Waiting For Regime Change

I have been in the deflation/disinflation camp since before 2008. The positive correlation between long-bonds and gold was afeature of this regime, as was the positive correlation between tech and gold, and even yen and gold. A flip to an inflation regime, of negative rates due to high inflation, should see gold move opposite to long-bonds, tech and potentially the yen since Japan is a commodity importer. The correlation below doesn't indicate a regime change is underway because 1 month is too short a time period, but if gold continues moving opposite to these assets I will take it as a signal that we're finally in an inflation regime. When gold is rising with the consumer price index (or whatever you want to measure inflation with) and rising with interest rates, the script will have flipped.

Yen Gains Momentum, Trouble Brewing for an Asian Currency?

I track long-term relative momentum for lots of ETFs. In the international group, CurrencyShares Japanese Yen (FXY) popped up strongly this past week. The last time it climbed out of the bottom and to this level was July 2015. A month later China devalued the yuan.

What's going on right now? The Hong Kong dollar is approaching the limits of its peg.

Euro,Yen, S&P 500

The CurrencyShares Japanese Yen (FXY) CurrencyShares Euro (FXE) ratio has broken out for the first time since August 2008. Yikes.

Second chart shows that in terms of the euro, the 2010 move in the S&P 500 looks to be sideways, but the last chart shows the SPDR S&P 500 (SPY) by itself.

Gold hits new high, dollar up

When gold moves higher along with the U.S. dollar, that means its moving higher in just about every currency in the world. Gold peaked at 780 euros per ounce earlier this year, as the strong rally in the U.S. dollar lifted the price of gold in euros. Gold is above the 730 euro level today, placing it about 6% away from a new all time high. Note that can come via a combination of a dollar rally plus a move in the gold price. At this moment, gold is up 2.4% in terms of USD. In terms of euros, gold is up 3%. Below is GLD divided by FXE, to show this move.

Below are gold in the yen and Australian dollar, as measured by their respective ETFs. The AUD chart looks particularly good.

September Performance

Index	Sept. %	YTD %
S&P 500 TR	3.73	19.26
MSCI EAFE	3.59	25.49
上海 Shanghai	4.19	52.65
Fund
Entertain. Trends	3.89	25.67
Green Dragon	1.22	30.41
Best of Funds	1.13	6.39
Pharma & Dogs	3.03	9.10
China Fund	2.18	13.70
Software Security	3.83	30.23
Yield to Me	6.29	18.53
Catch a Falling Knife	-7.13	-50.54

My Best of Funds lagged last month due to two failed attempts at going short, but the return is respectable considering my heavily bearish positions. The real lag has accrued over the summer when I pared back bullish positions too early, and didn't get as aggressive as I did in the Green Dragon, which scored some huge gains in the early stages of the rally.

Yield To Me did well because I added some gold miners and held them, whereas I sold them in August in Best of Funds.

The China Fund is the most disappointing this year, due to missing the major rally in U.S. listed Chinese equities.

Today's action in the market proves the sound allocation strategy in my portfolios. The worst performance came from the nearly fully invested Yield to Me, down 1.90%, while Best of Funds actually gained 0.76%, beating the S&P 500 Index by over 3%, completely negating the month of September in terms of comparative returns.

My major positions across the portfolios are long-dated Treasuries (TLT), gold (GLD), yen (FXY), U.S. dollar (UUP), and a smattering of leveraged inverse ETFs.

Going forward, I will increase the aggressiveness in the portfolios if markets continue to slide, but I am ready to pare existing positions should the market make another run higher.

August Performance

Index	August %	YTD %
S&P 500 TR	3.61	14.97
MSCI EAFE	5.16	21.14
上海 Shanghai	-21.80	46.51
Fund
Entertain. Trends	0.31	20.96
Green Dragon	-0.25	28.84
Best of Funds	-2.64	5.20
Pharma & Dogs	-1.04	5.89
China Fund	-0.85	11.28
Software Security	-2.37	25.43
Yield to Me	-0.81	11.52
Catch a Falling Knife	-5.54	-46.74

I went heavily bearish in my Best of Funds, with large positions in TLT, UUP, FXY, plus multiple positions in inverse ETFs such as FXP, SRS, SKF, EEV, QID, DTO, etc. It started paying off at the end of August, but I'm ready to reverse if the market climbs higher.

