Little question the market has finally realized the Fed has no intention of raising interest rates, thus the huge dollar tumble since December. At this point more QE and negative interest rates in a year or two are far more likely than meaningful hikes. If the dollar hadn't fallen so much in the last five months, the stock market would be quite a bit lower already thanks to horrible corporate earnings.
Very true, but... Eventually all that money shows up as inflation. Which devalues the SPX. The wealthy have been net sellers of SPX for over a year now. It is only the collapsing velocity of money which has prevented an inflationary tear so far...but that has a hard limit at zero ( unlike interest rates) which can only be reached by either obliteration of technological society or a reorganization of economic activity to be uncorrelated with money flows
If you believe that, then you would do well to swap your dollars for some other currency used by countries with low inflation and a more prudent fiscal policy.
He did end up making a 45% gain in < 2 years on billions of dollars by betting big on AAPL. If, as the fund manager, he gets 20% of those gains, he made $500m-1bn.
How do you think a potential Trump victory will affect the market, in terms of short term immediate effects? (I'm actually asking, not being sarcastic).
It's hard for me to predict in this case, but if Bernie were to win, I kind of expect a temporary downturn as people panic due to Bernie's promise of attacking "wall street".
What attacks could a president perform? An R congress will plant their heels. Even attempting to clean up malfeasance and nepotism at the SEC, "the President does not possess the power to fire the appointed Commissioners, a provision that was made to ensure the independence of the SEC."
On the other hand, suppose we had a 100pct trustworthy marketplace (unlike now). Wouldn't that spur investment and boost the markets? The only thing we get with the current system is rich wall street execs.
I'm sure President Trump would appoint a justice that would be fond of the "unitary executive" theory. The 10th Circuit rejected that theory (Blinder, Robinson & Co., SEC v., 855 F.2d 677 (10th Cir. 1988)), but who knows what could happen.
He favours a "temporary" ban on nearly a quarter of the world's population entering the US, delays to company's ability to hire anyone from overseas and a trade war with China... and also talks a lot about attacking Wall Street though without appearing to have any concrete policies to deal with it.
I don't think an unfunded plan to cut corporation tax is really going to tip things in his favour.
uh, his wall street plan is to get rid of carried interest and increase taxes on fund managers. i think we found some funding a corporate tax cut (if that's in fact what he's proposed).
He also proposes taxing _all_ income from pass-through vehicles (such as private equity funds, VC funds, and hedge funds) at 15%. Trump may eliminate the carried interest loophole, but he does so by lowering taxes until the loophole is irrelevant.
I consider this clear proof that he thinks his voters are chumps.
I feel the same way. I think the candidate who would create the least disturbance in the market would be Hillary. Compared to Trump and Bernie, she's the more normal "politician" which usually translates to "least likely to change anything" in the eyes of a lot of people.
I don't think Wall St buys Trump's populist rhetoric. His words aren't worth much and I'm sure Wall St knows much better where he actually stands on these issues than the average Trump supporter.
Personally I don't believe he would actually try to implement any of the stuff he says he has planned. He would probably just try to make it seem like he's making big changes while not doing much at all.
Markets crave financial stability and Trump is impulsive and seems to either not understand, or not care, about the long-term effects of the policies he mentions.
One example is his plan to get Mexico to pay for his wall, which involves holding hostage the wire payments that flow from people in the U.S. to their relatives in Mexico.
Financial institutions make money on those payments, but from a broader perspective the concept of holding capital flows hostage to policy ideas is deeply scary to Wall Street.
What if Trump decides that capital from Middle East sovereign funds will be hindered until they pay a greater share of the cost of fighting ISIS? What if he decides to hinder capital flows from China until they let their currency's value rise more? Etc.
Speaking of AAPL, this news puts his well publicized dump of the stock in a different light. He was obviously hoping it would cause a much broader and more severe sell off.
My favorite chart is to superpose the S&P for the past 10 years with the size of the Fed balance sheet. It's almost a perfect match. What is certain is that the Fed B/S isn't going up anymore (but it isn't reducing either). I don't know if we are heading toward a crash, but unless we have QE4, stocks are certainly not going up.
Negative interest rates and company stock buy backs might be able to allow markets to keep going for a while. Negative rates cause investors and sovereign wealth funds to pour money into equities. The Bank of Japan owns 50% of the ETFs in Japan. That should scare people.
