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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • What Is There To Do When Stocks Are Expensive And Bonds Are Crazy Expensive? 11 comments
    Sep 6, 2013 7:28 PM | about stocks: TVIX, VXX, TMF, AMZN, AAL

    I think that equity markets are mostly expensivish and credit markets are ultra expensive (although a bit less so in the past few months). My reaction was to short the leveraged treasury ETF (NYSEARCA:TMF) coming into this year in order to deal with expensive credit markets. In order to deal with expensive equities, I am light and selective. What is worth doing if not broad stock or bond exposure? Cash. Here is where I park it.

    Cash

    I set up about 500 cash accounts invested in money markets, CDs, and savings accounts, all under federally insured caps and some with decent yields, in order to capture the optionality on potential equity conversions.

    Use intra-month credit card debt

    In addition to the accounts that I funded with cash, I borrow on credit cards to fund several more - these collect interest on the account side as well as rewards on the credit card side. When the credit card bills come, I pay them off online from the savings accounts. Running through $250k/month, this has added up to plenty of AMZN gift certificates, Brooks Brothers certificates, airline miles, and cash back in Charles Schwab and Fidelity. American Airlines (AAMRQ.PK) is particularly advantageous as it locks one into the top of their loyalty program after only a year and a half of this strategy. This strategy is not that scalable, but it has the charm of allowing one to read, dress, travel, and fund tax-advantage retirement accounts with no taxes (since rewards technically are classified as rebates and thus are not taxed), no risk, and no capital.

    Borrow

    I want flexibility in addition to liquidity in order to be poised to take advantage of the next downturn. So, I took out loans against 100% of the value of my home. Rates are still extremely low and this flexibility could come in handy in the months or years ahead.

    Closed out of short volatility investment

    Finally, I closed out my VXX and TVIX shorts last month. Since late 2011, I had shorted them both as well as written calls and buying puts. While I still maintain my concern with the securities in terms of their structural flaws, the expensiveness of the markets and the cheapness of the underlying volatility undermined my case for holding onto this potentially problematic investment given the market levels.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

    Stocks: TVIX, VXX, TMF, AMZN, AAL
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Comments (11)
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  • Tim Meador
    , contributor
    Comments (31) | Send Message
     
    I love the idea of funding savings accounts with credit cards and reaping interest and rewards. However, the mechanics of this seem difficult. How do you take advantage of this? Fee free cash advance offers are the only way that comes to mind. What am I missing?

     

    Thanks for sharing your thoughts and ideas with those of us who don't have your time/resources/discipl... I was fortunate to start following you early and have gained much understanding and made a little money as well.
    6 Sep 2013, 10:12 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4092) | Send Message
     
    Author’s reply » Some financial institutions categorize funding accounts as purchases instead of cash advances. In my experience, it is running about 70% don't accept credit cards, 27% accept them but categorize their use as cash advances, but about 3% account for their use as purchases.
    6 Sep 2013, 10:14 PM Reply Like
  • jaginger
    , contributor
    Comments (501) | Send Message
     
    Thanks Chris.

     

    Could you explain a bit more about "captur(ing) the optionality on potential equity conversions?"
    7 Sep 2013, 09:18 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4092) | Send Message
     
    Author’s reply » Yes, when mutuals and credit unions convert to for-profit institutions, they do so via an equity offering to their members/depositors. These are free options.
    7 Sep 2013, 09:47 AM Reply Like
  • arbtrader
    , contributor
    Comments (173) | Send Message
     
    Chris, tracking the cash flows in and out must take quite a bit of planning and organization to get the repayment times correct. Impressive you can manage it.

     

    I always tell solicitors of free financial advice: 'get credit anytime (ANYTIME!!) it's offered on attractive terms'. A HELOC is accessible to the masses and a great tool. In 2006 I asked my banker to bump up my HELOC and 'max it'. To my surprise they came back with a generous bubble-era valuation on my house at prime -1%, no floor, for 10 years interest only. The cash was handy to put to work in junk bonds and converts in late 2008-2009 and some other investments that have done OK.

     

    Caveats: only use debt to purchase assets that hopefully will generate income or increase in value. Never use for consumption. Ever. If you aren't disciplined, don't even think about doing this.

     

    AT.
    8 Sep 2013, 01:38 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4092) | Send Message
     
    Author’s reply » A perfect plan. -C
    8 Sep 2013, 03:18 PM Reply Like
  • yogahelps2
    , contributor
    Comments (51) | Send Message
     
    "Caveats: only use debt to purchase assets that hopefully will generate income or increase in value. Never use for consumption. Ever. If you aren't disciplined, don't even think about doing this."

     

    If you've never had to move and sell your house at a loss, this might make sense. We moved to the metro DC area in 2007 and paid almost-peak price, while taking a loss on the home we sold in MI; and we just broke even on the home we sold in WI in 1991. With our luck there will be another downturn in the housing market when we decide to retire and make our final move. When local or regional unemployment increases, the rental market evaporates, too, so it doesn't make sense to convert a home to rental property. Unless it's $5 million+ prime property in NYC that you purchased at $1 million, how can you be sure the asset you purchase will not decline in value?
    15 Dec 2013, 08:50 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4092) | Send Message
     
    Author’s reply » Anything can decline in value or could decline in price and that is one reason why I always like lots of net cash readily available. As for DC, it will probably end up being a fine purchase over time: http://seekingalpha.co...
    15 Dec 2013, 09:00 AM Reply Like
  • arbtrader
    , contributor
    Comments (173) | Send Message
     
    I'd also suggest that not everyone needs to own a house. My max'd out house was a fine rental in a good school district, but in many regions that is not the case.

     

    So to your point- a house can be a loser investment and leverage should only be used with a fairly high degree of certainty and with a back up plan. (good rental, desirable, etc) Best, AT
    15 Dec 2013, 10:13 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4092) | Send Message
     
    Author’s reply » I agree 100% on no need to own a house. It was unfortunate of politicians to imply that it is an ideal to strive for. As for me, I would never use any net debt. I just borrowed all of the money against the house but have that money in cash. It is a tax benefit and also offers some flexibility.
    15 Dec 2013, 10:21 AM Reply Like
  • connellybarnes
    , contributor
    Comments (320) | Send Message
     
    I found a blog post that claims that the loss in value in investment vehicles like VXX is primarily due to contango:

     

    http://bit.ly/KdLjoY

     

    Although it doesn't seem they analyze the transactional costs that well so I am curious how much those contribute versus "contango costs."

     

    I should get a credit card so I can eventually get a mortgage. I've never used debt before. I would probably bet on having a job or enough assets to pay mortgage payments.

     

    In general wouldn't one lose the spread between mortgage rates and short-term cash rates by buying a house and then just leaving the money in cash? That is, barring any mispricings due to cheap government credit...
    12 Jan, 02:21 PM Reply Like
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