arbitragr

Hello all, Okay in light of recent events, I am going to take up a hedge for the rest of this month for the short to mid-term. I honestly don't have a clue what is going to happen with the macro, since there is all this government intervention left right and center. But all I know is that if something major happens with China, pig nations debt troubles, and if the Greek Tragedy ensues, we're in for a bumpy ride. I will be setting out some details of what I will be doing, which contracts I will be taking up, and if there are knowledgeable investors out there who would like to add there thoughts on what is going to happen for the short to medium term please do so. I do not claim to know everything, and am hedging b/c for the fact that I don't have a clue. Key themes - China; overheating, tightening of monetary policy, potential bubble - Commodity outlook is poor, commodity prices might be flat to down over the medium term. - Greece: sovereign debt problems, and the possible start of further debt problems with the other Pig nations. - ECB, Federal Reserve, and BoE all printing massive amounts of money; inflationary problems, weakening of USD, US bonds having poor yields adjusted for inflation. As I said, lots of govt. intervention which is impacting all my bottom up analysis. Some of the stuff I'm holding have earnings yields in excess of 15%, with P/E ratios at 4-5, with very good balance sheets, but they're still trending downwards due to all the above mentioned factors. There is a question about whether I/we should hedge at all ... and whether we/I should be buying into anything with depressed prices. However I don't have a clue whether China/PIGS are going to blow up, and if it does we're in for trouble. Instruments to use for "dirty hedges" US Market Index Instruments I will be using either single stock futures (SSF) or futures contracts, no options. Just better in terms of cost-effectiveness (no premiums) and commissions (almost zilch). If anyone has any divergent opinion on this please let me know. IVV - iShares S&P 500 Index Fund SPY - SPDR S&P 500 ETF Trust SPX - SPDR S&P 500 ETF Trust IWB - ISHARES RUSSELL 1000 INDEX I'm not sure what the difference is between these products (besides competition between ishares vs. spdr), and I'm sure that there are others, but from what I see there's way more volume traded on the SPY and IVV. See the chart below (1 month time frame since the start of Jan 2010). Commodity Index Instrments For those of you who are holding commodities and commodity related stocks there are a lot of instruments to use also e.g. iShares S&P GSCI Commodity-Indexed Trust - GSG PowerShares DB Commodity Index Tracking - DBC SPDR S&P OIL & GAS EXPLORATI - XOP SPDR METALS & MINING ETF - XME Hedge construction Will probably hedge up to half the total portfolio value. SSF might be used for individual stocks if there are SSF available. Commissions are like $1-$5 :D Gonna pull the trigger this time on the hedge. Shorting SPY mainly. Costs of shorting the SPY; mer = 0.10% + dividends = 2.2% p.a (approx.) --> shouldn't matter too much if holding short term. I'm very interested if anyone has a second opinion. Shouldn't hurt too much anyways since commissions are low and the hedge is very liquid. A note about margin SPY SSF = 20% overnight/initial/maintenance SPY SSF via Globex = 25% = initial 20% = maintenance (somewhere there but lower than 25) SPY stock = 25% initial/maint. but 50% overnight. SSF are superior in terms of margin but you might end up forking a bit more due to the spreads b/c of illiquidity.

:D Nice. Superstitious.

This table was via my broker.

Indeed right now, we're seeing some cheapness due to fears about the downcycle of the reinsurance market (lower pricing on reinsurance contracts). Some of the smaller Bermuda based reinsurer valuations: http://i163.photobucket.com/albums/t314/ripleyx/reinsurers-smallmidcap-jan2010.jpg

I don't think the salad oil scandal is the same as this. Salad oil scandal had nothing to do with the core business of AXP, which was cards - the use of AMEX cards. So you could take advantage of the short term scare. What does a salad oil inventory scandal have to do with my purchases using an AMEX card? However, cars, and the safety of it ... have everything to do with toyota's core business. It's like saying should you still buy GOOG if their search technology started to degrade in quality? or if news corp stopped producing high quality content, but started focusing on user generated content ... which is not their core skill set, would you still buy NWS?. Back in the 1990s Ford had multiple problems with sudden acceleration and their SUVs rolling over. They never recovered and lost leadership to Toyota and GM: Much like china (the ornaments, not the country), brands take a long time to build and an instant to destroy. Even AAPL had problems during the late 90s and took a while to recover - years!! (only when Jobs came back). AAPL's core business started to degrade - which was computers and computer-like hardware devices (i.e. consumer electronics devices). If this persists, and Toyota aren't up front about things, they lose their integrity, and people will eventually lose trust in the product. Would you see a heart surgeon who had a history of malpractice??

speak for yourself (or others). :) I've always liked how she has unveiled the truth about Buffett's methods; that he has to work extremely hard, like 'a demon' to get good returns, reading all day ... and that it doesn't come naturally and easily. makes me work harder.