Stock buy backs artificially inflate reported company earnings. Companies take on cheap debt to buy back shares of their own company (at historically high valuations) to keep investors happy and beat earnings estimates.
Everyone knows it's happening, the real question is whether it is a charade or not. Buy backs are a legitimate practice for companies that want to reward shareholders and gain a bigger chunk of their own business. Nothing sketchy there. The question is why would a company like Nike want to buy back it's own stock at historically expensive valuations rather than use that money on new products or to expand their market share? Are they doing it to gain a bigger piece of their own business, or are they doing it to juice earnings because top line sales are decreasing and they need to beat earnings expectations to keep the share price up? The jury is still out.
What goes up, must come down. The stock market is cyclical and a correction is bound to happen. I don't see why a Trump presidency would be bad for the market. Maybe it would take a short term dive because of his stance on protectionism, but long term it would probably rise because of his goal to repatriate dollars and stimulate domestic manufacturing. Right now, it's the uncertainty about Senate and presidential outcomes that might spook investors. Even the Supreme Court is in play. We live in interesting times.
I'm not sure about that. I think Trump gets a lot of play as a product of New York, compared to the rest of the republicans. /r/The_Donald rules reddit; often times every 5th story comes from that subreddit. These thing have contributed to his success.
Yes, the stock bubble burst, and Hoover's attempt to impose tariffs backfired badly.
I doubt that Trump would implement protectionism. His rhetoric generally points to leveling the playing field rather than simply banning foreign imports.
He talks a good talk about screwing the Chinese, but when push comes to shove there's nothing he'd be able to do about the trade imbalance.
> His rhetoric generally points to leveling the playing field rather than simply banning foreign imports.
His rhetoric is consistently vague, which allows people to read what they want into it.
> He talks a good talk about screwing the Chinese, but when push comes to shove there's nothing he'd be able to do about the trade imbalance.
There's plenty he could do about the trade imbalance; for instance, net imports necessarily must be balanced by a capital inflow; obstruct the capital inflow and you prevent the trade imbalance.
Of course, doing so would likely be disastrous, but its not impossible.
To repeat the well worn quote from John Maynard Keynes. "The market can remain irrational longer than you can remain solvent." This is especially true in the post financial crisis world of financial engineering, quantitative easing, and zero/negative interest rates. This market will come down hard at some point, but shorting it has been a losing proposition 99% of the time.
I've got put options on SPY as well as a portfolio hedge. They lose value every day (theta or the premium you pay for time) and if the S&P goes up puts lose value so fast it would make your head spin.
In the end for a big liquid etf like SPY, they aren't that much different than going short. Now for small companies that could skyrocket overnight and destroy a short seller, puts offer some protection since your loss is capped at 100% instead of theoretically infinite losses.
edit: I should add that puts give you leverage. To short 100 shares of SPY you would need $20000 worth of margin, while to buy 1 sept 2016 in the money put (100 shares worth) you probably only need to cough up $800. If the delta value of the put is equal to 1, your gains or losses will move inline with that 100 share short position.
Shorting is (roughly given efficient market assumptions) equivalent to buying a put and selling a call at the same strike. If the stock has no chance of going up a lot, the call will be relatively cheap, and so selling the call won't change much.
Edit: on the other hand if it has low volatility in both directions, then both are cheap, and it's a bit more complicated. Buying the put will be cheaper, but shorting will also require less margin because the margin provider will have less risk. (See e.g. http://openmarkets.cmegroup.com/3785/understanding-margin-ch...).
This should cancel out in theory, but might not for various reasons like transaction costs.
Just look at the payoff graphs. This is how options are explained and tested in finance classes and they are usually more accessible than textual descriptions.
Gotta make another trade to neutralize that theta component like a calendar spread. For situations where you're making a bet on a really really big move, ratio spreads are the best.
qqq would probably be ok. I like the open interest and spreads on spy options. I'm not looking to make a killing on options (or I should say I would love to but don't think I could), just looking to hedge out some systemic risk on a buy and hold portfolio.
I've made some huge mistakes, but I'm up 20% overall YTD. Just randomly picking tech stocks with out of the money puts has been profitable enough to stay up 20% even if the majority of them wash out. Biggest hit was 8x.
I own a diversified basket of stocks that I believe reflect the best of the S&P. Then I have a much smaller position in spy puts. The basket has a positive beta and increases in value much faster than the puts lose value. The puts are sept 205 strike and would be deep in the money if August 2015 or January 2016 happen again. Isn't that positive carry?
