’09. In short, I am happy with entry price for the near term risk-mitigation tool that I chose. VXX enabled me do some near term posturing with less trading and without altering desired long term positions.
Regarding Europe, I closed a VGK trade within each applicable style bias account in July. I’m much more proud of the purchase decision for timing, and discipline than my premature closing of the position. VGK appeared a smarter risk-adjusted opportunity than Closed-End Fund EEA to buy European Equities, with both the Euro and European Equities appearing emotionally oversold. In hindsight I do wish I had been less risk-averse when closing the position. I could have captured more of the rebound.
I’m surely never perfect in my timing. But, I do always desire to get smarter and better in all ways by being critical of myself because I perceive the long term as the aggregation of many short terms.
