Hedging Market Exposure

[stahleyp]

If it really is that simple, I wonder why guys like Watsa and Klarman  don't understand that? Perhaps they thought it would get worse and it didn't and now they're  suffering from the some type of bias.

 

Those two men are not in agreement with each other.

 

Watsa has deflation hedges and Klarman has inflation hedges.

 

So, why don't they understand each other?

 

Good point. haha ;)

[thepupil]

It looks like S&P500 trades at about 15x forward earnings estimates.  That's pretty normal I believe as long as the earnings continue to meet estimates.

 

So, I think to say the market is in a bubble is the same as saying the earnings are in a bubble.  So why not just go ahead and say what you mean.

 

Then, where is the imbalance.  Too much housing being built?  Too many autos?  What?  Where is the false demand? 

 

Which way is credit blowing?  I read Wells Fargo is dipping back into subprime again -- but it's the beginning of that phase.

 

For this reason i suggest those seeking a market hedge focus their efforts on the russell 2000, russell 2000 Growth and other areas of apparent froth and overvaluation. I have no desire to hedge by shorting Exxon or Apple at 11 or 12x or big banks at 10x or any if that and a SPY short is doing just that.

 

The small cap market appears to be far more fertile ground for diversified "market hedging"  and/or directional betting. Higher basis risk, higher "beta" or whatever but more interesting to me in that the acreage company is of lower quality and trades more richly.

[Phoenix01]

It looks like S&P500 trades at about 15x forward earnings estimates.  That's pretty normal I believe as long as the earnings continue to meet estimates.

 

So, I think to say the market is in a bubble is the same as saying the earnings are in a bubble.  So why not just go ahead and say what you mean.

 

Then, where is the imbalance.  Too much housing being built?  Too many autos?  What?  Where is the false demand? 

 

Which way is credit blowing?  I read Wells Fargo is dipping back into subprime again -- but it's the beginning of that phase.

 

For this reason i suggest those seeking a market hedge focus their efforts on the russell 2000, russell 2000 Growth and other areas of apparent froth and overvaluation. I have no desire to hedge by shorting Exxon or Apple at 11 or 12x or big banks at 10x or any if that and a SPY short is doing just that.

 

The small cap market appears to be far more fertile ground for diversified "market hedging"  and/or directional betting. Higher basis risk, higher "beta" or whatever but more interesting to me in that the acreage company is of lower quality and trades more richly.

 

Not only do you need to find over leveraged companies with doubtful ways to payback their debts in a downturn, but you also need to find puts that are reasonably priced.  The market cap does not really matter, but finding put opportunities in small caps is really difficult.  Small cap puts are not cheap.  I am looking for mispriced options based on the companies value in a downturn.

[Phoenix01]

It looks like S&P500 trades at about 15x forward earnings estimates.  That's pretty normal I believe as long as the earnings continue to meet estimates.

 

So, I think to say the market is in a bubble is the same as saying the earnings are in a bubble.  So why not just go ahead and say what you mean.

 

Then, where is the imbalance.  Too much housing being built?  Too many autos?  What?  Where is the false demand? 

 

Which way is credit blowing?  I read Wells Fargo is dipping back into subprime again -- but it's the beginning of that phase.

 

There does not seem to have been much effect from QE over the past 5 years.  The depression was avoided, but we have been essentially treading water over the past 5 years.  The market is up because of multiples expansion.  Earnings are up because of cost cutting.  There is no new demand and companies are not investing to increase production.  They are simply trying to keep/steal their existing market share.

[ERICOPOLY]

There does not seem to have been much effect from QE over the past 5 years.  The depression was avoided, but we have been essentially treading water over the past 5 years.

 

Perhaps treading water and avoiding a depression is quite a lot!  Perhaps not.  How do you know there hasn't been much effect from QE?  I can't say.  Had we instead experienced a lot of deflation, we might very much hope for some treading water.