China Fund also has a large neutral position plus bearish with heavy FXP exposure.

Other portfolios have raised cash or moved to more defensive holdings.

Faber's Yen Call

I posted on February 6 that Marc Faber said the yen could go lower.

On that date, CurrencyShares Japanese Yen (FXY) closed at $108.20.

As of today, April 8, CurrencyShares Japanese Yen closed at $99.88, a drop of 7.69%.

Market Direction

On CNBC's Asia Squawk Box (video and article) this morning, Marc Faber repeated much of the same investment themes he's been favorable on for the past few months: inflation, tech companies with the capital to continue R&D through the downturn, Asia, and a possible continued rally in the short-term for the broader market.

A new idea was that the Japanese yen (FXY) could fall versus the dollar, and was a possible short candidate. I'm going to look at this more closely, but it's in keeping with the theme of a market rally, fueled by a reduction in fear. Faber highlighted this theme as well, discussing the performance of iShares iBoxx $ Invest Grade Corp Bond (LQD), a fund that holds quality corporate bonds. That fund fell from $105 in mid-May (about $102 adjusted for dividends) down to $81 ($80 adj.) on October 10. LQD was back over $100 in early January, and has slipped back to $97 as long-term bond yields rise.

Todd Harrison of Minyanville also expects a rally.

Admittedly, part of Harrison's prediction is based on a "gut feeling." But he's
also expecting the next phase of the bank bailout package to be announced soon,
which could provide a catalyst.

One of the first markets to tank in 2007 and early 2008, mainland China, is up 19.8 percent for the year through Friday, February 6. Could a similar rally be in the cards for the U.S.?

If it is led by financials, I'd also expect tech to do well, as it's already outperformed in 2008. Commodity producers also may lead, since a rally may be thought to be backed by the stimulus spending.

January Fund Performance

Here's the January performance of my Marketocracy funds. The orange line is my fund, the purple line is the M100, the Marketocracy mutual fund, green is the S&P 500 Index, brown is the DJIA, and blue is the Nasdaq.

First up is my short fund. I've loaded up on financials, newspapers and solar. A surprise winner was FXP. The double short China fund from ProShares, even though the Chinese market has fallen, the inverse ETF went down as well. It's easy to make money shorting in this market though, and if you look at the chart since inception, the performance was bad during the bull market.












Next is my Entertainment fund, which is mostly consumer discretionary. I haven't traded this hardly at all in the past year. A chart from inception shows the gains from holding Marvel Comics (MVL) was slowly bled away over time. Now that this is one of the worst sectors in the market, the fund continues to underperform. Also, I haven't sold losers, with several holdings down 80- and even 90-plus percent.












Here's my Software Security fund. The turnover in this fund has never been much due to the limitation of the sector. Even then, I've had to branch into Indian outsourcing, Chinese gaming, and defense contractors.












Next is the Pharma & Dogs. I've maintained the pharmaceutical allocation, with about 50% in healthcare. My Dow stocks aren't Dogs though, I have Caterpillar and Johnson & Johnson. One holding that delivered big gains is Tesoro (TSO), which I have in several funds. It's up 127% since purchase on December 5.












This is my high-yield fund. This portfolio also has Tesoro, which is up almost 100%. It yields 2.3% now, but was over 4% at the time of purchase. The biggest loser in the portfolio is HTE, down 44% and yielding 33% (although I don't expect that to last).












Next up is the Green Dragon. If I read about a stock in someplace such as Barron's and I think it looks good, I'll add it to this fund. Thus, this is my "gut check" fund. Little portfolio management. At the moment, over 50% of the fund is in U.S. dollars (cash) and Japanese yen (FXY).












This is my Best of Funds. It has also performed the best of all my long funds. I trade this fund heavily (turnover was 31% in January) because I move in and out of double short stock and commodity funds.












Finally, the fund that fits with this blog's title, the China fund. Over 60% of the fund is defensively positioned in currency positions and gold. The largest Chinese equity position is currently Netease (NTES). The fund lost 4.06% last month, compared to more than 13% for iShares FTSE/Xinhua China 25 (FXI).