I would love to find two assets that are inversely correlated but somehow both have a positive return at the same time, but I haven't found that yet :)
I don't understand. EG, say I'm long a portfolio of US equities that I expect to outperform the market. I want to hedge my risk in case the market drops, but I don't want to limit my upside. What positive carry hedge should I do?
"I've got put options on SPY as well as a portfolio hedge. They lose value every day (theta or the premium you pay for time) and if the S&P goes up puts lose value so fast it would make your head spin"
I wonder if you would compare/contrast with short selling UPRO ?
That is, short selling the triple-long S&P 500 ETF.
The thinking here is that a long ETF (especially a triple long one) loses value every single day[1] due to the natural decay of long ETFs ...
So in a flat market, your short position is positive, and in down markets it is very positive. Further, it's not an option - you're simply short an ETF - so you can hold it through a market rally if you wanted to.
I have never employed this hedge, but it interests me.
I've never tried it. I'm skeptical that a broker would let you short a leveraged ETF since it's a bad deal for them. There are options out there for these but something tells me the decay is priced in or else it's getting into arbitrage territory. I have seen this question asked a few times before but never saw a definite answer.
If you were able to short TVIX or SPXU or any leveraged etf for a long period of time it seems like a near 100% chance of massive gains which makes me think there is a catch.
Shorting ETFs is expensive. You need to borrow the shares from someone in order to re-sell them, and you pay them for the privilege.
Futures work on margin with relatively low fees so if you wanted leveraged short exposure to the US market that's what you'd naturally trade.
One of the posters below who describes buying a put and selling a call at the same strike is describing a roundabout futures trade. The put/call method would have far higher transaction costs, though.
There are also leveraged inverse ETFs like SDS, which I have used at times. You don't want to hold them for more than a few weeks at a time because they decay, but for short-term trading they work fine.
"There are also leveraged inverse ETFs like SDS, which I have used at times. You don't want to hold them for more than a few weeks at a time because they decay, but for short-term trading they work fine."
Yes, that's the point - the idea is, instead of buying the short ETF, you short the long ETF.
They both decay, as you would expect an ETF to do, but by shorting the long, the decay works in your favor...
If you are long puts on spy, imho it's much better to fund them with short calls at the same strike, and hedge yourself with long otm calls at 1.2*strike.
ie. Forward + Call, as opposed to long put.
Or he can sell SPX calls. Or sell calls on another index or individual stocks. Or a combination of the two. Or he can sell futures. Or buy options on futures.
There are a zillion ways of shorting the market while not selling or directly shorting your existing long positions.
Careful with selling naked options though. You can have limited profit and unlimited risk in some cases. Selling naked puts on a stock you want to own or selling covered calls are pretty safe. Otherwise maybe spreads to hedge things out.
I didn't say they had to be naked. I almost always trade spreads. Naked options tend to be for casino individuals.
Also, selling naked puts against the VIX is a good long hedge. It's not going to 0 and when it gets really, really low there's already a little resistance in there as skepticism kicks in. You won't make a ton of money on the downside, but you can sell enough to buffer any long losses.
he can, which presents downside risk on those options equal to their purchase price.
however, the article seemed to describe a portfolio position of _actual_ borrowed stock, meaning he is trying to execute a classical short position trade on it, and not just hedge it with options.
his downside risk in that case is basically unbounded, though realistically only as much as the stocks might rise in price which is not unlimited.
but his ratio of short positions to long positions is 1.5:1 which means he could easily get blown out if he holds on for too long through even a relatively short lived rally. its a pretty substantial gamble no matter how you look at it.
I find it somewhat poetic that Keynes is the author of that often used quote, as the irrationality of our current market is a direct result of the abuse of his own theories.
I'm sure you're referring to his macro ideas, but this is a fun coincidence as I was reading about his Castle-in-the-Air theory of investment[1] last night.
How so? Irrationality of markets are a direct result of irrationality of human beings. I doubt things would be terribly different without Keynsian ideas.
How so? Irrationality of markets are a direct result of irrationality of human beings. I doubt things would be terribly different without Keynsian ideas.
OP was probably using Fortune as a "wrapper class" for Zero Hedge to give it some reputability. I like Zero Hedge but old Tyler Durden is a bit of a perma-bear. Although that assumes that Fortune is reputable I guess.
