OT : Portfolio Advice for RGP Friends
mo_charles
well, this is a poker community. however, the markets are fairly
disjointed at the moment, and i'd like to offer a little portfolio
management advice to the community. FACTS:
1. credit spreads are the narrowest i've seen them in a long while. in
short, this means that given the current level in i-rates more risky bond
issues like junk, investment grade, etc. are VERY EXPENSIVE relative to
their counter treasuries (deemed risk free).
2. the yield curve is very inverted at the moment; ie. short term
interest rate instruments currently yield more than longer dated
alternatives.
3. the stock market has rallied in a huge way over the last three to four
months, and the implied volatility levels in the market are at relative
lows.
when viewed together, these three facts lead me to believe that there's a
serious lack of care being exercised by highly leveraged professionals in
the business. the markets (basically every one i look at) believe that
there is no default risk - no recession risk - NO RISK WHATSOEVER in the
entire investment universe. here's how you can hedge your holdings or
trade in an effort to capitalize on the opportunity made available to you:
sell all coporate bonds you own (especially junk bonds - please understand
the tax liability here), and roll your position either into a money market
fund or short-term government bond fund. this will eliminate your risk to
a widening of credit spreads to reasonable levels, but will hurt you if
they continue to tighten (which i believe to be unlikely). this will also
reduce duration risk - ie. you'll own the higher yielding short-end thus
eliminating your exposure to a resteepening of the curve. the next option
you should consider is either selling a portion of your stock holdings
(there's also a tax liability here that you should understand) or buying
put options on a SMALL portion of your holdings (these could be stock
specific or stock indexed). with the options play, you'll be purchasing
options historically cheap, effectively selling some of your stock
holdings relatively dear, and protecting some portion of your already
achieved gains in your portfolio. options are a little tricky and carry
some additional risks, but i'd be happy to explain the nuances in a more
detailed fashion if some would like. please NEVER trade an option if you
don't understand what the hell they are or how they behave. finally, if
you don't know what the hell i'm talking about, don't do anything.
also, if some would like, i can offer an unwind post (to this thread or in
a unique thread) which explains how things panned out and how to again
optimize the portfolio when things return to "normal" (this may be six,
ten, twelve months away). my dog in this race is YOU. simply put - i see
a decent opportunity to take some gains and hedge some potential future
losses at extraordinary levels. you needn't do a fucking thing, but if i
owned a portfolio of these things, this is exactly what i'd be doing right
now.
any questions or flames welcome, as always.
mo_charles
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Bob
mo_charles wrote:
> my dog in this race is YOU. simply put - i see
> a decent opportunity to take some gains and hedge some potential future
> losses at extraordinary levels. you needn't do a fucking thing, but if i
> owned a portfolio of these things, this is exactly what i'd be doing right
> now.
>
> any questions or flames welcome, as always.
Thanks, mo!
- Bob T.
da pickle
Very nice, mo.
Wayno
> Thanks, mo!
Thanks, mo!
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Camp
Mo I don't disagree with the facts but that does not indicate future disaster.
quite the opposite. extreme conditions are often caused by pressures from
traders betting on an opposite directional move. for example:
>
> 1. credit spreads are the narrowest i've seen them in a long while. in
> short, this means that given the current level in i-rates more risky bond
> issues like junk, investment grade, etc. are VERY EXPENSIVE relative to
> their counter treasuries (deemed risk free).
this is no secret. speculators have been working this trade for years. it would
take an extreme narrowing of the spreads to wash out the short sellers and
remove downside support. there are simply too many shorts ready to buy when
spreads start to widen. only way to get rid of them is to have spreads move
significantly against the majority. that is why most tops are marked by a huge
surge on the upside on most markets.
>
> 2. the yield curve is very inverted at the moment; ie. short term
> interest rate instruments currently yield more than longer dated
> alternatives.
