Saturday, February 20, 2010

Bought 50 DDT at 18.42/New Long-Short Strategy: Bought 50 SDS at 34.75 and 50 PIE at 14.04

Brian Westbury, Chief Economist at FirstTrust, keeps track of cash inflation, which is based on actual transactions, and excludes the make believe number of what the government estimates a homeowner would charge himself for rent. The cash inflation number is now up 3.4% over the past year. ftportfolios.com 2010/2/19/_cpi


1. Bought 50 DDT at $18.42 Friday (See Disclaimer): At a $18.42 price, this is a very marginal buy. DDT is a trust preferred issued by Dillard's Capital Trust I and guaranteed as provided in the prospectus by Dillard's (DDS), a department store chain. This is a typical TP. The underlying security in the Delaware Trust is a deferrable junior bond from Dillard's. Dillard's Capital Trust sells preferred trust shares to the public and uses the proceeds to buy the junior bond. The bond matures on 8/1/2038, so there is a lot of interest rate risk with such a long term bond. Rising Rates and Your Investments There is also significant credit risk. The security is rated CCC- by S & P according to the QuantumOnline.com site. So that is deep into junk which explains my timid purchase of just 50 shares. The TP's coupon is 7.5% with a a $25 par value. The yield at a total cost of $18.42 would be 10.18% paid quarterly. This is a link to the prospectus: www.sec.gov . Interest is deferrable for up to 5 years, which is typical for a junior bond, and any deferred payment accumulates with interest. There is a stopper provision activated by payment on a junior security. Dillards is currently paying a small dividend on its common stock. DDS Stock Quote - Dillard Department Stores Inc

Dillard's was profitable during the Q/E 10/09, earning 11 cents per share. www.sec.gov The current consensus is for 80 cents per share for its fiscal year ending in January 2010 and 74 cents for F/Y 2011. DDS: Analyst Estimates for Dillard's Inc.

I bought this security for the first time at $5.82 in March 2009. buy 50 of ddt I was not exactly comfortable buying it at that time, and maybe a tad more comfortable now. I do have a tendency to look down before gazing skyward.

2. Long-Double Short Strategy-Bought 50 PIE at $14.04 and 30 of SDS at 34.75 (see Disclaimer): After the big run up in stocks since March, and what I perceive to be a dicey future, I have decided to initiate new positions only with some kind of hedge bought at the same time. This will be an imperfect process at best. I am running multiple strategies at the same time, and this will just be one layered on top of everything else.

SDS is the double short ETF for the S & P 500. I will add shares in stages based on the movement in the VIX. The VIX crossed below 20 on Friday, and that was my signal to start the SDS hedge. More SDS will be added when and if the the VIX closes below 19, and more on a close below 18. This is a modification of the SDS swing trade previously used successfully after the commencement of the Unstable Vix Pattern in August 2007. Trading and Asset Allocation in Stable and Unstable VIX Pattern If the VIX shoots back over 25 again, then the first position taken will be sold and the remainder on a close above 28. And, if the VIX meanders below 20 for 30 consecutive trading days, I will sell the entire SDS position, which is being used as a hedge and not as a bet. Most likely, under those later circumstances, the transaction would be at a loss. And SDS and other double short ETFs will be entirely a partial hedge just for positions added so far in 2010 or to be added, and will not be anywhere near sufficient to hedge the large number of stock positions held at the start of 2010. If I do not implement this kind of hedging strategy now, I will not be able to increase my stock positions in the coming weeks.

I added 50 shares of PIE to my existing position. DWA Emerging Markets Technical Leaders is an ETF from Powershares. This is a link to its existing holdings: InvescoPowerShares.com - PIE - DWA Emerging Markets Technical Leaders Portfolio Holdings This ETF includes generally around 100 companies from emerging markets whose stocks are demonstrating relative strength and are not listed for trading on a U.S. stock exchange. And that last point means that larger well known companies are not included in this ETF. The NAV at Friday's close on 2/18/2010 was $14.17.

I bought 50 shares of PIE in October 2008 at $10.01: Emerging Markets

A way to play large cap names in the emerging market space is via another Powershares product called BLDRS Emerging Markets 50 ADR Index Fund - ADRE. That ETF has an expense ratio of .3% and contains 50 companies from emerging markets, owning their ADRs. This would cover the companies known by many individual investors: Holdings

A more comprehensive and low cost ETF is VWO from Vanguard: Vanguard - Vanguard Emerging Markets ETF Overview VWO has a .27% expense ratio and has 810 holdings currently: Vanguard - Fund Holdings


The emerging markets have in recent years been highly positively correlated with U.S. stocks with a much higher beta. Seeking Alpha This paper written by William Corker has some historical correlation data: spwfe.fpanet.org:10005/.pdf ( and see instability & volatility in asset correlations & Emerging Market Currencies and Bonds as Non-Correlated Asset Classes).

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