While I agree that Forbes is much worse in this regard, I was referring to Fortune:
>Heeding the call for traffic growth, Fortune has joined the growing ranks of publishers that are opening up its site to posts written by non-staff contributors.
Each publisher has a slightly different approach, and Fortune is no different. The Time Inc. title draws from a 5,000-person contributor network who supply what Fortune digital editor Aaron Task calls “our op-ed page.”
Probably because when you see a link to ZH, you know exactly what it's going to say. The economy is bad, the market should have crashed yesterday, the USG is broke, etc.
ZH has little predictive credibility; they've been wrong their entire existence. They just make a shitload of money off click-bait articles. So not a lot of people are going to be willing to go to a ZH link, but if you link to Fortune, somebody might fall for it.
Not a bad idea. Greece and its "debts" will rear their heads again this summer, as there are some pretty significant payments due in June and July: http://www.ft.com/ig/sites/2015/greek-debt-monitor/. Just the spark un-needed in global markets where it seems everyone is in that pre-dive mood of complacency.
The continuing question is: do you play chicken with the central banks of the world?
Not really surprising there are a lot of reasons to think there will be a market downturn the thing that seems to be a big question mark is will/can it happen with the fed's current policies.
Is there evidence of active lobbying, ie making media do what they wouldn't do on their own of they pursued interests of their readers? Because this story in particular seems like an honest, interesting story by a good journalist.
He may well be right. If you say it often enough, eventually you will be.
2011:
>You’ve got to be myopic if you’re not at least concerned that there might be a major correction [1]
2013:
>Activist investor Carl Icahn on Monday said there was a chance the stock market could suffer a big decline, saying valuations are rich and earnings at many companies are fueled more by low borrowing costs than management's efforts to boost results [2]
2014:
>Carl Icahn says 'time to be cautious' on U.S. stocks [3]
>Carl Icahn Reiterates "We Are In A Major Asset Bubble" [4]
2015:
>Icahn warns of potential looming catastrophe...Icahn said he's "more hedged now than I've been in years." [4]
If the implication is that his statements in 2011 and 2013 were predictions that turned out to be false, I don't think these quotes are sufficient evidence.
That an inevitable correction has been delayed by sustained government efforts does not make predictions of a correction any less prescient.
No, his remarks have an obvious tone of urgency. If after 5 years nothing has happened (and actually the opposite has), then his credibility is damaged.
One doesn't need to be an economic historian to understand that the economy and market run in cycles.
There is always an "inevitable correction" somewhere in the future, but in this endeavor, it's timing that matters.
It’s probably not fair to pick on Icahn in particular, who is not really a perma-bear. There are far better examples (e.g. Marc Faber), who despite being demonstrably wrong year after year with their end of world predictions, are always welcome back on Bloomberg and CNBC explaining how the world markets are about to fall apart.
If you actually look at economy's over long time periods they really don't have a cycle. It's much closer to a random walk than you might think. After the fact we simply define periods as good or bad based on what followed them.
EX: People talk about Japan as if it was going though a bad time period vs. that just being the new normal based on it's demographics.
As someone paid to do such looking for the past decade I can assure you that both econometric and market series' are subject to periodic, as well as quasiperiodic, chaotic, and exogenous forcing functions. Everything looks like white noise when your eyes are closed.
If there where real periodic cycles you could predict if the US economy where Up or Down with above random odds for July 4th, 2050. Nobody can, because what you call periodic is something else. Another way of saying it is there where say a X year cycle to the economy it would be a very famous result.
You're correct, the US economy has a reliable boom/bust cycle that is caused in large part by monetary policy and started in earnest under Greenspan's tenure at the Fed.
That we're in the midst of one of the largest and most artificial of those 'boom' periods is undeniable, owing to the Fed's injection of $4.5 trillion into equity markets.
Icahn is banking on Newton's third law of motion applying to financial markets as well.
Their monetary policy is responsible for inflating asset prices, so yes they did effectively inject that money into equity markets. No one thinks they went out and bought stock on the open market with it.
Initially they weren't buying stock but it is pretty clear many central banks have been buying stocks in the last several years. It's a subject of some speculation if the Fed has joined the ranks of central banks who buy stocks directly.
> The market needs people that have the capital to lose consistently year after year...