>
this would not be the first time and historically speaking, spreads can remain
this way for long periods of time. at least until the banking system begins to
show signs of pressure that the fed may react. you also have to look at money
supply. if money supply is not an issue (i.e. vast liquidity) then short term
rates can continue to rise without constraints. while the market traded
securities (long term bonds) can continue to appreciate in value.
> 3. the stock market has rallied in a huge way over the last three to four
> months, and the implied volatility levels in the market are at relative
> lows.
>
the market is a discounting mechanism and can continue this way for longer than
you can remain solvent. the trend is your friend.
as i said i dont disagree with you in that these are unreasonable times. hard to
determine what the heck is going on at times. but its hard to bet against the
grain for the sole reason that things are not aligned with historical figures.
everyone has different needs and different ways of investing their money so it's
hard to say what people should do. it all depends on how you measure success,
and how often you check it.
best to all.
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mo_charles
stumbles in who actually knows a thing or two about a random thing or two.
thanks for the post, camp. my response follows.
> Mo I don't disagree with the facts but that does not indicate future
disaster.
i wasn't cuing the cloud crumble. when mr.market sells cheap insurance,
why not buy it? when mr.market pays dearly, why not sell to him?
> quite the opposite. extreme conditions are often caused by pressures from
> traders betting on an opposite directional move. for example:
i'll address them point by point, but my post was written in response to
some moves in the markets that i believe ARE indicative of large scale
blow-ups. i see absolute desperation in some corners, and thought i'd
share the info with my friends here.
> > 1. credit spreads are the narrowest i've seen them in a long while. in
> > short, this means that given the current level in i-rates more risky bond
> > issues like junk, investment grade, etc. are VERY EXPENSIVE relative to
> > their counter treasuries (deemed risk free).
>
> this is no secret. speculators have been working this trade for years. it
would
> take an extreme narrowing of the spreads to wash out the short sellers and
> remove downside support. there are simply too many shorts ready to buy when
> spreads start to widen. only way to get rid of them is to have spreads move
> significantly against the majority. that is why most tops are marked by a
huge
> surge on the upside on most markets.
i'm not sure what you're saying here. spreads have blown together in the
last month or so. everybody who trades any credit spread for significant
size has taken heat on the trade. i watched people blowing out of their
positions on the yield curve ten thousand contracts at a crack this
morning - we've since retraced a few ticks. are they as narrow as they
can get? who the hell knows. we don't need a top in the market to sell;
we just need some fundamental understanding of value. i see very little
risk associated with moving chips to historically cheaper, safer
instruments when the risky ones don't offer a yield spread significant
enough to counter even the default risk.
did you trade through the LTCM implosion? they made huge bets of the
nature you've suggested, and they flushed billions down the toilet when
the market finally woke up. i'm waking investors of the ng up.
> > 2. the yield curve is very inverted at the moment; ie. short term
> > interest rate instruments currently yield more than longer dated
> > alternatives.
>
> this would not be the first time and historically speaking, spreads can
remain
> this way for long periods of time. at least until the banking system begins
to
> show signs of pressure that the fed may react. you also have to look at money
> supply. if money supply is not an issue (i.e. vast liquidity) then short term
> rates can continue to rise without constraints. while the market traded
> securities (long term bonds) can continue to appreciate in value.
an inverted yield curve portends an economic slow-down (or deflation).
short-term rates are heading lower of late, but at a slower rate than
longer rates. stocks at highs; bonds near highs; credit spreads
narrowest in sometime (given the current level in interest rates,
obviously). what say you? i'd say one of those markets has it wrong, and
that a defensive trade in both is a very safe way to sail.
> > 3. the stock market has rallied in a huge way over the last three to four
> > months, and the implied volatility levels in the market are at relative
> > lows.
>
> the market is a discounting mechanism and can continue this way for longer
than
> you can remain solvent. the trend is your friend.
two fair maxims for trading not investing. i sold all my stock holdings
(amassed in college) in 1998 because i knew the market was insanely
expensive. i looked like an idiot for two or three years, but mr.market
finally regained his senses and proved me right. either warren buffet is
a heck of a coin-flipper, or the market in its trends can get things
wrong. i see some things in the market that are wrong, so i told the
community how i'd capitalize on it.
