Bookkeeping: Buying Long Term Downside Protection with January Puts

I am going to repeat a strategy I've tried 3 times in the past half year, once successfully - twice not so much; that is to buy a long term put as "portfolio insurance".   If the market has a sizeable downdraft in the months to come the insurance pays off; it we just rally to S&P 1200 to close out the year, these will expire worthless or near to it.

With this morning's rally from deep in the red to "flat", I am going to allocate 1.5% of the fund to this put option; we're using January 2010 101 SPY Puts (SWGMW).  For reference the S&P is just under 1040. This won't be traded "around" unless there is a heavy swoon in the next few weeks.  Most likely we'll revisit it near Christmas.  These puts are a bit "out of the money" and to pay off well we'll need to see upper 900s on the S&P 500.  Any move to low to mid S&P 900s will generate a large % gain... as with all options, due to time decay, the sooner the better.  Again... just an insurance policy stashed at the bottom of the portfolio, so don't be alarmed if in two weeks these show a 50% loss.  I will sell these for a loss if we make new highs on the year, i.e. S&P over 1100.

Long Jan 2010 101 SPY Puts in fund; no personal position

Ugly Premarket Action

Another change in character - it has been ages since I can remember a premarket that was significantly in the red without any specific news items.  In fact we have 2 buyouts, which a month or two ago would have premarket screaming +1%.  Yesterday the bulls made a last minute save, as the break of S&P 1034 led us down to S&P 1030... usually that sort of break of a previous day's low would lead to a lot more downside but this is not your father's market.  We received a late day rally instead... .

So the line in the sand just got pushed down 4 points, from 1034 to 1030 (yesterday's low).  In premarket we look to be around S&P 1031... notwithstanding that strange buying yesterday, once we break to a new low the market should continue down.  But that was the idea yesterday as well ;)

The bottom line is you have to change your thinking right now... before dips were to be bought, now rallies are being sold.  Turn the charts upside down and pretend its a bull market... that is the easiest way to think about it.  Caution continues to be the game plan and if we break below S&P 1030 I'll put on some short term hedges predicting more downside action (didn't work that well yesterday), and we're still targeting S&P 1020.

Of course the dollar is strengthening so in our 1st grade logic market, all things not named the dollar must be sold. If not for the Fed meeting conclusion tomorrow and labor report Friday I'd be leaning relatively aggressively on the short side.  I just hate the random lemming like action around these type of events.

Current "box": 1030 on the bottom (down from 1034 yesterday), 1047 on the top - all white noise inside the box.

p.s. I know the "real economy" does not matter much to Wall Street, but Johnson & Johnson (JNJ) announced a new round of 7000 job cuts lagging indicators, and in Europe Nokia (NOK) announced 5700.  As we know, that just leaves these people more time to shop (or else the terrorists have won) with money handed out by a bankrupt government.  J&J's profits go up, we cheer as speculators, 7000 people go out of work... we all win here.  Green shoots. Our path to nirvana (a completely jobless economy where the only production is money printing) continues ;)

• The cuts will shrink J&J’s workforce by 6 percent to 7 percent and save as much as $1.7 billion by 2011.... J&J rose 1.7 percent to $60.50 in trading before the opening of the New York Stock Exchange.

International Monetary Fund to Sell One Eighth of Gold (GLD) Stake to India

Rumors were China [Apr 25, 2009: China Begins Building Gold Reserves] was going to buy this stash of gold from the IMF; but it appears India "won".   This will drop the International Monetary Fund stake but still keep it at spot #3 in world's reserves, and send India screaming up the charts from 14th [Oct 13, 2009: Largest Gold Reserves by Country]  Gold fever is spreading across he globe as central banks go wild printing paper currency....

Via Reuters:

• The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.8 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.
• The sale, which surprised traders who expected China to be the leading buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock.
• It also fueled speculation that other governments -- including Beijing -- may be ready to diversify their reserves even at near-record gold prices, helping soak up IMF supply that the fund may otherwise be forced to sell on the open market.
• Although the IMF's plan to sell a share of its gold holdings in order to increase low-cost lending to poor countries had been flagged for a year before it was formally approved in September, both the speed of the deal and the buyer were a surprise.
• Although India is the world's biggest consumer of gold, primarily in the form of jewellery and investment among its billion-plus people, its central bank had given few indications of being a front-runner in the move to diversify into bullion.
• An IMF official said the sale was concluded at an average price of about $1,045 an ounce and that the transaction would be paid in hard currency and not in IMF Special Drawing Rights.
  
• "The fact that they've sold the gold to India would suggest there's going to be fewer official sales by the IMF on the market. So that might be a positive theme for the gold price," said David Moore, commodities strategist at Commonwealth Bank of Australia.
• The market's focus has now shifted to China, which has reportedly been in talks with the IMF about buying some of the fund's bullion as Beijing seeks to shift some of its more than $2 trillion in foreign exchange reserves away from the U.S. dollar.  "Now people may think China will buy the other half," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

• “The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” 
• “It’s more or less certain that government of India expects the U.S. dollar to weaken,” said Suresh Hundia, president of the Bombay Bullion Association Ltd., in an interview today. The purchase is “not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves.”

[Oct 29, 2009: Paul Tudor Jones 3rd Quarter Investor Letter - Another Gold Bug]
[Oct 8, 2009: Is Ben Bernanke Ruining Indian Weddings?]
[Sep 29, 2009: NYT - Out from India's Alleys, Gold Loans Gain Respect] 
[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]