Friday, October 17, 2008

Technical investment themes

I am 80% cash have been for 6 mo or so. I am now 85% cash, not because I moved out of equities (EQ) but because they lost a ton of value in the past few days.

Which leaves me thinking. Is it time to get back in EQ or out for good and just go fixed income? CD's in EU are yielding 600 bips. They can be unsecured (in my case they are) which adds a bit to the stress.

One approach is to create synthetic EQ exposure is based on current volatility levels (VIX). With VIX flirting with 80. You may want to SELL regular option (puts to get in, calls to get out) and leg into the market that way. You may want to BUY knock-out options and create synthetic exposure this way. The difference with regular and KO is reverse correlation with volatility.

Trade at your own risk, last time I did this, with VIX at 35, my personal portfolio of options, went to ZERO a couple of weeks ago when the VIX hit 60 (I was KO options only, my mistake). Not lost 5 or 10 or 30% but lost 100%. Think cash flow off the principal in safe muni or CD and invest that proceed to lever up, that is what a structured note is by the way, minus the fees all the piggies in the middle take. Do it on liquid securities like SPOOS and other indexes. Narrow down to boost risk profile.

Nothing is full-proof.

8 comments:

Andrew Meyer said...

While cash is not the most exciting investment alternative, it does have one redeeming value. It always trades at par.

Andy

Marcf said...

yeah, problem with it is that it is sterile. If cash is really a coupon on future debt, there better be assets to redeem it against in the future. In other words, par is a near-term certainty. What is going on in the credit markets will impact the economy and then the paper means claims on dwindling assets aka inflation.

Andrew Meyer said...

Marc,

I'm sure you saw it, but in case you overlooked it, Buffett has a great piece in today's NYT:
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?th&emc=th

In an era of deleveraging, inflation is not the concern. The concern is asset destruction. There are plenty of examples of that: $1,000 in AIG a year ago is about $33 today. The same $1,000 in Lehman is $0 today.

Short term, avoiding destruction is the concern. With all the liquidity being injected into the markets, you're right, inflation will become an issue, but as Buffett points out again and again, 5 years from now, living standards will be better than they are today and 10 years from now they will be much better.

What is going to happen short term on the markets? Don't know and it really doesn't matter. Long term, the markets will go up. It's an excellent time to buy simple Vanguard S&P 500 index funds or BRKA.

Or invest everything in your own company that you make successful.

Maybe someday I'll agonize over your concerns that GS isn't so exclusive anymore. Oh the horror of it all.

Marcf said...

andrew,

yeah I saw the buffet thing and it bugged me for a while. I am wondering whether he is talking is own book. Long term he is right, as I mentioned in the second post, money is but a debt on claim on future production. If production goes down , because you have held your money and didn't invest, then the value of your money goes down as there are more claims than assets. This is a different kind of inflation i am talking about it, it is in the case of Depression.

Your example about the asset destruction is good. But in my opinion it works a bit differently.

Say you had 1000, got out at 700 (went to cash) but the stuff went to 0, if everything went to 0 then your money is a claim on nothing that is left, inflation is infinite in that thought case. I think this is what Buffet means when he says "cash is trash". Cash is meant to be lent out, if it isn't it isn't producing anything, paper doesn't give us off springs.

Short term however, i find this dangerous a recommendation. Guys like Buffet can ride out a storm, meaning go down and down and sit at the casino table and never BLOW UP. So eventually he catches the way up and if statistics are positive (growth) then you capture it. If your amount of money is limited, you blow up and go home, you lost everything and couldn't wait out. That is the situation of most folks out there in 401k.

Yeah, I don't invest in venture but my own. I am very conservative that way. Open Remote is the only investment I have in "seed".

Finally, GS? yeah I am with you, serves them right, a little humility never killed anyone.

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