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Hedging in 2010


arbitragr
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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.

 

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I was watching BNN ( market call) around Christmas and the analyst dressed as Santa Claus ( can't remember real name ) was concerned at that time about a correction in the market. His top picks were ::Focus: Options and ETFs. Top Picks: Buy iPath S&P 500 VIX Short Term Futures ETN (VXX) at US $32.75; Sell Barrick Gold (ABX-T) July 46 puts at $6.00; Buy S&P 500 Depositary Receipts (SPY-N) Dec 111 calls at US $10.00Buy S&P 500 Depositary Receipts (SPY-N) Dec 111 puts at US $10.60 - I watched the VXX for a while and bought as I said a couple of weeks back. He was a little early on the call but it has worked and if we do crater it should do well

 

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Costs of shorting the SPY; mer = 0.10% + dividends = 2.2% p.a (approx.) --> shouldn't matter too much if holding short term.

 

I think the MER is your friend when you are shorting... you are shorting management fees, not paying them.

 

Good luck with the hedge, it is indeed scary out there.

 

Ben

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I was watching BNN ( market call) around Christmas and the analyst dressed as Santa Claus ( can't remember real name ) was concerned at that time about a correction in the market. His top picks were ::Focus: Options and ETFs. Top Picks: Buy iPath S&P 500 VIX Short Term Futures ETN (VXX) at US $32.75; Sell Barrick Gold (ABX-T) July 46 puts at $6.00; Buy S&P 500 Depositary Receipts (SPY-N) Dec 111 calls at US $10.00Buy S&P 500 Depositary Receipts (SPY-N) Dec 111 puts at US $10.60 - I watched the VXX for a while and bought as I said a couple of weeks back. He was a little early on the call but it has worked and if we do crater it should do well

 

 

You do realise that the VXX is a volatility index ETF ...? So it's based on market skittishness a la VIX.

I notice that you're also Canadian given the -N concatenation on the ETF symbols.

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yes to both - I had looked at buying spy puts but I did that back in july ( expired Dec)-  I have also purchased HSD for the short term - I have been building long postions in FFH , PD , SFK & MFC also gold SMF - plan to continue if the market craters - just thought I would try to offset what could be a significant fall in the market - one could sell everything and stay in cash for now - perhaps that is the answer

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Guest Broxburnboy

 

 

- 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.

 

 

Thanks for the post, you have raised some salient issues. I too believe that hedging is a necessary strategy in the face of  uncertainty and confused/contradictory reportage of the issues.

 

I must point out though that some of the outcomes mentioned above may not be written in stone.

 

China may have a real estate bubble in the short term, but long term GDP growth and further global trade dominance is almost assured.

 

The California (and other state) solvency problem has a potentially far greater impact than that of the PIIGS, based on the size of their economies. It is unlikely that the EU will bail out its weaker sisters whereas it is almost certain that the Feds will bail out the insolvent states at the expense of further dollar weakness. Moreover, Germany, the largest economy in the EU, has adopted a balanced budget target date, the American one is still not even on the drawing board... net result.. the current dollar rally against the Euro is probably a short term phenomena and vulnerable to a sudden nasty correction.

 

Some commodities are overheated, but others are not, particularly agricultural commodites.. As an aside, here in Mexico the price of sugar jumped 70% last week. Last year we saw similar jumps worldwide in the price of rice, corn and others.

 

I believe that hedging in face of so much uncertainty is imperative and continue to hold in FFH as part of a multi pronged strategy to preserve my purchasing power, believing that Prem and co. have a much better handle on bond and equity markets than I do and at the end of the day will continue to perform.

 

Again thanks for raising those points... Cheers BBB

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Look a little closer at the debt #’s of Greece, & compare them to the State of California - they are effectively the same. Then add to it that Greece’s place in the EU is very similar to California’s place in the US.

 

Virtually everyone recognizes that the Greek standard of living is going to drop, quickly, & with a lot of civil unrest. So why is California so ‘special’ ??

 

A couple of hedges on Californian banks could be a lifesaver.

 

SD

 

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Look a little closer at the debt #’s of Greece, & compare them to the State of California - they are effectively the same. Then add to it that Greece’s place in the EU is very similar to California’s place in the US.

 

Virtually everyone recognizes that the Greek standard of living is going to drop, quickly, & with a lot of civil unrest. So why is California so ‘special’ ??

 

A couple of hedges on Californian banks could be a lifesaver.

 

SD

 

 

I think it could be cashflow.

I haven't analyzed the actual debt ratios, but it's the same thing with US Debt/GDP ratios. The US is in deeper debt than Greece, way more.

However what distinguishes the US is that they have cashflow and can keep up with the interest payments (bond payments).

 

Greece does not.

 

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As an aside, here in Mexico the price of sugar jumped 70% last week. Last year we saw similar jumps worldwide in the price of rice, corn and others.

 

 

Just on sugar ... I was having a look at this little company called Imperial Sugar (IPSU) a couple of weeks ago. They recent had a lawsuit decided in their favor. The result? Their earnings per share for this year will be about $15/share. Their current stock price? $14!!! ... i.e. eps > share price.  :D

However next year's eps figure will be around 1-2 dollars depending on the outlook for sugar price.

I don't own it, because I don't know enough about the sugar market. But it's an interesting anomaly. If sugar prices sky rocket it could be a good stock to buy.

 

Trailing P/E is like 1x. Crazy.

:)

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It seems like the majority of cash insurance advances were already recieved through '09. Only about $45 million will appear in 1Q10.

 

Yes. That's why I said 'trailing p/e'.  :)

 

It's still a good yield though, if you normalize it. Looking forward it's gonna depend on the sugar market and sugar pricing, as aforementioned.

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  • 3 months later...

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.

 

 

Looking back on this post it's amazing to see how long things take to play out.

Just goes to show that when you theoreticize some idea based upon logical assumptions, even though it happens in your mind in an instant ... the market can take months and even years to play out.

From this post in Feb it took almost 3 months to play out.

 

My hedges are off now unfortunately.  :'(

At least I was on the right track.

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