Goldman Report on S&P 500

[bmichaud]

How 'bout that QE flooding.....

[Cardboard]

This is the second thread on the same topic in two weeks. What are you guys doing about it?

 

Many of you hold BAC, AIG, SD. What do you think is going to happen when the market starts going down for any reason? Do you truly believe that these stocks will stay flat while TSLA and all the other overvalued stocks will get pummelled?

 

The market is up big again today on Bernanke. The parabolic climb that I feared following Tepper last week is now in full swing. The P/E on the S&P is roughly 16 times earnings and there is really nothing to stop it from going to 20 or 25. They can always compare earnings yield to bonds and make a case for equity. Shorting in this environment is near suicidal.

 

I suggested buying calls on the market to "hedge" yourself while you may be trimming others, but I tell you it is gut wrenching since you never know when to pull the plug. There is no real measure of value and as it keeps climbing, the value of the calls rise quickly in dollar amount making you pretty nervous, pretty quick. The idea was to prevent underperformance since you are sitting more and more in cash and actually to increase your cash holding whenever the break finally occurs. The key is how to harvest this cash as the bubble evolves while always keeping a minimum amount of capital at work?

 

In terms of other strategies, have you sold your stocks or portions of them? Even if they remain cheap?

 

Have you sold covered calls in case you want to hold them longer term, but want some protection?

 

Have you bought puts on your stocks?

 

Unless we can turn these threads into action, then it is not worth the pixels being used!

 

Cardboard

[Parsad]

In terms of other strategies, have you sold your stocks or portions of them? Even if they remain cheap?

 

Have you sold covered calls in case you want to hold them longer term, but want some protection?

 

Have you bought puts on your stocks?

 

Yes, yes, and yes.  I walk the talk.  Cheers!

[Hoodlum]

No tapering for a while according to Bernanke.

 

http://www.forbes.com/sites/afontevecchia/2013/05/22/taper-this-bernanke-makes-it-clear-tapering-qe-isnt-happening-any-time-soon/?partner=yahootix

 

[Cardboard]

Regarding Bernanke, I really don't understand this guy. I am not him, but if I was, I would certainly "test" the market by pulling a bit of QE now. Say move it down to $75 billion a month and see what happens. Then he could always readjust upwards or downwards as needed.

 

IMO, it would be quite healthy actually since the market would have to readjust for a less predictable Bernanke QE. The economy is undoubtedly doing better, so it could easily absorb a small tapering and the market would maybe avoid getting into hyper-drive and create a crash down the road that will render all this QE today a disastrous experiment. At least, they would gather data now on their true impact on the market and the economy before it creates major distortion.

 

Cardboard

[Parsad]

Regarding Bernanke, I really don't understand this guy. I am not him, but if I was, I would certainly "test" the market by pulling a bit of QE now. Say move it down to $75 billion a month and see what happens. Then he could always readjust upwards or downwards as needed.

 

IMO, it would be quite healthy actually since the market would have to readjust for a less predictable Bernanke QE. The economy is undoubtedly doing better, so it could easily absorb a small tapering and the market would maybe avoid getting into hyper-drive and create a crash down the road that will render all this QE today a disastrous experiment. At least, they would gather data now on their true impact on the market and the economy before it creates major distortion.

 

Cardboard

 

The recovery in many respects while robust, is still tepid in many other ways...so I don't think he wants to do anything to affect the recovery until it has both legs under itself and is self-perpetuating.  Cheers!

[constructive]

30-70...default/no default

 

Have you considered buying sovereign CDS (on Japan, Italy, etc.)? The market is clearly trading orders of magnitude away from your prediction.

[Parsad]

30-70...default/no default

 

Have you considered buying sovereign CDS (on Japan, Italy, etc.)? The market is clearly trading orders of magnitude away from your prediction.

 

No...we use cash as a hedge.  Also, you have to have more money than us to buy CDS as an institutional investor. 

 

A good indicator on this will be Francis.  He is one of the few mutual funds that has clearance to buy CDS.  If you see him doing something like that in the next few months, it will be a pretty good guide.  Cheers!

[enoch01]

Recent Barron's article (via Josh Brown):

 

Major hedge funds are reportedly buying, or have bought, massive amounts of Standard & Poor's 500 index calls in the over-the-counter options market. The calls would increase in value if the index, now at about 1,664, rises to 1,725 by year's end. The funds reportedly missed the stock market's rally and are playing a vicious game of catch-up.

 

Did somebody say something about buying index call options recently on this board?  ;D

 

You can only get hurt playing when you are on the field.  I have been spending more and more time on the bench.

