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15 comments:
Hi Roger, I just want to thank you for the explanations on your video blog. This blog has been very helpful to me.
Good summation of investing balance and New Zealand/Australia. I was at first concerned you might let the reader keep the impression that these markets were the same when they're in fact extremely different. As you pointed out, Australia has the commodity depth that New Zealand doesn't which makes a huge difference as to how these markets act and their under-pinnings. Also liked your comment on diversification. Obviously we all want to always be on the winning side but if we're really seeking risk management we need stocks that are negatively correlated.
Speaking of international stocks, prior to the meltdown India was making a good comeback from the doldrums with some pretty amazing earnings. How do you feel about that market in general?
The video was wonderful this time Roger.
Well said, Roger. I try to keep a diversified portfolio in retirement with the result that a few components are always either lagging or going down. For example, I own HCP and FFRHX. Both of them clobbered recently. Yet, I feel they provide balance to my portfolio so I will stick with them.
Thanks for addressing my question Roger. Great video.
Anyone know the status of David Andrew Taylor's (Dismally.com) health? About June 18, he said he was off to the hospital as he was quite ill. He hasn't posted on his site since.
Great video Roger. It is good to hear someone say there is no relation of this selloff with fundamentals.
I have been living in the US, Asia, and now Europe, and to me the subprime thing was bound to happen.I have never seen anywhere else such easy lending pattern without collateral, as you have in the US.
Felix
I do not think you all are truly getting the reason for the decline (panic).
Loss of liquidity means no money to purchase/chase equities, real estate, or commodities. So they all will go down together (quite interesting and yet very sad at the same time).
The liquidity problems are not contained to sub prime and nobody knows that like the hedge funds, Bears Sterns, banks, etc. Where do you think the massive selling came from? Unfortunately this will not be very pleasant for some period of time.
It has caused the yen carry trade to unwind lowering liquidity even more. The panic is significant and everyone is running for safety - dollars and treasuries.
You see when there is a panic which is the only country sure to not run out of dollars? Maybe the one with the dollar printing press!
Things may be different 20 to 50 years from now but today when all else fails it is nice to have dollars.
I have bailed out of Asia and truly do not expect this period to be over quickly, not that I think the sky is falling just that I do not want to give back a 35% return from the rally since last summers correction. Yes I do expect this to be a notably greater correction than last summer, but it is hard to quantify how much worse or how long.
On the positive side I think there will be some nice rallies during the decline if you can time them right. Timing them can be so difficult and costly if you get them wrong unfortunately.
KL
Catching up on the comments.
India; Long term it seems obvious to me but short term? I sold a portion of IIF in April 2006 (good sale), sold some in July (bad sale) and still have some today but the weight is small. I have been warming up to TTM but don't really want to increase my EM exposure just now. I am about equal weight and want to stay that way for now.
Retired in P-town, I think you hit it; down for its own internal problem is a sale, down with the group no, from a bottom up standpoint. At anytime a top down decision, like reducing a sector, might need to made and so you gotta sell something.
I emailed David Andrew Taylor to see how he was but no reply yet.
Felix, I wish I could argue with you.
KL, I don't think anyone is forgetting what less liquidity could mean. I write about this a lot I think, I just wrote about it the other day, Businessweek even picked up my post on this.
Hi Roger,
A few weeks ago, I had proposed owning LEAPS in lieu of shares to limit ones downside. Your response to this strategy was that as the price of the underlying changes, the delta of this investment will change. You indicated that in order to keep a constant delta, one would need to actively manage ones position.
Your "down slide" post indicates you own double short funds for downside protection. It would seem that if one wishes to keep the downside protection "fixed", one would need to monitor ones positions quite actively.
Could you please comment on how, if at all, monitoring ones exposure using LEAPS differs from monitoring it using inverse funds.
Jey, it may not be different but if it is here is how...
You have a diversified portfolio of stocks and/or ETFs. You decide you want to reduce net long exposure by X amount by adding a double short fund. You are now left with one moving part that hedges the long portfolio and so if changes need to be made you simply ad to or subtract from the position in the double short fund, so one trade to make.
You have a portfolio of call options of whatever expiration you think makes sense in a stock substitution strategy but no hedge, per how I read the question.
So the big diff is that, you are not hedged. Do you want to be hedged or just take up fewer dollars to have a portfolio?
To make changes you would need to make a lot of trades.
Also there is no way to know how options will react to a big fast decline in the market.
I may not articulate it well but I think the two are vastly different.
Also there is no way to know how options will react to a big fast decline in the market.
I don't think this is exactly correct, but I think it depends on how precise you want to be. In that sense, you can't really know how the inverse funds will perform either.
With the inverse funds, you know what the specific price behavior will be over a single day, but over a longer time period, you won't get 1x or 2x depending on the daily sequence of gains and losses. The long-term historical performance of these funds proves this point.
With options, the price change will be a function of delta and change in implied volatility. The delta value is specific and known. It is easy to calculate for X% drop or rise in the underlying that the drop or rise in the option will be Y%. You don't know exactly how implied volatility will change, but it most certainly go up on a market decline. Because of that, in my opinion, options can be advantageous for hedging because you get a double benefit of the delta effect plus increasing IV on the options you are long.
I think the inverse funds position is probably easier to manage, and unless you have the expertise with options, one is probably best not using them until they get that knowledge.
"KL, I don't think anyone is forgetting what less liquidity could mean."
I may not express my self well at times. Yes I know you are a smart guy and understand the concept. It is just that we rarely experience less liquidity to the extent it is unfolding NOW. I just do not think you or most people are truly ready for what is coming by the posts I am reading here and else where.
Again I am not predicting the sky to fall. The Fed and other central banks will keep things orderly more or less. That said I do not think you or most people get how unpleasant this is going to be for your average investor yet.
KL
You mentioned Ireland in passing. I warned on this site that the Irish market was risky because of exposure to the local housing market.
Now I think Ireland is a play on the ECB rate. If you think rates are going higher (than expected) sell. If they are going lower(than expected) buy. Ireland has experienced an extraordinary increase in mortgage debt most of which is floating and linked to the ECB rate.
The current panic may be good longterm if it causes the ECB to stop earlier than expected. From the Irish point of view the worst thing would be that the global boom resumes, the dollar remains strong and the ECB keeps going higher.
No insult intended but I think your knowledge of foreign markets is quite superficial. To a degree, you are part of the herd.
double short funds don't seem to work out at least on the charts i look at, the concept is interesting but
why have a middle man
when i want to go short the market i go straight or mixed shorts on the very liquid index derivatives like miniSP500s, miniMidCap, miniDOW, and miniNQ100s and then maybe add covered puts to reduce risk if i intend to hold longer than a day or 2
jumping in and out (long or short) with that much leverage helps the bottom line big time if you religiously place stop loss orders in that make sense and don't get chopped
=)
nice bands of liquidity are always there (except for moments right before big reports) and entering and exiting is lightening fast on my Interactive Brokers' booktrader
imo
however my take is that in the long run fiat currency's inflation is always gonna drag quality stocks higher on ever inflated earnings so any index shorts need to be timed really well or they tend to blowup in your face
peace
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