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8 comments:
I'm going to forward today's video to Harvard, OK? :)
There's an interesting article at Index Universe about inflows into commodity funds beginning to overtake outflows. I've been out of commodities for a long time (thank you) and will get back in eventually.
Broadly, commodities meet the criteria of down a whole lot, but the charts would seem to indicate that price deflating isn't over yet. Other than hoping for an oversold bounce, I don't see much of a case for reallocating yet.
Can/would you comment on the article?
Thanks very much.
roger, you are NOT a"toothless hillbilly". I could clearly see some teeth.
:-)
Amen to that. Just came back from my morning walk by the river myself: the Canadian geese were out in force in the sun above the valley mist and the fields below it; beautiful.
And even in the current situation there can be laughter (okay, so it may sound a little hysterical): There's a sendup of Bad Moon Rising (Dead Cat aRis'n) at http://tinyurl.com/5cakgo that may tickle a little.
Don't go long tonight
Cause you'll grab a fallin' knife
there's a dead cat on the rise
Wow, you skip reviewing this site for a few days and you miss so much!
Bill B - re: predictions. Taleb has covered the subject very well in "Fooled by Randomness". The intriguing takeaway: even if you have a 93% likelihood of being right on direction (ex post analysis) over a [1] year horizon, the likelihood using that distribution of being right in the next minute reduces to 50.17%. In practice indistinguishable from a coin toss. (In other words, the person whose investment thesis -IF FAITHFULLY HELD FOR AN EXTENDED PERIOD OF TIME - will by definition produce alpha returns with a probability of success= 93%, will be nearly indistinguishable from "guessing" when looking at the short term results.)(This, in Taleb's exegesis, is provable by basic Monte Carlo simulation.) My takeaway is: nearly impossible to know - by looking at short term performance - whether one is successfully "predicting" or whether one is "guessing". Takes guts to stick with your thesis, but the difficulty should not result in a conclusion that all predictions are necessarily guessing.
As for the risks of "getting in" or "staying short" in this environment, Barton Biggs does a good job in "Hedge Hogs" of scaring the living daylights out of (me). Especially as he reviews the "Violence of Secular Market Cycles" in Chapter 9. I definitely underlined the passage re: the "selling climax" of May 1970, which was followed by a 51% rally that ended April 1971. The "Nifty Fifty" led rallies through 71 and 72, peaking Jan 11, 1973. The 74 decline took the Nifty Fifty down on average 60%. From it's peak in 68 to trough in 74, Value Line Composite (broad measure) was down 75%.
Key takeaway: for the Nifty Fifty, it took on average 10.5 years to get back to the previous price highs ('68?) in nominal terms and 16.5 years on inflation adjusted terms to get back the highs. [Don't bank on making back what's been lost in the near term; we may not be looking at a "V" or a "U", it could be a very long "L"!]
As for me, I continue to sell volatility with tight stops; negative gamma can be so unforgiving! Still, if you believe a bear rally is in place (or we've established a bottom for now), the "dramatists" still buying the tails of some of the inverse ETF options are continuing to offer truly mouth-watering opportunities. (Example: SDS Dec 160 calls bid 0.70. SDS currently trading for 89. SPY would have to move >approximately< 26-30% down over the next 10 trading sessions for these calls to be in the money.
The calculations are complicated by compounding, insofar as the SDS reflects daily inverse moves, and percentage decreases/increases, when in sequence, alter the arithmetic expectations: If SPY moves, on a daily basis, -5%, -5%, -5%, the SDS would increase, in theory, +10%, +10% and +10%. Thus, from 90, the SPY cascade would move to 85.5, 81.2 and 77.2, while SDS would move to 97.9, 107.7, 118.5. Roughly, the move from 90 to 77.2 is "only" a 14.2% decline, while the move up by SDS is a 33% increase.
Accordingly, if my math is correct, to get in the money on 160 calls (an 80% up move), the direct route would only require a move by SPY to 64.75 (averaging 3% losses per day, in sequence for 10 days).
Nevertheless, a defined risk position (buying the 170 calls, selling the 160 calls thereby setting a maximum loss of $1000 x n contracts), can - using theoretic fair value prices - yield a nominal return for the next ten trading days of 3%, and an annualized return of >70%. (Can't be done in size; insufficient open interest, and slippage on entry/exit - esp. if sold prior to expiration - and commissions, substantially eat into these percentage gains.)
These sorts of returns remain historic; and if you are absolutely confident that we are not going to see SPY touch 67 in the next ten trading sessions, it's an attractive opportunity amidst all the uncertainty.
R in NY
I may not have much for you on commodities depending on your context. My context all along has been to own just a little to zig when stocks zag. This worked for many months after the peak in equities but finally commodities rolled over and got crushed. So my opinion on them and their role in a diversified portfolio.
I have not hesitated to buy for any new accounts we have been implementing (bought some this past week for new accounts).
I am not a fan of zero weight, so that will never be my call. as i veiw the move down as clearly overdone there is no reason it can't get more overdone. The way I view it, if there is a terror attack in the US what do you think gold will do? given how much money we are printing what do you think gold will do?
actually i do have a good set of choppers I should have said slack jawed yokel.
I like the don't go long tonight bit.
Nifty Fitty is an interesting example. what does anyone else think of that one?
um...So my opinion on them and their role in a diversified portfolio... has not changed
The Nifty Fifty were the "buy and forget" stocks of the late 60's/early 70's but there is some debate over exactly which stocks comprised the 50 and Jeremy Siegel among some others argues that many of them deserved their high valuations; this article at http://tinyurl.com/6bchnz provides a useful overview. There were some great names in the list, some still going strong, and there are others that no longer exist as well as a few in between.
Regardless the '73-4 bear market pretty much discredited the thesis and "buy and forget," resurected as "buy and hold," didn't come back into vogue until the '82 - '99 secular bull market was well established. It will doubtless come back into fashion just when most folks aren't used to the idea but, for now at least, it's probably better to think in terms of shorter cycles and that not only requires a buy discipline it requires a sell (and/or hedging) discipline.
RW,
"Hedge Hogging" was/is a GREAT book. You might also want to read "Hedge Hunter" by Burton...published by Bloomberg Press.
Jan
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