[JBird]

"The risk of being out of the game is huge compared to the risks of being in it."

 

[JEast]

It's not hedge funds that have missed the rally, it is pension funds.  At the next board meetings, they are sure to start allocating more to equities.  And who can blame them when they have discount rates of 7.5% and bonds are yielding below 5% on average, you got to make that up somewhere.

 

If so, it would seem that the summer will be interesting with potential 2% (or more) swing days.

 

 

[Kraven]

It's not hedge funds that have missed the rally, it is pension funds.  At the next board meetings, they are sure to start allocating more to equities.  And who can blame them when they have discount rates of 7.5% and bonds are yielding below 5% on average, you got to make that up somewhere.

 

If so, it would seem that the summer will be interesting with potential 2% (or more) swing days.

 

Retail as well.  Friends involved in the business inform me that their clients have yet to participate in the market, but calls are starting to come in asking "if there's anything they should be doing now".

[ERICOPOLY]

Oh well, I'm not going to cash.  I just can't do it.  Market is just too fun and I don't have a day job anyhow.

 

I wrote a bunch of MBI puts today just before the close and used the proceeds to purchase SPY puts. 

 

I purchased about $2.70 of at-the-money SPY insurance for every $1 of MBI insurance written (slightly out of the money).

 

We'll now see if MBI drops more than 2.7x harder than SPY.  Let's say the market drops 27% -- well, this trade is only going to lose money if MBI drops more than 72.9%

 

Perhaps I can make the argument that I de-leveraged my portfolio with this trade (on a notional basis).

 

I really need tax losses this year.  That 52% tax rate is just murder.

 

Scenario #1 (market has epic crash):

1.  capture tax loss on MBI puts on Dec 31, 2013

2.  capture SPY put gain on Jan 1, 2014.

 

Scenario #2 (market doesn't have epic crash)

1.  capture SPY put loss on Dec 31, 2013

2.  capture MBI  put gain on Jan 1, 2014.

 

Other scenarios... lots of them...

 

One of the main goals of this is to shift my short term capital gains from 2013 to 2014.  I just don't want to pay 52% tax rate. 

 

 

[buylowersellhigh]

Oh well, I'm not going to cash.  I just can't do it.  Market is just too fun and I don't have a day job anyhow.

 

I wrote a bunch of MBI puts today just before the close and used the proceeds to purchase SPY puts. 

 

I purchased about $2.70 of at-the-money SPY insurance for every $1 of MBI insurance written (slightly out of the money).

 

We'll now see if MBI drops more than 2.7x harder than SPY.  Let's say the market drops 27% -- well, this trade is only going to lose money if MBI drops more than 72.9%

 

Perhaps I can make the argument that I de-leveraged my portfolio with this trade (on a notional basis).

 

I really need tax losses this year.  That 52% tax rate is just murder.

 

Scenario #1 (market has epic crash):

1.  capture tax loss on MBI puts on Dec 31, 2013

2.  capture SPY put gain on Jan 1, 2014.

 

Scenario #2 (market doesn't have epic crash)

1.  capture SPY put loss on Dec 31, 2013

2.  capture MBI  put gain on Jan 1, 2014.

 

Other scenarios... lots of them...

 

One of the main goals of this is to shift my short term capital gains from 2013 to 2014.  I just don't want to pay 52% tax rate.

 

How much of what you are doing is dependent volatility in MBI puts and/or what you think downside is in MBI? 

[Guest]

Eric, pardon my ignorance, but can you run through the math on that trade?

 

If you wrote slightly out of the money puts on MBI and it drops to $0, how could you only lose if it drops over 70%? Thanks in advance man! :)

[Parsad]

Oh well, I'm not going to cash.  I just can't do it.  Market is just too fun and I don't have a day job anyhow.

 

Eric, this just won't do!  We're going to have to find you a real job with your growing family.  Come work for me...plastics, my boy...plastics!  That's the future.  ;D  Cheers!

[ERICOPOLY]

Eric, pardon my ignorance, but can you run through the math on that trade?

 

If you wrote slightly out of the money puts on MBI and it drops to $0, how could you only lose if it drops over 70%? Thanks in advance man! :)

 

I said if "the market" drops 27% (meaning the SPY puts are soaring) then...

 

MBI will have to be down more than 2.7x that much (or 72.9%) to spoil the trade.  Otherwise... I'll make money.

 

See... Gary Shilling warns that the market would need to drop 27% to get back to fair value.  So... in a market correction (one that merely brings us back to fair value later this year) I'll be making money unless MBI drops more than 72.9%. 

