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The Perfect Storm

The "Digging" Report Q1 2005

March 31, 2005

"If you think education is expensive, you should try ignorance", Dolf de Roos
To view previous reports visit The "Digging" Report Archives.

My Personal "Mutual Fund" OTC:RASXX

Note: OTC means Over The Counter. The ticker symbol is fictitious; please don't ask your broker to buy it. In the rare event that such a ticker does exist please inform me at once, in order to change it. I don't want to mislead anyone.

I knew this quarter would not be good for me because I transferred my previous employer 401k plan into a rollover account and the plan termination involved fees. Plus, another account that now comprises a good chunk of my fund also had to pay fees. The loss of 10% is actually overstated. This is due to the way Captools accounts for option purchases. The market value of the position is equal only to the intrinsic value. Any time value is disregarded. Therefore, the purchase on March 1 of a Dec07 120 SPY Call for $1510, when the SPY was at 121 gives a market value of only 100 ( (121-120)*100). This is reflected as a 1410 instant loss (see Quarterly chart below) that actually is not true at this time.

The market action seem to be repeating that of 2004, only this time volatility is more subdued. Many pundits says that the market has gotten too far too fast. It may be true, but coming from a long bear, it is still possible to have more upside before it turn around. Undoubtedly resistance will be met at the latest high. Also, a retest of last year's bottom may be possible. That will give clues whether this is the start of another downward move or just a pause in a long advance.

Last year I used options in an attempt to catch up with the market. The method I used didn't work very well. This year I am trying another experiment with at least 40% my funds: A combination of fixed income with options on the SPY (an ETF that tracks the S&P 500). The general idea is to have a 100% upside participation while the fixed income provides a degree of capital guarantee. In my case I structured the combination in a way that by December 2007 the funds involved in the combination option/bonds will either have a minimum total return of 3% or whatever the S&P 500 returns ABOVE that 3%. Whit the rest of the funds I will try other strategies more aggressive and lastly, I will use 5% of my funds to continue experimenting with high leveraged options.

Performance as of 03/31/2005

NAV: 14.09

 

RASXX

S&P 500

YTD as of 03/31/2005

-10.18% -2.59%

1 Year

-10.65% 4.83%

3 Years*

-8.37% 0.98%

5 Years*

-7.54% -4.66%

10 Years*

--- ---

Since Inception (10/05/1996)*

2.72% 6.30%

* Annualized compound return

The 1, 3, 5 and 10 year periods are counted backwards starting from the report date

Performance is before personal taxes. Maintenance and research costs (my personal time doing the accounting, trading and web publishing; time spent on the web and investment books) are not taken into consideration.

Freedometer ratio: 4.01%

Scale: 0-10 Worthless slave; 11-25 Rank and file; 26-40 Lowest level privileged; 41-75 Candidate for temporal release; 76-99 Almost free on parole; 100+ A free person!

Unless you can't make ends meet with your present salary.

Quarter/Year to date

Since Inception

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