Since a clear conclusion has not been suggested, I’m going to stick with a high yield savings for the time being. 1. Since I plan to buy a home in a year, I would rather not put money in the market for such a short term. 2. Both of my portfolios are down 10%. That feels like such a punch in the gut. I would rather make ~4% FDIC insured instead of trying to call a bottom and so forth.
If you are saving for a home, cash/CDs/Treasuries are for you. Unless you don’t mind being down a bit and having to wait longer for the home. Then you might consider putting a small portion in other stuff, like… A) Maybe you want to look for industries that are inversely correlated to housing, since the housing crisis is likely to deepen before it gets better. I don’t know what industries those are, exactly, but it would be a place to start thinking. I think Hedge Street allows you to trade small amounts of housing futures based on the Case-Schiller index. You could go short in some areas that you think are especially bad. Note that these futures don’t have a built-in arbitrage mechanism due to liquidity and transaction costs, so the price likely reflects expected future value at expiration already. B) Maybe you want to short an equity index ETF like IVV, and make your bets on specific defensive sectors, but you’d really need to know what you’re doing to balance it right, and again, only if you feel comfortable waiting longer to buy your home if it doesn’t work out for you. Cash is a pretty good option for that money though, especially since most housing is likely to continue dropping for some time now.
… that’s strange… the second accidental double post this morning… I wonder if my browser upgrade is doing something funky…
KJH Wrote: ------------------------------------------------------- > Since a clear conclusion has not been suggested, > I’m going to stick with a high yield savings for > the time being. > > 1. Since I plan to buy a home in a year, I would > rather not put money in the market for such a > short term. > > 2. Both of my portfolios are down 10%. That > feels like such a punch in the gut. I would > rather make ~4% FDIC insured instead of trying to > call a bottom and so forth. It seems to me that this is what you should have posted first. Since you didn’t, you got a bunch of people suggesting investing in a structure (which is not exactly an asset although they probably mean oil pipelines) without concern for your tax situation, goals, risk tolerance, risk-taking ability, etc… Those same people then decided that Virgin was an idiot because s/he suggested there was risk in these investments (suppose terrorists decide to target pipelines - think distributions would fall then?).
Thanks bchadwick. I have never shorted a security before and do not think now would be the time to try to learn (being I’m using this as a down payment). I did one last buy in of a bond ETF last week but moving forward I plan on putting everything in a high yield savings.
Yeah, don’t “learn” with your lunch money unless you can afford to go hungry. But if you have other funds, you might read up a bit on shorting in order to be more neutral to the market. One thing about shorting is that it is key to look at how the trend and the volatility of what your shorting affects your portfolio value. It often looks costless to enter a short position, which can throw off some of your risk indicators if you’ve only done longs in the past. Make sure you have a sense of what the volatility of your short is likely to do to your portfolio NAV’s volatility.
If you are talking about investing/saving to buy a house, and a house purchase is in theory a liability (you will have a cash outflow in the future, sure not the traditional definition of a liability, I know) as opposed to an asset you own, you would definitely NOT want to hedge it with something negatively correlated, as per an above post. Maybe i misunderstood. The last thing you want is for housing to rise in value (your liability becoming larger), while your hedge declines in value (which would happen if purely negatively correlated, and the correlation holds up). Sure, you get a double win if housing declines/your liability shrinks and your hedge rises in value. Say goodbye to the double-wide and buy a McMansion! But on the flipside, housing rallies 10%/your liability grows and you live in your parents basement because your hedge has gone to zero. Having a liability tied to an asset and being short it at the same time is a super leveraged one-way bet. Once you have made the purchase, and it becomes an asset, THEN you want something negatively correlated. You could buy a slug of an inversely correlated housing ETF (they exist) to hedge your equity in your home, but assuming you drain your account to buy the house, you probably don’t have much left. At least, I didnt. Nothing like being naked long housing!!! At the end of the day, anything can happen in a year. Treasuries/CDs/Gov Mmkt funds/Savings accounts are the way to do it. No need to be cute with money that is really important to you.
Grover, you make a good point generally; my point about inverse correllation to housing was based on a tactical consideration about the current declining housing market. However you point out that the risk might not be worth it (though not explicitly) if one is wrong.
virginCFAhooker Wrote: ------------------------------------------------------- > I’m long natural gas since November when it traded > at 1/15 the price of oil. In the last 8 years > Canadian natural gas has traded at about 1/9 the > price of oil (on average). Right now it’s trading > at 1/12. When natural gas spikes (i’m not sure > it will spike this year) it trades up to 1/5 or > even 1/4 that of oil! Back in the 1990s there as a significant correlation (positive or negative, I forget) between price of crude and some USD interest rate. So a lot of banks started selling basket hedges to clients based on this correlation. If you stop and ask yourself why those two commodities should be correlated you might not come up with an answer. So you can probably also guess what happened to the correlation after the hedges were sold. I don’t know why you think oil and gas should be cointegrated – without a reasonable rationale there it just looks like a spurious correlation. The only relationships I can think of: + some power plants can burn either gas or fuel oil – but I believe those are rare + homeowners could swap a gas furnace for an oil one or vice versa, depending on the spread. Also unlikely. So why do you think the gas/crude spread mean reverts? Why aren’t you playing e.g. the cotton/corn spread?