 

But really I'm highly motivated to shift my already booked short term capital gains out another year.  I think it's true that once tax rates get too high, tax receipts go down.  Nobody wants to be treated like this, so there is retaliation in the form of what I'm doing.

 

[Kraven]

Oh well, I'm not going to cash.  I just can't do it.  Market is just too fun and I don't have a day job anyhow.

 

Eric, this just won't do!  We're going to have to find you a real job with your growing family.  Come work for me...plastics, my boy...plastics!  That's the future.  ;D  Cheers!

 

Are you trying to seduce him, Mrs. Robinson?

[mhdousa]

30-70...default/no default

 

Have you considered buying sovereign CDS (on Japan, Italy, etc.)? The market is clearly trading orders of magnitude away from your prediction.

 

A good indicator on this will be Francis.  He is one of the few mutual funds that has clearance to buy CDS.  If you see him doing something like that in the next few months, it will be a pretty good guide.  Cheers!

 

Sanj, do you know if this is true for his American funds, or just the Canadian ones?

[ERICOPOLY]

Eric, pardon my ignorance, but can you run through the math on that trade?

 

If you wrote slightly out of the money puts on MBI and it drops to $0, how could you only lose if it drops over 70%? Thanks in advance man! :)

 

Okay, if the SPY drops 36% it will completely reimburse me if MBI goes to $0.  That's because the SPY exposure is 2.7x larger than the MBI exposure.

 

I am guaranteed a profit on this trade if SPY declines more than 36%.

 

[Guest]

Eric, I think I get it now. thanks as always! :)

 

 

[Parsad]

30-70...default/no default

 

Have you considered buying sovereign CDS (on Japan, Italy, etc.)? The market is clearly trading orders of magnitude away from your prediction.

 

A good indicator on this will be Francis.  He is one of the few mutual funds that has clearance to buy CDS.  If you see him doing something like that in the next few months, it will be a pretty good guide.  Cheers!

 

Sanj, do you know if this is true for his American funds, or just the Canadian ones?

 

Hi Mdhousa,

 

Not sure, but I would suspect that he can, as he can also go well over 10% positions, etc.  Best to probably check the fund offering documents on their website.  Cheers!

[Parsad]

One day does not make a trend, but you guys should keep an eye on this:

 

http://www.cnbc.com/id/100760159

 

http://www.bloomberg.com/news/2013-05-23/japan-s-bonds-fall-on-fed-comments-as-10-year-yield-rises-to-1-.html

 

We talked about both these issues at our AGM this year.  As Prem mentioned in the annual letter and at the AGM, the outcome of so much intervention is completely uncertain when that intervention is removed.  Cheers!

[JEast]

Given that the story of the demise of the Yen and especially the Japanese Bonds is so much reported about, so known in the market, so overly predicted by nearly everyone -- is this not the worry now?  To paraphrase, it is not what you know that kills you its the stuff you do not know about that does.  I guess the question is what is it about the Japanese experience and the possible triggers/outcomes that we do not know is the question.

 

Does anyone really think that any major quasi-government body is not going to not pump, not going to pull out any and all stops, not going to go the distance, or even signal that they will not manipulate during a crisis?  In other words, don't fight the FED as they are in a fight for survival and they are not going to back down.

 

Just a thought.

 

[vinod1]

Given that the story of the demise of the Yen and especially the Japanese Bonds is so much reported about, so known in the market, so overly predicted by nearly everyone -- is this not the worry now?  To paraphrase, it is not what you know that kills you its the stuff you do not know about that does.  I guess the question is what is it about the Japanese experience and the possible triggers/outcomes that we do not know is the question.

 

We could have said the same about the housing market in late 2007. Yet, the severity was still a shock to the system. The problem with the Japanese situation is that we just do not how the problems would manifest themselves or even if there would be any severe problems.

 

Does anyone really think that any major quasi-government body is not going to not pump, not going to pull out any and all stops, not going to go the distance, or even signal that they will not manipulate during a crisis?  In other words, don't fight the FED as they are in a fight for survival and they are not going to back down.

 

Very good point. This is the mistake I think many like Hussman, Rob Rodriguez, etc made. They fully expected the 2008 crisis to turn into a depression as they did not expect Fed/Treasury to do as much as they did. They did not invest aggressively at the bottom due to this and are now bitter.

 

I would not go as far as say dont fight the Fed, but you do have to consider Fed's reaction. Bernanke has pretty much laid out his thinking in "Essays on the Great Depression" and still people kept getting surprised that he did what he said he would do in a situation like 2008.

 

Vinod