It Always Rains When The Car Is Washed – Volatility And Hedging Your Portfolio
I decided to wash the car on Sunday which had all the appearance of a hot and sunny day and turned out so.
But as Murphy’s Law would have it, a single lone and evil raincloud decided to stalk me the entire afternoon and it chose to pour right overhead me when I had no choice but to leave the house exactly at 6pm in an absolute freak of nature passing shower just over my car, making me look like a real sore loser with a wet car amongst all the dry beauties out there.
My mother passed away 2 years ago this time (right before the controversial QE3) and the moral of the story is that when things go wrong, they do. Just like Murphy’s law, with the last straw being a nil insurance settlement because she did not die of an accident ! at the age of 58 while climbing a mountain ! (Say No To GE Policies !)
We are going through a truly transitory phase in the markets and I believe we are at the brink of a Murphy’s moment.
Because if markets were always right, then nothing can go wrong. But history has shown that things do go wrong.
And volatility monitors shows the market under prepared.
Libor-OIS spread flatline for extended period. (Libor-OIS is used to measure distress in banks borrowing)
Monitor of Financial Conditions is way above average. The Investment Grade spread vs 10Y US treasuries in at a 1 year low. Note that the swaption volatility index is also near lows.
The change in forex volatility in 6 months is astonishing. There is nothing to be made in selling vols or running any dual currency deposits (except for the Russian Ruble)
Some are putting plans into action as I read that investors are hedging their junk bond portfolios at the highest rate ever in a year.
“There haven’t been this many bearish options (HYG:US) on an exchange-traded fund tracking high-yield debt in almost a year, relative to bullish contracts, according to data compiled by Bloomberg.” http://www.businessweek.com/news/2014-05-07/junk-attracting-bears-as-high-yield-etf-rockets-higher-options
It makes sense when “Junk-bond investors are accepting yields that are 0.74 percentage point lower than the earnings yield on the Standard & Poor’s 500 index, a measure of profit as a percentage of equity prices.”
And how did an economics book manage to become a bestseller ?
Thomas Picketty’s “Capital in the Twenty-First Century”, a book about wealth inequality and the dangerous path the economy is heading down, is quickly embraced by the media even as the same media reports that Home Sales Topping $100 Million Smash U.S. Price Records.
For the US median wage of US 27,519 in 2013 (vs $44,389 in 2004), it would take over 5,000 years to pay off the new record price of US 147 million for a home. [Amended nominal median wage is US 50,000 (according US Census Dept) in 2012 which would take just 2,940 years to pay 147 mio off]. ** The US 27,519 number came from an Al Jazeera article whose source if the Social Security Administration http://america.aljazeera.com/articles/2013/11/4/median-wage-stagnationincomeinequality.html.
I realise that many retail investors do not hedge mainly because they know not how to and so they are caught up in the storm with the sinking ship and hold on for dear life like my dad did with Capitamall Asia and is barely breaking even with this privatisation by Capitaland exercise.
So, do me a favour and take time out to look at hedges in this cheap sale period.
What are some ways that retail investors can choose to hedge in this market environment?
Depends on the portfolio.
1. Interest rate risks – Short US Treasuries ETFs
2. Credit risk for corporate/junk bonds – Options on HYG as mentioned. The rest are not available.
3. Currency risks – options
4. Equity market risks – S&P futures, options, short S&P ETFs
5. Real estate price risk – Short sell real estate companies via CFDs etc
6. Event risks – USD, CHF, Gold, US Treasuries
Cleanest – sell.
I went long USDSGD in the spot market, but find the carry costs to be too much – about $2 per day per $100K position.
Did you go long on leverage ?
The USD/SGD o/n and t/n fwds is now -0.01/+0.01 which means its -0.000001 which is nothing (10 cts).
But if they had charged you the fx bid-offer spread then in your case, it would work out to be 1.24752 vs 1.2475 which is not bad if you ask me.
Murphy’s Law = Dow is up 113 points currently when you talk about hedging….haha
Still early though, may close in the red!
Who hedges when its down ?
Only hedge when it is up no ??