Not necessarily true. The sellers miss out on gain, but they don't necessarily need to book a loss. Unrealized gains are not equivalent to losses. I believe what you're thinking about are derivatives (which are zero-sum, and for every unit of profit booked by one entity, there is a unit of loss booked by another entity).
Equities are not zero-sum, the companies behind them produce very real value.
Yeah...the problem with your analysis is that Icahn was never really "short" the market when he said those things. He owned big momentum stocks, as a matter of fact, Apple, Netflix, etc. Now he has a massive short position in the market, his money is now where his mouth was/is.
The first time in your analysis that he actually said he was hedging, the market took a nose dive of 20%. I think his advice is worth warrant, especially when you have people like Bill Gross saying similar.
It's of my opinion that we are in an asset bubble, but we could have a "blow off top" before we really see what happens. Stock declines also generally occur during election years after a 2 term President, so it's a generally good bet for a correction at the very least. But, if I really knew what was going on, I'd be rich.
Economic and market predictions are practically impossible to get right in timing. We can only really see us trending towards something, but that trend could last long enough to lose some serious money. That's why Buffet ignores the noise, and invests long term. I threw that last sentence out there, because, while I think I am right...I've been wrong enough to lose enough money that it genuinely hurt; I don't want anyone reading my post and affirming a bias and losing money. Even if I see eye to eye with some market experts, in the end, a single event could make the opposite occur.
"It's of my opinion that we are in an asset bubble, but we could have a "blow off top" before we really see what happens. Stock declines also generally occur during election years after a 2 term President, so it's a generally good bet for a correction at the very least. But, if I really knew what was going on, I'd be rich."
What's missing right now is the taxi driver sentiment ...
I don't hear inexperienced investors talking about playing the market or about average folks day trading. Yet.
There was an ad that recently played on the radio for some service that will help you take your money from a retirement account to fund a family member's start-up.
I haven't heard it recently, so hopefully some people had enough sense to pull it. Investing retirement money in a family member's start-up is one of the worst ideas I've ever heard of.
The analysis needs to factor overall market earnings [1]. It is more level-headed to look at the S&P 500 P/E ratio, which does show a historically over-valued market, though not dramatically over-valued at this time [2]. S&P 500 overall earnings hit all-time highs in 2013 and 2014, but have fallen back somewhat in 2015.
So it's a pretty safe bet to short, if that is one of your investment tools. But I don't think you'll really make a killing, unless earnings decline substantially. I've chosen to just divest stock-based investments and increase cash somewhat, and then cherry-pick value in dividend stocks.
"In April, Icahn argued that stock prices have been pushed artificially high by low interest rates, but that economic fundamentals could not support those prices."
Along with Druckenmiller.
Then, I hear Willie Brown is concerned about what San Francisco is going to do with thousands of unemployed computer programmers.
The top two arn't lightweights.
Don't we all kinda look at all that free money the rich have played with, and wonder what's up?
I look at my cd, and I made $9 dollars. It seemed like a few years ago I made $350?
I look around and don't see this great economy? I see a few hot spots, and a huge swath of people just getting by. I see too many people who just gave up.
(I don't want to argue. The Bulls are probally right. I'm always wrong on predicting a crash.)
U.S. corporations have issued more than $9.9 trillion in debt since 2008. Last year, corporations issued a record $1.5 trillion in debt.
76% of the companies in the S&P 500 bought back their own shares ...most companies used debt to pay for these buybacks, in a clever move of financial engineering to boost EPS.
To top it off, we've been in a multi-quarter earnings recession for the S&P, and total retail sales growth has dipped below 3% which has always correlated with a recession:
The stock market seems sane when compared to real-estate prices in major cities. In Canada, people are mostly pointing fingers at foreign buyers. People are generally ignoring the elephant in the room - lowest rates in a generation. Despite being in the 1% of wage earners, we personally are so badly screwed ... we'll never be able to afford property in hour home towns unless there is a 50% crash. I don't think that is likely at all ... so we're (and most of our friends who missed the buying opportunities of 2011-12) are figuring our what remote town to move to so we can earn some fraction of our salaries but have a shot at home ownership. As rational people, we know we cannot afford million dollar homes if interest rates ever normalize. In Canada, you cannot get mortgages longer than 10 years ... so it is very grim for us. People who don't know math are raking it in while we are suffering in no uncertain terms. But no one seems to care.
I am just hoping self driving cars come out in the next 5-10 years and hopefully that expands the geographic area you can reasonably live in and still commute to work.
