Seeking Alpha


View as an RSS Feed
View K202's Comments BY TICKER:
Latest  |  Highest rated
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    I plan on another article in the series this week, but not for the next round of options purchases. The next round will probably come sometime in the next 3-5 weeks unless something dramatic happens to change my mind.

    For instance, if the Ukraine situation were to get out of hand and look like it could prompt the U.S. into taking actions beyond sanctions (I really don't think elaborating is worth the ink here because I don't expect anything) I might do something earlier. But I do not expect anything drastic to come out of this administration.

    OTOH, if economic reports were to improve markedly resulting in stocks surging higher, I would probably wait longer, if necessary, for the S&P 500 to make new highs.

    Otherwise, assuming the markets just keep muddling along and the geopolitical stage settles down, I will probably just dollar cost average with purchases about 6-8 weeks apart. I realize that this is not very certain, but I hope it helps explain what my planned timing could be.

    Thanks for the question.
    Mar 16 10:43 AM | Likes Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    mykie - Thanks for your kind words and I wish you well in your investing. I took some time off (about 18 months) and have just recently gotten back to writing again. I intend to write 3-5 articles per week in the future as I find things worth writing about in my research or when I sense a change in the investing environment that makes another of my regular strategies beneficial.
    Mar 15 04:47 PM | 1 Like Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part III [View article]
    In this particular strategy, for hedging purposes, I am buying put options. But when the market dips or corrects during a strong bull market I tend to sell puts in hopes of either picking up bargains or creating some income on the cash I may be holding. Different strategies during different environments.

    Thanks for the question.
    Mar 14 11:16 PM | Likes Like |Link to Comment
  • Is The China Real Estate Bubble Real? [View article]
    samuel - Good point. I moved from inside the beltway in Virginia near D.C. and the cost of living dropped when I got more than 100 miles away. More house, lower fuel prices and even food costs less! But things here are still more expensive than other parts of the country. Across borders and oceans is a whole different story. But then again, the wages are different in each location, too.
    Mar 14 11:13 PM | Likes Like |Link to Comment
  • Is The China Real Estate Bubble Real? [View article]
    According top this Bloomberg article, China had $1.27 trillion of US treasury debt at the end of January 2014.

    Here is another article ( how much the total debt in China has risen recently and now stands at 58% of GDP. This is total public debt. The two parts of the total debt burden in China that concern me are the private debt and the debt held by the provincial and local governments. This is made up of a mixture of debt owed to banks and debt owed to the shadow bank industry. Bank debt has grown to $9.1 trillion and I haven't found a figure for the shadow banking debt. The shadow bank debt was created for two reasons: to provide financing to those companies and local governments that could not qualify for bank loans and to create high return products for investors; it's really junk bonds in disguise.

    To put things in perspective, China's GDP is about $5.1 trillion. So, the $1.27 trillion in U.S. treasury debt held by the central government doesn't cover everything, but it does form a good backstop.
    Mar 13 08:49 PM | Likes Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    Robert - Thank you for your comment and kind words. Brevity is difficult with somewhat complex concepts, especially when those concepts are new to many readers.

    I have used leveraged bear ETFs in the past and done well over short periods. But I would caution you that those instruments are not designed for long-term holding positions. Values are recalculated daily and, without getting into the mechanics, there is a sort of decay process that goes on. These securities are great when the market is moving steadily in your direction, but if it trades up and down or sideways, you will lose money even when the market treads water. Be careful to not stay in those ETFs for very long. Just words of caution. Thanks for reading and commenting.
    Mar 12 12:44 PM | 1 Like Like |Link to Comment
  • Is The China Real Estate Bubble Real? [View article]
    adrian - Real estate is bought with cash or 50% down in China; this is true. But other investments are being made with borrowed money. There is much copper stored in warehouses in China and this copper is being used as collateral (call hypothecation). Not only that, often the copper is used in re-hypothecation (borrowed against multiple times). There is tremendous leverage in the Chinese economy and much of the leverage is founded on the copper in storage. Unfortunately, copper prices are falling and paying back loans that used the copper as collateral (especially, multiple loans) could create the crack in the China miracle.