Thanks guys for your replies. Had a feeling that they were sort of status quo in terms of managing money. Seem to do a lot of advertising they do.

Anyone know what the reputation of Franklin Templeton (NYSE:BEN) is these days? A friend of mine is considering a job offer from them but is unsure about their reputation/standing these days. I think they've shifted quite a bit since Sir John passed, these days Mark Mobius is the face of BEN. They're quite well known in North America, but less so in other major financial centers (London, Europe, Asia Pacific). Didn't Prem learn a thing or two from Sir John himself? Any thoughts would be great. Cheers.

I never had a stake in Citigroup. The reason I brought this up is because Berkowitz said that he did not invest in many of the financials like Citigroup is because he could not understand their Balance Sheets. I am wondering what has changed so much with respect to the BS that he can understand them. Of the troubled financials, I only bought COF LEAPS during the March lows. But it is unfortunately only a tiny amount so the 70 bagger did not mean much to my portfolio. Vinod Oh sorry. I do remember someone made a post about buying C. I confused you with Mandeep:

Closing the position is not hard. You can close it any time - you can buy and sell in one trading session easy. It's just the spreads might be a bit out of whack, and might cost (or give you) a couple of extra points. I see no difference in liquidity in terms of say, a SSF vs. the S&P500 e-Mini futures contract. Especially if the exchange (being the market maker) has to close your position. If you plan to hold a SSF position for longer than 3-6 months then there might be an issue of rolling over your investment. However if you have arbitrage in mind, or are more short term in your focus, then SSF would be a great tool to trade on. In any event, with commissions on SSFs at 30cents, if you're investment is still (according to your appraisal) undervalued, there's nothing wrong with rolling it over, selling your current position and buying out the next three months. Transaction costs are meaningless. Only issue is tax. But I've always been of the view that, the government only taxes you when you make money ... not when you lose. Winners in our society pay tax. ;)

Are you still holding Vinod? I remember you bought some a while back.

Just having a look now ... Some mechanics: commissions are tiny: 30 cents!! cheaper than stocks. spreads can get wide as you go out ... example ... JPM Sep10 bid: 37.68 ask: 40.69, last: 39.31 ... no wonder chicagoone (and IB for that matter as they own a stake in CO) makes money. however for those stocks with negative outlook, the ask can even be lower than the underlying last trade price.

Some useful reading: Always good to read the risk disclosure statement: http://www.onechicago.com/?page_id=91 Wiki: http://en.wikipedia.org/wiki/Single-stock_futures Chicago one webinar: http://www.onechicago.com/tutorial/index.html http://www.investopedia.com/articles/optioninvestor/06/SingleStockFutures.asp Might get that book on Amazon called Single Stock futures: an investors guide.

The other advantages would be you don't have to borrow money if you want to leverage ... and pay your broker whatever rate. Most brokers charge a fortune except for IB. And if you're looking to short, you don't have to find securities to borrow, thus no institutional impediments and counterparty risk. I certainly see advantages over options (no time decay, no paying a premium for volatility) ... but for the liquidity issue. But I think the SSF, as designed by ChicagoOne tracks the underlying stock, and if you need to sell then the exchange must buy. Also I'm sure I read somewhere that Interactive Brokers owns part of ChicagoOne (the exchange) so ... that's all good from a transactional and order fulfilment standpoint. what is the exchange for physical ... actually?? is that like a different type of order?

Sorry for how late this reply is. I'm just starting to explore. Okay I had a look at SSFs ... b/c I was looking for something simpler+cost effective to short. They look good. Same if not better leverage, and margin requirements are similar. In regards to the margins, it would be similar to a futures contract. Your initial and maintenance margin are 20% of market value of the SSF. You keep topping up your account if it goes below. The only problem is liquidity ... I had a look at the Chicago One site ... and volume is not high ... for something like JPM for example, volume was like zero for the last 2-3 days and open interest is 25: http://www.onechicago.com/?page_id=10&trade_data-ipsquote-timestamp=2010-01-25&expiration_year_month=201006&product_type=SSF&class_symbol=J&sort_value=t_volume&submit=Submit Anyone have any idea on what trading ssf with low volume and liquidity is like??? Any whipsaw-ing??? :-[ Have you been trading SSF Scorpion? what's it like?

