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Jeff Miller  

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  • Trading Ideas For Europe, Copper, Tech And CDSs [View article]
    Angel -- there are two problems in hedging CDS exposure:

    1) Using anything other than the credit of the issuer involves basis risk. On this sort of trade, things can be highly correlated but still have large and sustained changes in the basis differential. It is easy to "blow out" doing this kind of trade.

    2) What hedge ratio do you use? From the perspective of the seller, the risk may be ten or twenty or thirty times the premium you are collecting. That is why the "heroes" of the financial crisis of 2008 made so much money. Even if you could calculate an accurate hedge ratio (delta in option terms) that ratio keep changing (gamma in option terms). That is why I was comparing it to put selling.

    Selling CDS is more akin to selling an insurance product. The seller is an underwriter, not a hedger. The business requires deep pockets and plenty of opportunities to get into the "long run."

    I am sure that some sellers are hedging in the way you suggest but it is not the sort of position that is safe to do in size. Compare to Long Term Capital Mangement, for example.

    This is why I think it is easier (and more profitable) to move the market by buying the CDS.
    Oct 27, 2011. 09:52 PM | Likes Like |Link to Comment
  • Trading Ideas For Europe, Copper, Tech And CDSs [View article]
    Peter - I am interested in your comments on the CDS markets. While comparing that market to the bonds is one approach, how much buying does it take to move the market?

    In 2008, we had many sellers, led by AIG, who had no collateral for the risk they were taking. This is similar to equity put sellers before the 1987 crash. When the rules changed, put selling was limited. We have a permanent skew in the implied volatility of options as a result.

    I am skeptical about the CDS supply. Who are the sellers? Since they have no real way to hedge this exposure, how do they measure risk. Meanwhile, the spike in the CDS prices has frequently affected equity prices -- a tail wagging the dog effect.

    Thanks for your thoughts.

    Jeff
    Oct 27, 2011. 04:03 PM | Likes Like |Link to Comment
  • A Consumer Guide To Investment Forecasting [View article]
    retailinvestor -- predicting the direction of long-term interest rates has probably been the worst area for the forecasting community. Even Bill Gross (finally) called a bottom in rates too soon. People have been fooled by tepid economic growth and a race to safe assets.

    Good point.

    Jeff
    Oct 23, 2011. 02:29 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Real Progress In Europe? [View article]
    cautiousinvestor -- Thanks for your fine discussion of the internal disagreements. As I noted in the article, I have not found anyone who is optimistic on a solution -- at least something that would meet the general tests.

    The big question is what will be the reaction to this week's partial measures.

    The pervasive pessimism on this subject is something to think about. Merely by raising the question in my title -- no prediction of success -- some seem to think I am a wild-eyed optimist.

    I welcome these comments as well as yours, and I am enjoying the music discussion, too.

    Jeff
    Oct 23, 2011. 11:59 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Real Progress In Europe? [View article]
    Young - I have not been impressed by the "leading" quality of the LEI, but I am open to further consideration. I know that some -- Paul Kasriel of Northern Trust, for example -- swear by it. The index composition has been changed a few times.

    You are correct about the transparency and long-term history to study.

    Thanks,

    Jeff
    Oct 23, 2011. 11:51 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Real Progress In Europe? [View article]
    miscon2 - I will have a replacement indicator approach soon. I am working on a separate article that will review what we know about the ECRI and compare to other approaches.

    Thanks for your comment, and to others who understand what I am trying to accomplish.

    Jeff
    Oct 23, 2011. 11:48 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Real Progress In Europe? [View article]
    jmrathbun -- Bespoke Investment Group is showing the 50-day moving average. The trading range -- roughly 1120-1220 -- has been widely discussed for weeks. People may draw the chart in slightly different ways, but BIG has a nice, clean presentation, as they always do.

    I hope this is helpful.

    Jeff
    Oct 23, 2011. 11:46 AM | Likes Like |Link to Comment
  • The Quest For Yield: Part 5 - Building Your Income Portfolio [View article]
    donzelion -- acquiring positions by selling puts is just fine for investors who want to own the stock at a good entry price and are willing to accept the put premium instead of ownership if the stock moves higher.

    I think I have written about this approach before, but the investor must be very careful -- prepared to buy the stock at the price of the strike if the opportunity arises.

