Thursday, January 8, 2009

TBT vs. PST: Hedging Corporate Bond Positions

Added 5/17/2009: A more recent post on the double short ETFS for U.S. treasuries can be found at Item # 2 Potpourri This Sunday Afternoon:

ADDED 6/7/2009: More recent posts on TBT and PST include the following:

Item # 3: /PST-

Recent Discussions of tracking issues with TBT is contained in the following post from October 2009:

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The picture for this evening is what I mean by a serious game face. The youngster picture here did not like to lose and that would be with an exclamation point rather than a whimper. I can say for a fact that, in his entire four years as a catcher in little league baseball, from age 9 as a starter to age 12, no one stole a base on him, his body was thrown in front of every wild pitch, and no ball was jarred loose by a collision at home plate. This youngster was already in training to be an old man at the age of 10.

Any rally after receiving awful economic news is viewed positively by me. It means that most investors with money expect it and believe most, if not all of the bad news is reflected in the index averages. While they may be shedding some defensive names, the overall re-positioning would be to increase their stock allocation. The contrary, dark forces are still strong in this tug of war but are not gaining the upper hand as easily as before.

I did see one money manager recommend the double short ETF for the 7 to 10 year treasuries (PST) Seeking Alpha I considered that one as opposed to the one that I bought which was TBT. I thought that the 20 year treasury was less subject to the pressure caused by quantitative easing by the FED than the shorter maturity notes, and had more room to fall in price and rise in yield than the 7 to 10 year maturities due in part to the long term ramifications of the fiscal and monetary stimulus. I always try to make money on the hedge if I can, which has worked so far with TBT. I am considering using PST in my hedge of the intermediate bond position that I currently have but I have not done it yet. For that one the hedge would amount to no more than 40 shares whereas TBT could go as high as 200 provided I can get a better price on the remaining shares in the hedge.

I am too cautious to buy PST or TBT as a bet, and certainly not as an investment, just put that thought out of my head, but only as a hedge against purchases made at very favorable prices in the corporate bond part of my asset allocation.

I would not use DOG as a hedge now for stocks which is another recommendation of this manager. Seeking Alpha I am not worried enough now to hedge my under weight allocations to stocks, and I would be more inclined to use SDS rather than DOG as a hedge anyway for large caps, TWM for small caps, and QID for Nasdaq stocks, and just juggle it to arrange the hedge for whatever happens to be in my stock portfolio. I could forget about QID and TWM using that criteria since my stocks within those sectors are immaterial . The DJIA is just a more stable index and DOG is not a double short which is both good and bad in my opinion. If you are hedging, personally, I would want the most bang for the dollar allocation used to form the hedge since my dollars are limited and I have other uses for them besides forming hedges. The good part associated with the 1 times short ETFs like DOG is that the losses will be twice as less in the event the hedge is not needed and the index goes up causing a loss in the hedge. Moreover, one thing learned about the enormous distributions from many of these Proshares short and particularly double short ETFs is not to own them in December if they have had a really good up year. Chris Cox: Medal of Freedom?/Massive Dividends for Proshares ETFs/TBT add Just speaking for myself, I am not going to buy any of the single or double short ETFs for stocks now. So I am unhedged except I did sell the stock position way down in 2007 and that money is still on the sidelines which is one reason I do not have to hedge stocks now. Cash is still hovering at close to 30%. Moreover, if you use a hedge, there has to be a plan in my opinion going into the transactions of how to exit it and I am not sure what that plan would be now given the volatility that we are seeing.

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