The LA to SF bus comes to mind. Seems like a miserable existence to spend so much time couped up in a car but the self-driving option will allow more productive use of time.
Traveling long distances is a pain even by transit -- mobile data needs to catch up first. Dropped calls, dropped vpn connections, slow speeds... it sounds great to work during your commute until you have to actually do it.
You are right, and there is no fracking boom on the horizon to save us. We just had 0.5% gdp growth. Where is the growth needed to sustain the stock market going to come from? If you read between the lines, Icahn is essentially saying that monetary policy is not effective as an elixir for the economy, though it may be a short term elixir for speculators, and that absent Keynesian fiscal policy(thank you politicians) he doesn't see growth drivers.
To badly paraphrase the words of Jack Bogle - "I don't know anyone who can successfully time the market, and I don't know anyone who knows anyone who can either."
"In April, Icahn argued that stock prices have been pushed artificially high by low interest rates, but that economic fundamentals could not support those prices."
That tells me that his bet is actually that the Fed will keep raising rates, which would likely push down stocks.
I wonder what kind of effect that will actually have, given the stark divide in retirement preparations. On the one hand, we have a lot of people who have little retirement savings, who play a small role in the markets and will delay retirement (or just never do it). On the other, we have some people with well-planned retirement accounts. I would not be surprised if a fair number of the latter have planned to live only on the proceeds of their investments. That will introduce some bias towards dividends over reinvestment, I suppose. This is speculative, granted.
The guy is quotable, but I don't understand why anything Icahn says about the market is actually newsworthy. He never says or does anything that isn't about benefiting the interests and net worth of Carl Icahn (inc.). May as well be quoting press releases from SCO lawyers about software patents and Unix.
145 comments
[ 4.7 ms ] story [ 188 ms ] threadMost corrections are 20-40% - which is bad enough.
But every so often you get something much, much worse.
Quantitative easing has effectively been the biggest gift in the last 50 years to the wealthy.
To be fair, the coming Trump victory might not be priced in yet. Also, Brexit could bring some turbulences.
It's hard for me to predict in this case, but if Bernie were to win, I kind of expect a temporary downturn as people panic due to Bernie's promise of attacking "wall street".
https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_C...
On the other hand, suppose we had a 100pct trustworthy marketplace (unlike now). Wouldn't that spur investment and boost the markets? The only thing we get with the current system is rich wall street execs.
I don't think an unfunded plan to cut corporation tax is really going to tip things in his favour.
I consider this clear proof that he thinks his voters are chumps.
Personally I don't believe he would actually try to implement any of the stuff he says he has planned. He would probably just try to make it seem like he's making big changes while not doing much at all.
One example is his plan to get Mexico to pay for his wall, which involves holding hostage the wire payments that flow from people in the U.S. to their relatives in Mexico.
Financial institutions make money on those payments, but from a broader perspective the concept of holding capital flows hostage to policy ideas is deeply scary to Wall Street.
What if Trump decides that capital from Middle East sovereign funds will be hindered until they pay a greater share of the cost of fighting ISIS? What if he decides to hinder capital flows from China until they let their currency's value rise more? Etc.
Stock buy backs artificially inflate reported company earnings. Companies take on cheap debt to buy back shares of their own company (at historically high valuations) to keep investors happy and beat earnings estimates.
This game of musical chairs can run for a while.
In white the S&P, in Green the size of the Fed balance sheet.
I doubt that Trump would implement protectionism. His rhetoric generally points to leveling the playing field rather than simply banning foreign imports.
He talks a good talk about screwing the Chinese, but when push comes to shove there's nothing he'd be able to do about the trade imbalance.
His rhetoric is consistently vague, which allows people to read what they want into it.
> He talks a good talk about screwing the Chinese, but when push comes to shove there's nothing he'd be able to do about the trade imbalance.
There's plenty he could do about the trade imbalance; for instance, net imports necessarily must be balanced by a capital inflow; obstruct the capital inflow and you prevent the trade imbalance.
Of course, doing so would likely be disastrous, but its not impossible.
In the end for a big liquid etf like SPY, they aren't that much different than going short. Now for small companies that could skyrocket overnight and destroy a short seller, puts offer some protection since your loss is capped at 100% instead of theoretically infinite losses.
edit: I should add that puts give you leverage. To short 100 shares of SPY you would need $20000 worth of margin, while to buy 1 sept 2016 in the money put (100 shares worth) you probably only need to cough up $800. If the delta value of the put is equal to 1, your gains or losses will move inline with that 100 share short position.
