Posted by Davy on February 1st, 2010 in Enlightened-American Portfolio
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THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: -2.3% through Jan, 2010 (my actual IRR, including cash balance)
• DJIA: -3.5%
• Nasdaq: -5.4%
• S&P 500: -3.7%
• DJ Wilshire 5000: -3.5%
• Russell 2000 (smallcap): -5.1%

Our portfolio outpaced all major indices thus far out of the gate in 2010. As always, this outperformance can not be attributed to any sterling market calls. Yes, I was expecting the market to head lower but I had been waiting for most of 2009 for a downturn. While a 40% cash holding could be construed as a market-timing call, most of our portfolio holdings suffered above-market-average drops in share prices due to my heavy concentration in commodities, gold and foreign stocks.

What kept the portfolio afloat is the same strategy that allowed us to beat the broader indices in 2009 despite being wrong on a market downturn — diversifying a portfolio of high-yielding, core value holdings with short-term special situations and options plays. At the heart of this strategy is identifying areas where volatility has been mistaken and mispriced as risk and building confident positions in these situations.

January’s portfolio activity illustrates some of these points:

• I opened one new position, disclosed to Enlightened American Premium members only. Get access to all of my research, positions and more in real-time by joining EA-Premium.
• Our previous going-private play, Maxxam (MAXX), closed in January, delivering 1% during the month and 12.5% overall. In addition, the nice correction in gold and related stocks allowed us to extract most of the value from our AUY $13 Apr 2010 calls and MFN $12.5 May 2010 calls months before expiration. By closing the options contracts early, we maximize annualized returns and are in position capitalize on this sector’s volatility if and when prices should spike up again. As I type this, AUY and MFN are up 5% and 9%, respectively.
• The United Rentals (URI) naked short position expired worthless, generating 4% for the month and ~25% overall. We currently have no naked short positions open at the moment, a rarity for the Enlightened American portfolio.

As mentioned before, the market outlook is not the slam dunk it was in 2007, 2008. While a housing bottom at this point seems premature, I am willing to consider the possibility that massive government intervention may have prevented a natural bottom from occurring. Of course, there must be severe consequences for such actions — the financial crisis of 2008 taught us there is no such thing as a free lunch — but where the fall-out may land is unclear at this point. And we could say much the same thing for other sectors where the government has intervened.

However, some of the broader macro themes remain intact, if a bit obscured by current events. Government intervention in financial markets make gold a necessity for every portfolio, though members may want to wait for a better entry point.

Energy, especially oil,  remains vital for the global economy. Utilization may be down due to the global recession but oil has rebounded to levels that generated much hand-wringing just a few years ago. If $70 – $80 is the new normal for oil, then the peak oil thesis is steadily and quietly playing out. The fact that the media and investors have forgotten about peak oil is a good thing for investors looking to make a move.