    Believe what you want. But the price of copper is generally a good sign of health in the Chinese economy. Lower copper prices may mean a slowing economy in China as demand for the industrial metal falls. As demand for natural resources by China falls, emerging market economies dependent upon China purchases and economic growth could contract. Emerging markets now make up just a bit more than 50% of China's export market. So, if those economies contract it will adversely affect China's ability to continue to grow its economy.

    The bankruptcy in China last week of an investment fund may be just the beginning. Before last week, government-sponsored banks had been stepping in to shore up bad investment funds to make sure nobody had to take a loss. With so many billions in fund maturities coming due, there appears to be a change in policy. More bankruptcies and major losses by Chinese investors means that more of the loans taken out against copper in storage will be called and then things could get very messy!

    Don't get me wrong; I do believe that China will again be a great place to invest, but not for the next year or two (maybe a little longer). Once the dust settles there will be bargains again in China.
    Mar 12 12:38 PM | 2 Likes Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    Raj2020 - I tried to select no more than one stock from any industry, but did not attempt to correlate to my portfolio because I tend not to buy cyclical stocks since I hold them long term. So, I concentrated on more cyclical industries and looked for those stocks I expect to react the worst in the next downturn.

    If we have no major correction within the next year I will take another look at how these companies have performed. If you read the comments to my previous articles in the series you will note that some are under new management, have made strategic acquisitions and/or have gone through either a bankruptcy or major reorganization since 2001 and may be able to perform better than in the past. My position is that if the market drops sooner than later (like in 2014) enough progress will not have been made to remove the preconceived fear that investors tend to have for these stocks in a downturn. Perception is often more important than reality in the investing world. Having said that, I would definitely take another look at some of those companies at the end of 2014 if enough progress has been made to warrant switching to a more vulnerable alternative company or two. If that happens I will most definitely write about my new selections, what I am replacing, and why.

    Thanks for the questions.
    Mar 7 05:18 PM | 1 Like Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    Raj202 - The 15-20% correction did not materialize. It would have been healthy for the market to take more time to consolidate for the next leg up, but it appears that we have already begun the next leg up. I would expect this move to make even higher highs. Of course, neither I nor anyone else knows for sure how far the market will go up or how long it will take. But it has been quite some time since we had a good correction and the longer the market goes up without a healthy correction the harder and more significant the next downturn is likely to be.

    Regarding your idea about putting on a bear spread: it is not a bad idea, but the cost still is higher even with the offset of the premiums and you leave your portfolio more open to the downside if the bear market is worse than expected.

    My premise for this strategy is to keep the costs to a minimum and protect only against a bear market, not lesser corrections. The corrections come and go rather quickly (weeks or months to recover). Those I can stomach without much concern. It is when things get much worse and my portfolio gets down by more than 20% that I don't like. This coverage, believe it or not, should start to kick in by the time your portfolio is down by less than 15%. The stocks of these companies can fall like rocks when there is a general panic in the air. Others will take a little longer, but are still likely to drop much faster than the overall market. If the broader market is down by 20% LB could be down as much as 40-50% and your protection will have already kicked in. If the market drops by another 10% or more, LB could easily drop by another 25% during that same time frame. So, yes, your hedge won't protect your portfolio for the first 15% or so, but after that the gains on the options will outpace your portfolio losses. I hope that explain my purpose for using this strategy.

    Remember, I am trying to not risk anymore capital than necessary because I can't time the market. If I put the hedge on too early I could lose all of the premiums I paid. This is the most difficult market environment I have ever seen in that the Fed is still supporting the markets and financial system with asset purchases and artificially low interest rates. Some of the most reliable indicators of the past haven't worked so well this time as we are sailing in uncharted waters. Thus, I don't want to spend any more than necessary on a hedge because I may need to do it again another time or two. That is the reason for keep the cost so low an only protecting against a "major" drop in equities. If I spend too much now and the market does not fall. I will need to spend just as much again to remain hedged. If it still does not drop, I may need to do it again. It can expensive most other ways.