Shorting is (roughly given efficient market assumptions) equivalent to buying a put and selling a call at the same strike. If the stock has no chance of going up a lot, the call will be relatively cheap, and so selling the call won't change much.
Edit: on the other hand if it has low volatility in both directions, then both are cheap, and it's a bit more complicated. Buying the put will be cheaper, but shorting will also require less margin because the margin provider will have less risk. (See e.g. http://openmarkets.cmegroup.com/3785/understanding-margin-ch...).
This should cancel out in theory, but might not for various reasons like transaction costs.
http://i.investopedia.com/inv/articles/site/short_vs_put.gif
This link is simple and doesn't point out strike price or take transaction fees into account but you can draw similar graphs that do.
Any reason you chose spy over qqq or others?
I would love to find two assets that are inversely correlated but somehow both have a positive return at the same time, but I haven't found that yet :)
I wonder if you would compare/contrast with short selling UPRO ?
That is, short selling the triple-long S&P 500 ETF.
The thinking here is that a long ETF (especially a triple long one) loses value every single day[1] due to the natural decay of long ETFs ...
So in a flat market, your short position is positive, and in down markets it is very positive. Further, it's not an option - you're simply short an ETF - so you can hold it through a market rally if you wanted to.
I have never employed this hedge, but it interests me.
[1] except for up-market days, of course ...
If you were able to short TVIX or SPXU or any leveraged etf for a long period of time it seems like a near 100% chance of massive gains which makes me think there is a catch.
Futures work on margin with relatively low fees so if you wanted leveraged short exposure to the US market that's what you'd naturally trade.
One of the posters below who describes buying a put and selling a call at the same strike is describing a roundabout futures trade. The put/call method would have far higher transaction costs, though.
Yes, that's the point - the idea is, instead of buying the short ETF, you short the long ETF.
They both decay, as you would expect an ETF to do, but by shorting the long, the decay works in your favor...
There are a zillion ways of shorting the market while not selling or directly shorting your existing long positions.
Also, selling naked puts against the VIX is a good long hedge. It's not going to 0 and when it gets really, really low there's already a little resistance in there as skepticism kicks in. You won't make a ton of money on the downside, but you can sell enough to buffer any long losses.
however, the article seemed to describe a portfolio position of _actual_ borrowed stock, meaning he is trying to execute a classical short position trade on it, and not just hedge it with options.
his downside risk in that case is basically unbounded, though realistically only as much as the stocks might rise in price which is not unlimited.
but his ratio of short positions to long positions is 1.5:1 which means he could easily get blown out if he holds on for too long through even a relatively short lived rally. its a pretty substantial gamble no matter how you look at it.
[1]: http://finance.wikia.com/wiki/Castle-in-the-Air_Theory
The irrationality would be regarding the monetary policy, such as QE / ZIRP.
Can the url be changed?
Indeed. I'm not sure how reputable can a site be with several thousand non-staff "external contributors" producing content.
I've never found anything original there and typically avoid it in search results.
>Heeding the call for traffic growth, Fortune has joined the growing ranks of publishers that are opening up its site to posts written by non-staff contributors.
Each publisher has a slightly different approach, and Fortune is no different. The Time Inc. title draws from a 5,000-person contributor network who supply what Fortune digital editor Aaron Task calls “our op-ed page.”
http://digiday.com/publishers/fortune-hopes-avoid-platform-p...
ZH has little predictive credibility; they've been wrong their entire existence. They just make a shitload of money off click-bait articles. So not a lot of people are going to be willing to go to a ZH link, but if you link to Fortune, somebody might fall for it.
The continuing question is: do you play chicken with the central banks of the world?
What does it mean?
Icahn has a much more complex position, but essentially, he's borrowing and using derivatives to get a $1,500 return for every $1,000 drop in value.
2011:
>You’ve got to be myopic if you’re not at least concerned that there might be a major correction [1]
2013:
>Activist investor Carl Icahn on Monday said there was a chance the stock market could suffer a big decline, saying valuations are rich and earnings at many companies are fueled more by low borrowing costs than management's efforts to boost results [2]
2014:
>Carl Icahn says 'time to be cautious' on U.S. stocks [3]
>Carl Icahn Reiterates "We Are In A Major Asset Bubble" [4]
2015:
>Icahn warns of potential looming catastrophe...Icahn said he's "more hedged now than I've been in years." [4]
[1] https://next.ft.com/content/c9612302-4c09-11e0-82df-00144fea...
