Author: Alejandro Paschalides
Covestor Model: Energy
Disclosures: Long BPZ, Short UCO
We are pleased with how the portfolio has performed since the last letter in October, and are happy to have been on the right side of the rally. The environment has changed since then, however, and I expect the S&P 500 to decline or at best be flattish over the coming months due to cessation of quantitative easing.
I have sold short some high-flying consumer-focused stocks, with the expectation that they will be hardest hit if the market corrects significantly, and thus provide a hedge to the portfolio.
I closed out Trinity Industries, Inc. (NYSE: TRN) and Baker Hughes Incorporated (NYSE: BHI) and opened a position in BPZ Resources, Inc. (NYSE: BPZ). BPZ has had a dramatic selloff recently, and is trading far below the net asset value of its fields. We think this is an attractive entry point, but because the stock is volatile and difficult to value, we will keep it as a small position and see what happens.
We also initiated a new short position in ProShares Ultra DJ-UBS Crude Oil ETF (NYSE: UCO). This is an example of an ETF that experiences both contango drag and volatility drag. Because the portfolio is positively correlated with oil, shorting this ETF provides a effective way to reduce volatility without, in most likelihood, significantly impacting returns (because volatility drag and contango drag will in the long-run offset adverse short-term movements).