    Good point and thanks.

    Jeff
    Oct 20, 2011. 08:11 PM | Likes Like |Link to Comment
  • The Quest For Yield: Part 5 - Building Your Income Portfolio [View article]
    It is like buying a bond in that the price moves inversely with the yield.

    But it is unlike the bond in that you might not get your original investment back.

    I encourage everyone to check out the link to the original article (part 3) where I described this more completely.

    I do see why you raised the question, and thanks again for helping to clarify this point.

    Jeff
    Oct 19, 2011. 06:53 PM | Likes Like |Link to Comment
  • The Quest For Yield: Part 5 - Building Your Income Portfolio [View article]
    Jeff -- I did not state that very well. Let me try again. Suppose you have a stock that is priced strictly on its yield. Some utilities are like that. If you buy a bond (barring a default) you will get your coupon payments and your principal at maturity. With some high-yielding stocks you will get the dividends, but you may not get your investment back when you are ready to sell. The reason is that if yields go higher, the price of these stocks goes lower. I showed a chart of this in Part 3.

    Some utilities have produced dividends and also appreciated in price in recent years, but it has been an environment of falling interest rates. What if the next few years sees the ten-year note back at four percent, for example?

    I know that many people have utility investments they love. Some have a low basis and do not want to pay taxes on a sale. The key question to ask is whether the stock is priced based upon earnings or whether it is more of a pure yield play.

    Thanks for the question, and I hope this is a more complete explanation.

    Jeff
    Oct 19, 2011. 05:17 PM | Likes Like |Link to Comment
  • The Quest For Yield: Part 5 - Building Your Income Portfolio [View article]
    Thanks to all. I like to build on prior material rather than writing the same things again, so I'm glad you find the approach helpful.

    Jeff
    Oct 19, 2011. 03:11 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Escape From The Trading Range? [View article]
    hypnos7 --
    Thanks for the suggested links and your comment.

    In the Greek "haircut" issue -- I want to emphasize that I am not making a value judgment about this, nor commenting on the fairness to any party. I am saying that this development is market-friendly. Any solution that is negotiated and avoids contagion helps to stabilize markets.

    Everyone who has experience and skill at picking stocks and sectors should hope for a time when those skills will once again be most important.

    And you are correct -- if this is not viewed as a 'credit event' it may be unfair to CDS holders.

    Jeff
    Oct 16, 2011. 04:52 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Escape From The Trading Range? [View article]
    Last Boomer -- I agree that there is a problem with one currency and fiscal independence. I also agree that serious economists have highlighted the problem.

    But I am curious. Why do you think that economists are the best experts on how and whether Europe can solve these problems?

    My own conclusion, drawn from 40 years of working with experts in various disciplines is that economists are good at economics. Political scientists would do better on predicting the path for Europe. Sociologists and historians would also have a contribution to make.

    I agree that the full process may take years, but I don't think the panic story will be with us forever. Markets have a way of remembering the "last war" which right now means 2008 and the Lehman moment.

    I want to emphasize that no one yet knows the final outcome. I do think that the process represents normal problem solving for democratic governments.

    So many factors.....

    Thanks for joining in with your thought-provoking comment.

    Jeff
    Oct 16, 2011. 01:36 PM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Escape From The Trading Range? [View article]
    Cautious Investor -- Interesting points --

    JOLTS -- The official interpretation is that there has been a continuing long-term improvement since the recession. The values that you cite are not "statistically significant," meaning that the changes do not meet the 90% confidence interval for this survey. That is why I like to focus on major, long-term changes. Most people try to infer something about net change. That is better done by the regular monthly employment report.

    Profit Margins -- First, I'm sure you know that the sources you cite have been making this argument for years while earnings have moved higher. Eventually, the margins will come down (probably at the same time we see more hiring) but this does not mean that earnings per share will decline.

    Good comments on subjects worth following.

    Jeff
    Oct 16, 2011. 01:18 PM | 1 Like Like |Link to Comment
  • 8 Of The 10 Best-Performing Dow Stocks Are Good Values [View article]
    This is terrific work. I use the F.A.S.T. Graphs method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.
    Oct 16, 2011. 12:02 PM | 6 Likes Like |Link to Comment
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