Sean’s Rant

Bear Market Rally

I’m still bearish in the mid to long term, but tomorrow could show us a bear market rally, which should be sold into on its highs. After taking profits turn around and start shorting again.

Overall we still have a ways to go before any consideration should be taken for the equity market.

Equities are dead. They are the lowest man on the totem pole in the capital structure. Everyone and their mom (the government representing their mom) gets more capital from a liquidation than equities in the case of a liquidation. Debt is the new equity investment. It pays more and you get more in case of liquidation, which is looking much more likely right now. The Yields have gone much higher and it makes much more sense to buy debt now. 

Again, I was right.

This makes a point for hedging your portfolio for scenarios like this. Let me make a point for this:

If you had put 80% of your $100,000 in an DJIA index fund and 20% in the ETF UltraShort Financials SKF you would be doing just fine right now and heres why:

The DJIA Indexed fund lost 46% from Oct 11, 2007 to November 20, 2008. So 80% ($80,000 investment) results in x (1-46%)= $44,000

The Ultrashort Financials EFT gained 354% so 20% ($20,000 investment) results in $70,800. 

So, if you had hedged just 20% of your portfolio in the Ultrashort ETFs to cover your long position in the DJIA you would have a gain of $14,800. A more conservative investment of 20% in Ultrashort S&P SDS with a return of 266% would put you at a net ((.2*2.66)+.44) ($3,000) loss. Big whoop. 

Some food for thought on using only ONE methodology for investing. The whole concept of “diversification” is not taking into account a real sense of diversification. Asset classes should be used for diversification, not just different equities.

Related posts:

1. Detaching regulatory capital requirements from Mark to Market
2. Risk Aversion, Complacency, Mutual Funds, and the Status Quo market. (Repost)
3. Mark To Market accounting Relaxed…has anything really changed?
4. I’ve said it before and I’ll say it again. The decline still isn’t over and heres why I’m short the DJIA.