[2] http://www.reuters.com/article/us-investment-summit-icahn-id...
[3] http://www.reuters.com/article/us-investing-icahn-exclusive-...
[4] http://www.zerohedge.com/news/2014-08-12/carl-icahn-reiterat...
[5] http://www.cnbc.com/2015/09/27/-of-potential-looming-catastr...
(2011 ending @ ~1257)
That an inevitable correction has been delayed by sustained government efforts does not make predictions of a correction any less prescient.
There is always an "inevitable correction" somewhere in the future, but in this endeavor, it's timing that matters.
It’s probably not fair to pick on Icahn in particular, who is not really a perma-bear. There are far better examples (e.g. Marc Faber), who despite being demonstrably wrong year after year with their end of world predictions, are always welcome back on Bloomberg and CNBC explaining how the world markets are about to fall apart.
EX: People talk about Japan as if it was going though a bad time period vs. that just being the new normal based on it's demographics.
(Ignoring seasonal variation.)
Isn't that what random is?
That we're in the midst of one of the largest and most artificial of those 'boom' periods is undeniable, owing to the Fed's injection of $4.5 trillion into equity markets.
Icahn is banking on Newton's third law of motion applying to financial markets as well.
They bought treasuries and junk mortgages to bail out home owners, the US Government and the big banks.
Their tampering with equity markets so far has been limited and indirect via the banks.
http://business.time.com/2013/04/26/why-are-central-banks-su...
Not necessarily true. The sellers miss out on gain, but they don't necessarily need to book a loss. Unrealized gains are not equivalent to losses. I believe what you're thinking about are derivatives (which are zero-sum, and for every unit of profit booked by one entity, there is a unit of loss booked by another entity).
Equities are not zero-sum, the companies behind them produce very real value.
The first time in your analysis that he actually said he was hedging, the market took a nose dive of 20%. I think his advice is worth warrant, especially when you have people like Bill Gross saying similar.
It's of my opinion that we are in an asset bubble, but we could have a "blow off top" before we really see what happens. Stock declines also generally occur during election years after a 2 term President, so it's a generally good bet for a correction at the very least. But, if I really knew what was going on, I'd be rich.
What's missing right now is the taxi driver sentiment ...
I don't hear inexperienced investors talking about playing the market or about average folks day trading. Yet.
I haven't heard it recently, so hopefully some people had enough sense to pull it. Investing retirement money in a family member's start-up is one of the worst ideas I've ever heard of.
Shiller PE is over 26, stocks are clearly valued very high.
http://www.multpl.com/shiller-pe/
So it's a pretty safe bet to short, if that is one of your investment tools. But I don't think you'll really make a killing, unless earnings decline substantially. I've chosen to just divest stock-based investments and increase cash somewhat, and then cherry-pick value in dividend stocks.
[1] http://www.multpl.com/s-p-500-earnings/table
[2] http://www.multpl.com/
Along with Druckenmiller.
Then, I hear Willie Brown is concerned about what San Francisco is going to do with thousands of unemployed computer programmers.
The top two arn't lightweights.
Don't we all kinda look at all that free money the rich have played with, and wonder what's up?
I look at my cd, and I made $9 dollars. It seemed like a few years ago I made $350?
I look around and don't see this great economy? I see a few hot spots, and a huge swath of people just getting by. I see too many people who just gave up.
(I don't want to argue. The Bulls are probally right. I'm always wrong on predicting a crash.)
U.S. corporations have issued more than $9.9 trillion in debt since 2008. Last year, corporations issued a record $1.5 trillion in debt.
76% of the companies in the S&P 500 bought back their own shares ...most companies used debt to pay for these buybacks, in a clever move of financial engineering to boost EPS.
To top it off, we've been in a multi-quarter earnings recession for the S&P, and total retail sales growth has dipped below 3% which has always correlated with a recession:
http://i0.wp.com/bawerk.net/wordpress/wp-content/uploads/201...
That tells me that his bet is actually that the Fed will keep raising rates, which would likely push down stocks.
Over the next 20 years, they will be drawing down on their retirement accounts, putting slow yet constant negative pressure on the market.
Japan has had similar pressure and it is one thing that contributed to the Lost Decade.