Energy vs. Financials, FINAL RESULTS

Many of you may be familiar with this sectoral strategy that I have presented, which was due to the unusually wide extreme to which these two sectors had diverged from each other as of April 22, 2008. To review :

On April 22, 2008, I decided to go short on Energy (XLE) and long on Financials (XLF).

Then, on May 20, 2009, I decided to cover the Energy short, and use the proceeds to double down on Financials.  Up till that point, the trade had earned a loss of -5.36%, vs. a loss of -32.20% for the S&P500.

Now, it is time to sell the Financials position, and assess the final performance over the entire 18-month period, against the S&P 500.

The purple line indicates the May 20, 2009 transition from being short XLE to covering that short and using the full proceeds to double down on XLF.  Note that the short of XLE was profitable, so that the amount that was redeployed to XLF was more than the existing value of the XLF position. 

Therefore, the final results are (with all dividends reinvested) :

 
This strategy yielded a gain of 21.92% vs. a loss of -17.19% for the S&P500.  This is a huge gap of almost 40 points, and means that $10,000 deployed to this strategy would have yielded $12,192, vs. just $8,281 if placed in the S&P500 over this period.  Also note how the gap widened from what it was on May 20, 2009. 

This continues our track record here at The Futurist of collectively beating the market by a wide margin, with portfolios that beat the market greatly exceeding the deficit of those that do not.  Of course, these trades are for entertainment purposes only, and should not be taken as professional advice. 

Related :

A History of Stock Market Bottoms   

Comments

[Geoman]

Interesting.

One comment I have - what do you perceive the effects of unconventional gas on future energy prices? As I understand it, shale gas has increased the proven reserves of natural gas in the U.S. by 35% in the last three years. Oil is now 4 times more expensive for the same amount of energy.

A gas/nuclear/solar future seems viable...

[jeffolie]

Since 2007, I sold my stock market position and started a small short position that I still maintain.

I bought gold below $800 and silver as low as below $10. I hold my precious metals in physical form.

I sleep well and expect my large gains through 2013.

[GK]

Geoman,

If gas can be used for electricity generation, that would be the killer ap to replace a lot of coal.

Some car engines use gas, but unless millions of those are produced and sold, it can't really dent oil. That is, unless plug-in hybrid cars are using electricity generated via natural gas.

[Geoman]

Conversion of cars to CNG is not that hard to accomplish. There are even home kits for doing it, so converting off the shelf petroleum powered cars to run on CNG shouldn't be too hard. Certainly cheaper and easier than inventing electric cars. An alternative is conversion of gas to liquids (diesel). This is in essence the Picken's plan after all - use renewables for electricity, and natural gas to drive cars.

Will a large and sustained gap in cost per BTU between oil and gas start changing how we view things?

But you are right, displacement of coal is the most likely outcome of cheap gas. Which of course has no impact on oil prices.

Most people don't realize - almost all our imported oil goes to autos and nothing but autos. High oil prices are therefore predominately a transportation issue. That is why oil spikes have almost no impact on electricity rates, while gas spikes do.

[GK]

jeffolie,

What price do you think gold will rise to, and why? Keep in mind that gold has no inelastic demand the way oil does.

I think we are relatively close to a top in gold.

Geoman,

That is why plug-in hybrids and fully electric vehicles are important. They make the oil market vulnerable to the electricity market, which itself is being reshaped by wind, solar, nuclear, etc.

If PHEVs, and EVs displace 20% of oil consumption by transfering it to electricity, all of which is generated domestically, that is substantial.

[jeffolie]

I do not have a target price for gold nor silver. I expect them to rise as a safe haven against fiat currencies including but not limited to the Dollar. I do have a target time of 2012-13. As India and China have been buyers, I expect more respect to be given to precious metals.

Why 2012-13 ?

First, because I expect Obama and the Democrats to lose the 2012 elections. The voters will reject their failed looting of the taxpayers that has come from give Trillions to the banking and financial class without creating jobs.

Second, because I expect the declining Dollar to create the beginning of inflation sometime in 2010. The Fed has and will keep interest rates to its primary dealers at zero or near zero under its philosophy of supporting the banks that borrow from the Fed at zero and turn around and buy US Treasuries for a risk free pure profit.

Third, recently I became aware of the PEAK GOLD concept. Just as the peak oil concept gained some credit, now peak gold has started to get some media space.

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Barrick shuts hedge book as world gold supply runs out

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:20PM GMT 11 Nov 2009

SIMMONDS Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.

Gold exchange-traded funds (ETFs) – dubbed the "People's Central Bank" – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.

Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.

Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper - at greater cost - to replace depleted reserves, not helped by "social uplift" rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.

Mr Norman said the "false mine of central banks" had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.

Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.

Mr Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among 'gold bug' enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today's spot prices.

The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. "Hindsight is always 20/20," said Mr Regent, who was appointed from the outside earlier this year.

Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.

Mr Regent said the hedge policy has weighed badly on the share price and irked investors, becoming a bone of contention at every meeting. The financial crisis brought matters to a head as markets fretted about counterparty risk. "It was clear to me that there were a significant number of institutions who wouldn't invest in Barrick because of the hedge book," he said.

Barrick produced 1.9m ounces of gold last quarter, down from 1.95m a year earlier. Costs have been "trending down" to $456 an ounce, though rising energy prices pose a fresh threat. Total reserves are 139m ounces, far ahead of rival Newmont Mining at 86m.

The hedge book venture has not been a happy one, but those who predicted that Barrick would eventually "blow up" on its contracts may owe the company an apology.

http://www.telegraph.co.uk/finance/newsb....y-runs-out.html