I’ve mentioned 2-3 months ago that I was feeling strong (and long, ~1.5 years or greater) on canadian financials, just thought i’d restate that I still feel the same way. Even with another expected subprime hit within the next few months or so, if they decline more (ie: assuming its not already built into its current price), it won’t be much more, and it’s just a matter of time before we see them back on the upswing. Just my feeling.
Darien, You answered your own question on the demand side by talking about switching. On the supply side, there are fundamental mean reverting forces, too. If n.gas prices go up then E&Ps will target more n.gas instead of oil, etc. Gas rigs will be built instead of oil rigs, etc. Natural gas drilling in Canada was at a 4 year low this past summer whereas every oil target imaginable was being explored. The correlation between natural gas and oil is not spurelious like it may have been with interest rates. I don’t play the cottom/corn spread cuz I don’t know anything about that stufff. As far as energy goes, I usually look at the commodity part as one element of a trade. I usually trade E&Ps, not commodities. Regarding the interest rate/oil trade that you talked about from the '80’s… i’ve noticed a lot of goldbugs do stuff like that. They try to trade on the historical spread between oil & gold, or gold & the dow. I guess oil & interest rates would fall in that kind of trading?
Healthcare, baby. And I sleep soundly. The market has that one all wrong.
Etienne, what healthcare stocks do you like? Have you analyzed it enough to know which ones will do best under whichever potential regimes?
I focus mostly on European large cap pharma (that’s my job). Among these, Novartis is a favourite of mine (implicit “hedge” in diversification model, limited medium-term patent exposure, good science and - most importantly - a valuation that looks cheap under an anything-but-apocalyptic scenario). CEO owns 2mn shares too, if you look at that kind of thing. Your regime question is a very ambitious one. I don’t believe you can position a pharma portfolio for different regimes (I don’t think this would be “reasonable basis”, if you like). Perhaps the best hope there would be to simply tilt away from companies with the most US exposure. Taking healthcare more broadly, a simple rule of thumb would be that the generics stand to gain the most if the democrats have teeth. However, I think people are getting carried away. Drug re-importation is probably a red herring (the Canadian drug market is c.5-7% of the US drug market… think about it!). Direct federal negotiation is possible, but the CBO and the Department of Health and Human Services (name?) have both come out against it, saying that the gov’t does not have the leverage to negotiate a better deal. At the same time, surveys suggest prices will keep rising in the near term. Now, even if you take a bearish view on the above (and the other issues I don’t have time to mention), the demographics strongly suggest that healthcare is a growth industry.
Put your cash in MLP and other stuff like REITs that have the FCF to cover their div. Then wait until one of these builder and/or banks go bankrupt. At that time buy a basket of builders/banks with the best management.
Etienne, I was thinking more about healtcare providers (insurers). They seem to be getting hit harder than big pharma. I’ve been reading some comments that say any kind of new healthplan will likely be good for them, not bad. Yet the market hates the uncertainty… Thanks for telling me about NVS. Why is NVS better than JNJ? JNJ is cheaper than NVS while normally it is more expensive than NVS.
virginCFAhooker Wrote: ------------------------------------------------------- > Etienne, I was thinking more about healtcare > providers (insurers). They seem to be getting hit > harder than big pharma. I’ve been reading some > comments that say any kind of new healthplan will > likely be good for them, not bad. Yet the market > hates the uncertainty… > > Thanks for telling me about NVS. Why is NVS > better than JNJ? JNJ is cheaper than NVS > while normally it is more expensive than NVS. I don’t know why the insurers have been so badly beaten, but it’s not something I think about as much. On NOVN/JNJ, in my opinion, i) better pipeline, ii) I like what they are doing to restructure the R&D process, iii) their generics business has a fairly compelling competitive advantage (focus on “difficult-to-make”) and iv) the vaccines / diagnostics business is a good place to be. I don’t look at relative multiples, but a greater appreciation of the latter two factors (least controversial) could be behind the relative re-rating. Also, at the moment, being less exposed to the US is obviously seen positively. Remember that it makes little sense to look at Pharma on a P/E or P/B basis (I mean compared to other industries) because they fully expense R&D. R&D, rightly, is a sort of tax-deductible capital expenditure which should thus be amortised.
negativefcf Wrote: ------------------------------------------------------- > UNFI - No Brainer. Terrible operators but valuable > market position and relative assets. I don’t see > why this isn’t a double in 18 months. No Brainer
On the U.S side, I prefer large cap pharma, biotech, and medical providers on the health care side. software, internet service providers should fare well for Tech, as I think the sector’s strong earnings, cash flow, and sales growth are not being recognized by the market, and consumer staples stocks - particularly tobacco and beverage ones that are more resilient to economic slowdowns and recessions. Health Care - AGN, GENZ, TMO, MDT Technology - ADSK, CSCO, GOOG, ORCL Consumer Staples - CVS, MO, PG, KO