Keynes returns managing the Chest Fund were okay. Not outstanding, about 9-13%. However relative to the UK Market return at the time which was about -0.11% from 1928-1945 a 9-13% return is above average. He started out market timing and speculating, but after experiencing big losses ... came around to buying good value and holding over the long term.

Check out BRK-B price action compared to the major indices. Something fishy is going on. :D

Split is having some effect ... BRK-B jumped up 4% today, when everything else was down.

Anyone know what his returns are like? One of you say his returns are good since inception, another says that it tanked during 2009 ... ??? ???

Anyone know the logistics and procedural events that will happen due to the split? i.e. what happens between you and your broker and whether there are implications for the stock price given its increased liquidity?

I'm sure you could do a search on good CRE REITS. I don't know whether they are 'distressed' and I'm not sure whether the level of 'distress' is as high today as it was the previous few months, but the following are industry leaders and have great track records; SL Green (SLG) Vornado (VNO) Boston Properties (BXP) Simon Property (SPG) You could probably do a search for smaller REITS, however my view is that the quality of properties won't be as high as the above. I've been invested in SL Green since July/August this year and it has been one of my best investments thus far - doubling my original investment. I'm not pumping either, I generally think that valuations are quite lofty or fair right now so you might have to look harder for good quality REITs. But back in June/August things like SLG was a no brainer. I took a position back in August and talked of it's merits on this forum here:

Ah great. That happened to me as well, like dealraker. Especially when I use IE's InPrivate mode. Wells will be okay, they can earn their spread that will add to equity. Having said, were it not for the govt giving them TARP, I don't think they would be as valuable a company today. Might have taken longer to earn their net spreads as the housing market is ffff-ed ... so is the coming CRE market.

Looks like us bulls on natural gas were right. Natural gas surges on record supply drop: http://www.google.com/hostednews/ap/article/ALeqM5i5TtajgUpSm7KY5jf-lCJGHBB-tAD9CL95D84

Alot will depend on trucking traffic volumes. I see TA similar to Buffett's railroad play, except this is on the road.

I use IB and three other full service/online brokerage accounts. Out of all the online brokerages I have used, they are probably the best. They're the only online brokerage that is also a market maker (MM), all the other competitors just count commissions. I would say they're probably the Goldman Sachs of the online brokerage world, not the largest, but definitely very strong at what they do (technology, execution, costs, trading). IB are the market leader in terms of lowest commissions, at about $1 per trade/contract. They also have the lowest margin loan rates aswell. The reason they can do this is because they generate most of their revenue from the MM business. As ScorpionCapital alluded to earlier, they take the spread when trading and providing liquidity for retail traders using their algorithms for short term quotes/pricing. The technology they developed was originally for their MM business but they branched out to brokerage. MM and brokerage offer good synergies that keep marginal revenues above marginal cost in a sustainable way, much similar to the way a Goldman Sachs would structure their business. This is an advantage in the retail/semi-professional online brokerage space, as all the other online brokers, from ThinkorSwim, optionsXpress, TD, or Schwab don't have MM capacities like IB does. In terms of customer service, I don't think they're targeting the low quality retail investor like a Schwab or TD/e-trade are doing. They're targeting professional and semi-professional traders with small capital bases. The fact that their min. account requirement is 10K (as opposed to 2K for most other online brokers) and that their commission rates are low and they have a highly technical trade platform reflects this. One area where they are a true differentiator is the globality of their platform. None of the other brokerages offer the level of global access that IB do. Which will keep them in front for a while in that regard. In summary it's a good business due to the following differentiators; - globality - technology - lowest costs, lowest margin loan rates - speed and execution - MM function which adds to their revenue and profitability as well as provides liquidity to their customers The retail players like optionsXpress and thinkorswim do a good job of educating and getting retail investors into the trading game and teaching them how to trade. Then if they get sophisticated they move along to IB. Considering the fact that options trading and futures trading as well as equity cultures have continued to grow throughout the world, I think they have a very bright future, especially if they decide to push into Asia, where the level of savings is very high. They have no competition (or very little) at all when it comes to servicing Asian investors who are looking for a global trading platform on a semi-professional basis. On a scale of types of brokers, from retail to full service, I would put IB in the middle of the spectrum: optionsXpress, ThinkorSwim, Scwab <---------> Interactive Brokers <---------> Goldman Sachs, BA/Merrill Lynch, JP Morgan, Salomon/Morgan Stanley etc etc note: I'm not holding or investing in IB. But this is just my experiences on using their services.