 

 

  The market is up because of multiples expansion.  Earnings are up because of cost cutting.  There is no new demand and companies are not investing to increase production.  They are simply trying to keep/steal their existing market share.

 

S&P500 multiple expanded last year from 12x to 15x (forward multiple).  That's the historical mean.  It was below the mean a year ago, and low and behold, it reverted to the mean.

 

I'm concerned for the market if earnings disappoint, but I don't think the market multiple of earnings is high.  It's just at the mean.

 

 

[TwoCitiesCapital]

There does not seem to have been much effect from QE over the past 5 years.  The depression was avoided, but we have been essentially treading water over the past 5 years.

 

Perhaps treading water and avoiding a depression is quite a lot!  Perhaps not.  How do you know there hasn't been much effect from QE?  I can't say.  Had we instead experienced a lot of deflation, we might very much hope for some treading water.

 

 

  The market is up because of multiples expansion.  Earnings are up because of cost cutting.  There is no new demand and companies are not investing to increase production.  They are simply trying to keep/steal their existing market share.

 

S&P500 multiple expanded last year from 12x to 15x (forward multiple).  That's the historical mean.  It was below the mean a year ago, and low and behold, it reverted to the mean.

 

I'm concerned for the market if earnings disappoint, but I don't think the market multiple of earnings is high.  It's just at the mean.

 

We're at the mean with low top line growth and the bottom only beating because margins are at record highs. Margins are mean reverting. Now, we're not seeing any wage pressures which would be the most likely reversion to the trend, but it's very clear to me that earnings are inflated.

 

On top of that, inflation expectations are extremely low. Falling inflation expectations is generally what leads to P/E expansion. Without this tail wind, and with inflated earnings, it's hard for me to believe that we're in a long-term bull market. Rather, it's just a question of when this will turn.

 

[ERICOPOLY]

There does not seem to have been much effect from QE over the past 5 years.  The depression was avoided, but we have been essentially treading water over the past 5 years.

 

Perhaps treading water and avoiding a depression is quite a lot!  Perhaps not.  How do you know there hasn't been much effect from QE?  I can't say.  Had we instead experienced a lot of deflation, we might very much hope for some treading water.

 

 

  The market is up because of multiples expansion.  Earnings are up because of cost cutting.  There is no new demand and companies are not investing to increase production.  They are simply trying to keep/steal their existing market share.

 

S&P500 multiple expanded last year from 12x to 15x (forward multiple).  That's the historical mean.  It was below the mean a year ago, and low and behold, it reverted to the mean.

 

I'm concerned for the market if earnings disappoint, but I don't think the market multiple of earnings is high.  It's just at the mean.

 

We're at the mean with low top line growth and the bottom only beating because margins are at record highs. Margins are mean reverting. Now, we're not seeing any wage pressures which would be the most likely reversion to the trend, but it's very clear to me that earnings are inflated.

 

On top of that, inflation expectations are extremely low. Falling inflation expectations is generally what leads to P/E expansion. Without this tail wind, and with inflated earnings, it's hard for me to believe that we're in a long-term bull market. Rather, it's just a question of when this will turn.

 

So we agree -- it's just a question of whether earnings will go down.  That's really the primary risk.

[original mungerville]

Read latest Hussman below and it should get you quite worried about fundamental over valuation (on anything but a P/E basis - I agree its the earnings and related profit margins which are the main worry), about optimism, even about bloody charting!   

 

http://www.hussmanfunds.com/wmc/wmc140217.htm

 

I agree that from these levels the S&P should be expected to return zero over the next 7 years in real terms. 

 

 

[original mungerville]

 

Liberty posted a nice link on the "Macro" Musings thread:

 

Good read on profit margins and the flawed way in which they are often calculated (mixing 'national' data with 'domestic' data, etc):

 

http://philosophicaleconomics.wordpress.com/2014/03/30/foreignpm/

 

[Guest JoelS]

How many of you employ a collar strategy with individual stocks?

 

http://www.investopedia.com/terms/c/collar.asp