Friday, July 20, 2007

Gold and BEARX

It's officially defensive-fund season, and this has me thinking about the Prudent Bear fund (BEARX) again. Part of the strategy used by BEARX is to invest in gold-mining and related companies, since gold usually increases in value during economic downturns. These long positions are part of the reason that BEARX has actually been able to go up in value during slow market rallies.

Carl Swenlin on his Decision Point website points out that gold has been on a huge bull run since 2001, and may be poised to crash in the not so distant future. That run-up in gold has obviously helped BEARX over the last few years, and if Mr. Swenlin is right about the upcoming gold crash, then BEARX's ability to rise during bull markets may be coming to an end.

All in all, these concerns are enough to keep me out of BEARX. For the time being, I no longer recommend BEARX as a defensive fund.

7 comments:

jademonki said...

great article from Decision Point on gold and bearx. I'd like to get into this but seems maybe a bit late looking back at gold's massive run up to here ?

I just watched a spot on Wisdom Tree's ETF called Emerging markets high yield, or DEM.

sounds interesting and it's comprised of high yield stocks of emerging markets so you get paid dividends as well.

have you heard of it or have any thoughts on this?

thanks again,

jademonki

pokeytax said...

I'm not sure you should be so keen on DBV either for your purposes. It's not really a market-independent ETF - it operates on the carry trade between yen and Oceaniadollars. In the event of a sharp market decline, the carry trade is going to get squeezed hard. Maybe a good fund, but I would never pick it as a defensive fund I held while expecting the market to decline.

As a grumpy bear myself, my pick for a defensive fund would be HSGFX over BEARX, no contest. As a bonus, they don't rely on commodities.

Hodarius said...

Jademonki,

I really like Wisdom Tree's ETF lineup in general, particularly for long-term, buy-and-hold investors. However my particular method works best with funds that have the highest volatility, not necessarily the highest long-term return.

My strategy is to buy volatile funds at the bottom of a correction, and then sell them at the completion of the recovery. I think any emerging market ETF will work well with this method, including DEM. Right now I'm partial to EEM simply because of its diversification (relative safety) and high trading volume. I'm hoping for a 2x leveraged emerging market ETF in the near future.

------------
pokeytax,

Thanks for your comment, and welcome to the blog!

DBV picks 6 currencies from the G10 countries, going long on 3 and short on 3 more. (Except it never hedges the dollar.) The positions are determined by the interest rates in those countries, and are adjusted as interest rates change.

As far as DBV's suitability, the track record of the index speaks for itself. (http://www.dbfunds.db.com/dbv/index.aspx) Sure, DBV has occasional down blips, but the big picture is that DBV makes steady gains in all market conditions. Particularly take note of 2000-2003.

Regarding HSGFX, I'm intrigued by its day-to-day anti-correlation with the S&P 500. However the fund's average return over the past 3 years is less than 4% ... which is not much better than a simple and safe money market fund.

Even looking at shorter-term performance through corrections, I can't say I'm impressed. From December 2006 to the bottom of the next correction on March 5, HSGFX returned 1% or less, depending on when you purchased it. After including brokerage fees ($49 on TDAmeritrade) and expenses (1.14% annually) it hardly seems worth it.

However, I would certainly be interested in a low-beta stock fund like HSGFX if the medium- and long-term returns were better.

pokeytax said...

Well, like you said, HSGFX is a low-beta stock fund, without commodities juicing returns. ITD it is up 9% annually on the S&P thanks to 2000-2002, but I just noticed it's got a redemption fee for holdings of fewer than six months so it's probably not worthwhile for you.

Regarding DBV, I know how it works - short yen (and francs and kroner) and long New Zealand and Australian dollars (and pound sterling). But a sharp correction is likely to cause liquidity issues with bad consequences, because this carry trade is at an all-time high - see http://etf.seekingalpha.com/article/41870 or any of a billion other carry trade articles. An example of this is the March 2007 correction, where DBV wasn't really a safe haven in the way you're looking for.

For those reasons I have a small long position in FXY as a defensive hedge, which is not far removed from being short DBV. It's not that you have an opposite position that worries me, it's that you have an opposite position for the opposite reason!

Hodarius said...

Pokeytax,

Yes, I've been watching Roger Nusbaum's coverage of DBV ever since he brought it to my attention in his blog. Nusbaum seems conflicted about it; he's definitely taking time to research and talk about it, but he's also been afraid of it almost since day one. On February 5 he sold it "on a hunch," and the fund has since gained 13%.

http://japan.seekingalpha.com/article/26104

I am first and foremost a contrarian investor. When I hear that good folks like Nusbaum and yourself are betting on a Yen rally, then I assume that most investors are making the same bet, meaning it's already too late to make money on it. This logic doesn't necessarily work 100% of the time, but it does work most of the time.

Indeed, now that I look at the charts, I see that the Yen (FXY) has already staged a 2% rally since June 22. DBV has gained 2.5% in that same time span, despite its short Yen position. That's the advantage of placing bets on 6 currencies instead of one. All other things being equal, I expect it would take at least a 3% change in the Yen to cause a 1% change in DBV.

Sure, for all I know there could be a record rally in the yen tomorrow which hurts DBV, but my contrarian antennae tell me that too many people are worried about it already for it to be a large threat. Whether or not you and Nusbaum prove right this time, I'm simply betting that my intermittent DBV positions will, in the long run, result in a net gain for me.

pokeytax said...

Well, as long as you know the risks. You've got moxie!

Hodarius said...

Thanks, Pokeytax. Time will tell.