    Thanks for commenting.
    Mar 7 04:26 PM | 1 Like Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    ScottHB - Thanks for the questions. I appreciate your position and you have made some valid points. Let me see if i can explain my thought process a little better.

    First of all, a buy and hold investor investing for dividends will be fine as long as they continue to hold. That is true. I am trying to provide a strategy for two groups: investors who are relatively new to the buy and hold strategy who may get nervous the next time the market goes into a bear trend and those investors who practice the buy and hold with conviction but would like to lessen the mental anguish when the markets fall significantly.

    We all have different temperaments so there is no one strategy that is the perfect fit for everyone. That applies to my strategies as well. Also, in terms of timing the exit, each investor needs to make that decision but I intend to explain how I do and offer alternatives methods for consideration in a future article. After a dramatic bear market I like to see capitulation before I start looking for bargains. In a lesser down move, like 30%, I would watch for the 50-day SMA on the S&P 500 to move above the 100-day SMA before I would exit my hedge. I will (definitely) miss the bottom, but probably not by so much that it matter. That is also when I would begin buying. I readily admit that I cannot time the top or bottom exactly. That isn't the aim of this strategy.

    What I try to do is capture a significant portion of the downward trend to offset what would otherwise be much larger losses. Sometimes we can do better than expected and sometime we don't do as well, but we do get a good portion of the protection for very little cost. If we get out too early, say we protected 25% by exiting during a bear market rally, and the market goes down another 25% before it bottoms; will I complain because I protected my portfolio for only half of the loss? My answer is no. If had used no hedge at all, I would still be poorer by the 25% that I protected. Even if I begin to add shares early with the cash generated from the gains realized from selling the puts, I end up ahead of where I would have been without any hedge. I end up at even much sooner (even before the overall market fully recovers) and I will have added income from the new dividends.

    In the end, there is no such thing as the perfect hedge or the perfect investment strategy, especially one that feels right for every investor. I am simply trying to offer an alternative that has helped me in the past and that I expect will help me again in the future. I think that SA is a great place to share ideas and consider new ones.

    Your last point, about mispricing in the market: theory is great but it doesn't always work in practice. Right now the market (in my opinion) is pricing most stocks as though there won't be another bear market for many years. That may be true this time, but the market always tends to price things that way at or near the top. In other words, the market has always been wrong in pricing these options just before the crash in the past so there is no reason to expect it to be pricing correctly this time. That is what makes this strategy so cheap to employ.

    I hope that explains my logic a little better. Thanks for reading and asking those thoughtful questions.
    Mar 6 11:20 PM | 1 Like Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    Raj2020 - Good point. I will add the target prices (in future articles in the series) that I wrote about in the previous articles. In the case of an overall market decline, I expect LB stock to get down to $16 because it has demonstrated the tendency to fall much further than the rest of the market. If it does get to $16 you profit on the put should be about $14 per share. Thanks for the question.
    Mar 6 10:53 PM | Likes Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    You are always proving yourself "clever." Yes, I did mean March 4. Thank you.
    Mar 6 10:49 PM | Likes Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part XI [View article]
    I often buy or hold that which I recommend. In this case I will buy and hold all of the positions listed in quantities sufficient to protect my portfolio. Thanks for reading.
    Mar 5 12:36 PM | 1 Like Like |Link to Comment
  • Protecting Your Equity Portfolio For Less - Part X [View article]
    For those waiting for the next installment:

    I will be traveling through Saturday to pay my respects to the family of an old friend in Texas. My laptop crashed, but I got everything off the hard drive I need. But, I may not get the next article published until Monday or Tuesday of next week as a result. My apologies, but the timing isn't really that critical at the juncture.
    Feb 25 07:42 PM | Likes Like |Link to Comment
  • The Dividend Investors' Guide To Successful Investing [View article]
    Very clever replies. Thank you!
    Feb 25 07:39 PM | Likes Like |Link to Comment