ikkyu

The Return of Japan's Zombie Finance

Great article and overview, despite how grim the outlook!

Japan: DPJ's First 100 Days (Part II)

Wow, awesome review of a complicated situation. Many thanks.
Cheers from Osaka,
john

Opportunities in Options Markets, Summer 2009

Greetings Geoff,

Nice to see the evolution of your thoughts about monte-carlo and options pricing. I think this is the most interesting stuff you have done to date.

Please let me ask a few questions, if you don't mind.

Not sure why underpriced options would suggest buying calls rather than buying puts (or more reasonably straddles) in the short run (<3 years). Serial correlation can be positive with a negative price trend, can it not?

Also, are you talking about buying OTM calls on EBAY? While stock markets tend to go produce positive results over long periods, you have to have to inherently predict the magnitude of the move when buying options.

Which options are you talking about selling? The long dated LEAPs or the front month? You would have interest rate risk on the LEAP, far lower gamma initially, and wider bid-ask spreads. I usually divide the time value by the number of days till expiry to get a better idea of the decay per day.

Also, why sell covered calls at all? Naked puts would be the risk equivalent and would simplify things. If you get exercised, you could then start selling calls on the underlying.

While i like your plan, it is clearly not an equivalent for Bodie's conservative methods. Bodie's plan seems like it would work better with a call spreads. It would be like your own index annuity.

Just some thought. Nice piece of work. Seems like you are definitely thinking out of the box.

Cheers from Osaka,
john

Rising Interest in Currency Funds

Greetings,

As always, a great overview by Mr. Shaw

To throw my 2 yen into the discussion, I think the carry trade makes sense as a default position for engaging in currency markets. I don't think that is highly disputed among currency experts. Of the three major techniques for trading currencies, valuation (PPP), momentum, and carry, carry has by far the best risk-adjusted returns. Don't take my word for it though. Compare various indices:
https://index.db.com/d...

Also, carry trading really compliments a bond heavy portfolio, as there is a fairly constant negative correlation.

Cheers from Osaka,
john

Japan's J-REIT Market to Get a US$10.5 Billion Bail-Out

Great article, Whitten-sensei, if a bit of teaser.... (we all have to make a living!) Presumably those strong candidates you mention would be appropriately represented by market cap in the ETF.

What is the current yield of the index? Is there not going to be considerable share issuance? Average leverage ratio? Discount to NAV for the index? Sorry, maybe these might just be ideas for future articles.

You are a great resource here.

Best wishes from Osaka,
john

S&P 500: Plausible Downside Target of 500

Very nice piece of work. Exceptionally well thought out.
Thanks from Osaka,
john

Asset Allocation ETFs: Low Expenses Are Nice, Losing Less Money Is Nicer

You call yourself "at the forefront," "astute," and an "expert" yet you also claim that ETF's are the "lowest cost possible" way invest in currencies?

You might want to read up on that.

Commodities Roll Yield in 2009

Excellent presentation on a critical topic. Thanks.
Best wishes from Osaka,
john

Let Warren Buffett Handle Your Portfolio

[Initially published at World Beta]

Greeting Folks,

I am a huge fan of Mebane's stuff and this site has taught me a lot. Thus, I just want to go through an example to see if a pure alpha extraction of a Buffet port is going to work.

Here is how I break it down with today's numbers for a $100,000 port on prices and margin for today. Consider two options. The first might be buying SPY one year at-the-money options. Right now, they would cost about 15% of the port and that is only with a delta of 50 (i.e. an imperfect hedge). You could use emini S&P futures. You would need about 2 and a quarter contracts and your initial maintenance margin would be $13,923( at Interactive Brokers), or roughly 14% of the port, if you could have fractional contracts). You would be asked for more margin if the trade was going your way. You also lose about 1% a year for yours service and there are the trade transactions. I don's see how this is going to work. 3:1 leveraged ETF would require at least 33% of the port (and would work horribly).

Your example had a 50% hedge so that would require about 7.5% of the port value to hedge with a return of 7.4%? Whoops…. You would be at least minus 1% with your service fee. That is assuming your hedges went well (they aren't always so tidy).

I would take a good look at the alpha extraction sales pitch. It doesn't seem to add up to me. Am I missing something?

Cheers from Osaka,
john

The Pundits I Admire Are Turning Bullish

"I have no idea where the market will be three or six months from now. But 10 years from now, do you really think the Dow will be trading at 8,000? I sure don't."

I live in Japan. No one here thinks 10 years is a sure bet for a stock market recovery!

Cheers,
john

The Run to Safety: Ten-Year Treasury Hits All-Time Low

"The only way that Treasury yields can go any lower than they are now is if investors become even more terrified than they already are and that just doesn't seem possible.

Does it?"

My understanding is that quantitative easing implies buying long term debt to drive down that part of the yield curve. I am not sure i go along with your purely contrarian call. Look at how low japanese 10-year notes went! I would wait until a chart shows a downtrend.

Cheers,
john

Triple Leveraged ETFs On Fire

Why not go long the 3x and short the -3x for some real leverage!

Small-Cap Japan ETFs: Big Things May Come in Small Packages

Greetings,

Unfortunately, japanese equity markets and the $/Yen are rather strongly positively correlated, so investors in these u.s. funds are going to suffer from currency situations when things turn around in Japan.

By the way, J-reits are a great deal as well.

Cheers from Osaka,
john

Currency ETFs: Consider the Commissions

Greeting Ray,

Fair enough my friend.... different strokes and all. Funds like DBV and JEM may be useful, if expensive.

If there is a bundle to be made, carry trading is likely the best way to do it IMHO.

Best wishes and thanks for your opinion.

john

Currency ETFs: Consider the Commissions

Greetings,

I agree with the original poster on these costs being absurd. Any medium to long term forex strategy is going to be better accomplished with a forex broker. ETF's are a primitive way to get such exposure.

I am not sure where Ray is getting his quotes from. I show a spread of around .007% for EUR/USD and .039% for USD/MXN. That is more like 5.6x than 100x, my friend.

For a one year holding period costs are 57x cheaper using the broker OANDA for EUR/USD than the ETF FXE. That is not counting the bid/ask spread on the ETF or commissions, which could jack this up considerably. You have no further costs after that (outside of interest on a negative carry) no matter if you hold for years. So there is virtually no comparison cost wise.

See spreads and carry interest for Oanda here:
www.xrof.com/index.htm...

These ETFs are a scam. This is the cheapest market to trade in the world! Hell, SPY has what like .17% expense ratio?

Also you didn't mention the tax advantages. If you document yourself as a professional trader, you get 60/40 (LT/ST capital gains) like for futures trading.

Here is another article similar to yours:

www.thefinancialwhiz.c.../

I like Ray, he seems cool and quite thoughtful, but ETFs are blunt, expensive ways to trade currencies not matter how long your holding period.

Best wishes,

john