> as i said i dont disagree with you in that these are unreasonable times.
hard to
> determine what the heck is going on at times. but its hard to bet against the
> grain for the sole reason that things are not aligned with historical
figures.
the best investors always bet against the grain.
> everyone has different needs and different ways of investing their money so
it's
> hard to say what people should do. it all depends on how you measure success,
> and how often you check it.
>
> best to all.
thanks for the post.
mo_charles
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Jonathan
wouldnt you buy a call here or better yet leave your shit alone and let it
"rally".
im sure im just missing something simple so help the young finance major out.
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mo_charles
> wouldnt you buy a call here or better yet leave your shit alone and let it
> "rally".
> im sure im just missing something simple so help the young finance major out.
the market has rallied for the last three to four months delivering
investors who own it pretty outsized returns. i'm not sure about exact
returns, but s&p is up north of 10% and the nasdaq is pretty close (though
lagging this year). if you believe the s&p will deliver another 20% on
the upside you should lever up and buy the index. if, like me, you're
satisfied with some portion of your already achieved return, you can
either sell or insure. i haven't advized the community to liquidate their
stock holdings for a couple reasons - first, who the hell knows how high
the stocks can go, and second, there's an incurred tax liability
associated with selling. everybody should own some stocks most of the
time, including now, but one should lighten up (sell just a portion) when
things get expensive. the best way that the market currently offers to
sell (without actually selling) is to insure your portfolio with the
purchase of cheap puts (just in case, ya know?). so, how cheap are puts?
http://finance.yahoo.com/q/bc?s=%5EVIX&t=my&l=on&z=m&q=l&c=
the VIX is the volatility level of the s&p 500 index, and it helps
determine the value of options in most pricing models. we're at the
lowish end of the last ten to fifteen years.
here's how one might approach the idea of insuring one's portfolio:
at the start of the year, i owned $100,000 of stock. today that portfolio
is worth $113,000. i'm happy with the return, want to continue to own
stocks (an option on unlimited upside), but would like to lock in some
gains. i like 10% returns, believe the extra 3% was extraordinary, and
can use that money to insure against a future potential loss on the 10%.
now young finance major, how would i do this, and what are the expected
returns given our newly modeled portfolio (long put, long less stock) for
these three possible scenarios - stocks drop 20% from here, stocks rally
20% from here, or stocks stay exactly where they are.......this is a VERY
tough problem, btw, but a great exercise nonetheless.
mo_charles
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Jonathan
buy puts to hedge against falling stock price, if the fall you can sell at
whatever price the put says, for of course the premium. or if the stock rises,
eat the premium and let it be????
stocks go up 20%, eat premium and leave stock alone
stocks go down 20%, exersize put
stocks stay the same, eat premium??
i think i understand this, your saying the market is rallying but still need to
hedge against possible downfall?
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Howard Beale
Would you give me some specific advice please? About 6 months ago I
bought an IPO preferred stock issue yeilding 6.5% from either GE or Morgan
Stanley (I can't remember and don't think I need to look it up). I also
bought a fair amount of CDs because I wanted to 'see what would happen'
and I didn't know what my cap gains tax would be exactly and wanted cash
on hand in Jan when the CDs come due so I had the funds available. What
should I do with them and how long should I wait, and what should I do,
whenever it is that I should do comes due.
I'ts a good thing for me that you can probably figure out what I'm asking.
Howard Beale
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mo_charles
so, rgp, it is time to unwind at least a portion of this trade. take your
money market funds and your treasuries and invest them back in corporate
bonds and high yielding junk bonds. these spreads are historically cheap
and have moved over 400 basis points since i posted the opposite trade.
additionally, the VIX has skyrocketed from 11 to 25ish, so i'd further
recommend you dump all your options positions. i hope some folks listened
to me, and i hope they listen now. this is a great time to be buying the
riskiest bonds in the market - panic and blood everywhere.
mo_charles
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