I am going to be occupied with other matters today.
1. Hedging: Most of the time, I hedge by selling the asset class that I view as in need of a hedge. That is based on my simpleton view that the best hedge comes from selling the long position until I reach a comfort level. A recent example was selling down by stock positions into the current rally, just a tad, but I also started last week a small hedge.
There are several ways that I can hedge a stock or bond portfolio. I have discussed extensively my use of the double short ETFs last year to hedge my stock portfolio, relying primarily on two of them-TWM and SDS. As some readers have noted there are tracking issues involved with these double short ETFs. I would never buy one of those ETFs to bet on the directional move, but simply as a temporary partial hedge for a long position. Last year, I used the VIX movement as a timing mechanism to buy and sell the double shorts, buing them on a move below 20 in the VIX and selling them on a spurt above 30, a process that broke down after the Lehman failure. Some of my earlier discussions are contained in these posts:
These posts discuss some of the tracking errors:
Few Tidbits from the Weekend Financial Papers: Inverse ETFs/ better off with Dem or GOP Pres?/ TIP pricing
Morning Notes 6/3/2009: More on TIP Pricing/Sold PST/Record Spreads in 2 and 10 Year Treasuries/Australia GDP
I also used TBT and PST earlier in the year to hedge a long corporate bond portfolio, and have sold both of those positions.
After selling some of what I view as in need of a hedge, there are a number of ways to hedge. Some individuals would prefer buying options, to hedge individual security positions by selling calls or by buying puts on an index. Some may sell short an Index ETF like SPY for the S & P 500 or IWM for the Russell 2000 or TLT for 20 year treasury bonds.
I would say that most of my response is just to sell long positions. Occasionally I will put on a small hedge with the doubt short ETFs, and that is just a matter of personal preference.
I have currently restarted a small position in a double short ETF last week for stocks.
I am evaluating buying at some point before the end of the year a small hedge position on bonds. One way that I hedge my bond position is to reduce my fixed coupon bonds and increase my bonds which have a guarantee and a float above some short term rate, which provides at least some protection against a rise in rates and inflation. So, as an example, I trimmed recently 100 shares in two 50 share lots of the fixed coupon TC JZH, containing a long term senior bond from Prudential, and bought an equivalent amount of a CPI floater from Prudential maturing much earlier, PFK. That is my favorite way to hedge bonds from interest rate and inflation risk. That process would include buying some TIPs too. Another way is just to sell some fixed income securities that have rallied a great deal, particularly those bought at a large discount to par value and have rallied to prices above par. Then, my least favorite way is to buy a double short. I wrote an email to a reader last night that highlights some of the factors that I am currently evaluating on the timing issue:
2. Revisionist history at Work: The NYT columnist Jeff Sommer, when summarizing the views of market strategist David Rosenberg, said that Rosenberg "did not expect so robust of a rally" NYTimes That is not how I would have characterized Rosenberg's view, as if he had called for a 30% rally off the March low and was surprised by a 58% burst. In fact, Rosenberg was calling for no rally at all the weekend before the rally started in early March and was instead forecasting a continued decline. This is how Allan Abelson described his soul mate's view on March 9, 2009: "
I do disagree with Rosenberg's characterization of the long term bull and bear cycles as lasting 18 years, his start of the current bear cycle in 2000 which is what most people do, and his opinion that another 9 years is left in the current bear cycle.
Part of the problem is that you do have to look back to make a clear delineation in the cycles. And, no one can go into the future and make that determination about what is happening now. I can say that if the S & P is around 950 or 1000, or 1200, in 2018, Rosenberg would be right. I just do not view that as realistic. Instead, my fifteen or sixteen years for a normal bear cycle, with the Great Depression simply being about five years longer due to the severity of the downturn, will result in the current cycle's end in 2012 to 2013. At that point, looking back to 1997, the S & P 500 would still be range bound within a fifteen to sixteen year period, which is how I define a long term secular bear market. A long term movement, defined by a series of cyclical bull and bear markets, where we end up about where we started the period, is my definition of a long term bear market. If this comes to pass, something will happen in a year or two that will cause a loss of confidence again, take the air out of the current rally, and keep the averages in the range bound pattern of a long term secular bear market. On the source of that problem, I can only hazard a guess. The most likely potential causes would be the withdrawal of fiscal and monetary stimulus, the lack of consumer demand increasing sufficiently to generate growth, and possibly incipient inflation that causes a tightening by the Federal Reserve.