Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Welcome Back, Fubsy_Cooter!

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I saw this comment from a long absent sloper this morning & thought it deserved a wider audience:

I haven't posted in SOH since 2009, but I sense a sea change in the market trands and when its time to short, this is the best site bar none, so I'm back. 

Here's my take regarding the Whipsaw, and a low risk way to get positioned near the beginning of a trend that will likely last close to a year.

Its becoming more apparent that, there is an imminent and significant trend change underway. The reversal of this trend will change the direction of virtually every asset class, and will provide a multi-month opportunity for profit by entering near the pivot. Over the past two years, a majority of asset classes have been influenced by a weakening US dollar.

Currently, the dollar is trying to put in a bottom. Sentiment has reached negative extremes that mark multi-year bottoms, and the commodity complex and stocks are showing signs of topping with sentiment having become extremely positive and price volatility increasing. When the dollar puts in a bottom, the unwinding of the weak dollar trade will take several months, lasting until sentiment reaches the opposite extreme of overwhelming favoritism toward the dollar, which will likely be the point at which the dollar begins to once again roll over.

With this trend reversal, assets that have risen for the past two years will fall..

-Commodities (oil, precious metals, and agriculture)
-Stock sectors (energy, real estate, financials, tech, retail)
-The Euro

Here is a low risk tactic for getting in on this trend early. The dollar has recently bounced at 72.69. That currently marks a potential bottom. When the dollar has its next correction, if it manages to stay above the 72.69 pivot, and reverses upward through its peak prior to correcting, positions should be bought that favor a strong dollar.

Short commodities (oil, precious metals, and agriculture), stocks sectors (energy, real estate, financials, tech, retail) and the Euro.

To manage risk, position size should be determined by setting a stop 1% below the 72.69 level on the dollar (71.97), and calculating how large a position can be taken such that one’s loss if the trade goes against them is within one’s risk tolerance.

For example: With a total hypothetical account size of 100k, I might be willing to risk 2% of my account to open this trade. Thus, if I buy DUG at 32.00 (appx where it will be if the dollar breaks through its peak pivot), and set a stop at 25.00, (appx where DUG would be with the dollar at 71.95), I could open an initial position of 300 shares. 300 x 7.00 would give me a loss of 2100 or 2.1 percent of my account if the stop is hit. If the strong dollar trend continues, positions will be added when the dollar has corrections, and when it reverses higher after becoming oversold. New stops will be set below bottoming points. The reward to risk ratio is highly favorable if one waits for this setup.

An even more compelling oppty awaits when Silver and Gold reach their bottoming points, which is why I'm only willing to risk a small percentage of my portfolio. I want to preserve capital for that time, but I believe getting into a strong dollar trend offer the potential for substantial gains in the meantime.

Final Slopefest Update (Market Sniper)

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Well, folks, the time draws near for our get together! I do have some disappointing news, however. Our gracious host and the cause of all of this, Mr. Tim Knight, will not be joining us, sadly. Family obligations have cropped up beyond his control. As we know, family ALWAYS comes first.

He will be with us in spirit if not in corporeal form. He has made a rather nice gesture in apology. There will be autographed copies of his book for the lucky slopers who show up before the stack of books runs out! Tim wishes to express his regrets for this last minute change and made me promise not to hunt him down like a wounded goat! 

I will be arriving late Thursday afternoon, early evening. Be glad to meet with anyone at The Deuces Lounge on Thursday evening. here is a link to The Deuces Lounge.  http://lightgroup.com/las-vegas-ultra-lounge-deuce/

Here is a map of the places, times and activities we have planned.  http://www.screencast.com/users/Victorio91306/folders/Jing/media/1e355201-81ca-452e-b78d-6fa8da7671e2

Thank you, vittorio (who has already caught a freight car to Vegas as we speak) for your work on that!

We should also be looking forward to meeting the mysterious Mr. K who helped me put this together. He has done almost all of the leg work! Thank you, Mr. K!

We should have Mr. Butch Headding and his lovely wife Phyllis from John Person's organization with us as well! And, if time permits, Mr. John Person himself!

I look forward to seeing all of you there and I can guarantee you, one and all, we will have a great time!

Yours in the pursuit of that trading edge (and edges in casinos as well!), Market Sniper

Slopefest III – All Firmed Up! (Market Sniper)

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As most of you know, Slopefest III is scheduled for Saturday and Sunday, May 14th and 15th in Las Vegas, Nevada. I had a lack of input from Slopers as to events, activities, etc. but no problem! With the massive help of a Slope lurker (Mr. K) who is a long time resident of Las Vegas, we have put together the formal meeting. I kept in the front of my mind the fact that the size of everyone's' dollar is different (As Dear Old Dad Used To Say!). I think we have found the right spot to accommodate everyone price wise and it is also a spectacular venue!

Saturday, May 14th between 6 and 9 pm at a private club at the top of The Mandalay Bay in the Foundation Room!

Go to the main elevator bank at the Mandalay Bay. You will see a desk at one of the elevators. You will need to tell the person there that you are with the Slope Of Hope. As this is a private club, there is a minor dress code. No open toed shoes/sandals for men. No sneakers, no shorts (no gang apparel either for you wannabees). No tank tops either I think. Just use common sense.

There is a minimum cover of $50 per person. Use your credit/debit card. Your drinks and eats will be charged against your minimum. IF you cannot afford $50 for the evening, you should not be in Vegas! This way, you are in control of what you spend. We most likely will be in the Media Room which is the best one according to Mr. K. We will have an absolutely spectacular view of Las Vegas while we get to know each other. Here is a link to the site. There are some pictures if you scroll down to the  links.  http://www.houseofblues.com/venues/clubvenues/lasvegas/foundationroom.php

Dinner is a bit pricey for many so we can all decide where to go for dinner from there, should we wish to eat more.

As for further meetings/get togethers, that is open. Personally, will be going to the Sterling Buffet on Sunday at Bally's. Never miss the chance myself.

For those who do not yet have rooms. City Center has the best deals and the rates are not only good, they always have rooms and the rooms are VERY nice. Check the Vdara and the Aria for best deals.

Have another special announcement. Mr. John Person, his wife Mary as well as Mr. Butch Headding and his wife Phyllis may also be in attendence! So if you have an unautographed book by either Tim and/or John Person, bring it with you!

I look forward as does our host, Mr. Tim Knight to meeting you all at Slopefest III!

Time to take a time out and have some fun, good people. We have MORE than earned it! I will also be giving mini-seminars on how to get an edge on the casinos at blackjack and craps!

Yours in the ever elusive search for edges in and away from markets, the Market Sniper.

Plan Not to Panic

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Hey fellow Slopers,

Initially, I wasn't planning on posting this here, as some of you will find it a little basic. But I received an e-mail over the weekend from a Slope lurker and self-described beginner with questions, so I thought other beginners lurking here might find some value in it. The only new info in the post below for the rest of you will be this: the cost of hedging against a >20% drop in DIA over the next several months dropped to 0.84% today (Monday).

First though, a quick, unrelated note: In the comments here on Friday, I mentioned a stock that someone had posted about on Short Screen the night before, PUDA, was plummetting. Trading in its shares was halted Monday. On to today's post:

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"Plan not to panic" next time your stock portfolio drops 40%. That was hedge fund manager Joel Greenblatt’s advice for retail investors in a column on his Magic Formula investing site last year. So what did Greenblatt do when Mike Burry, a hedge fund manager Greenblatt’s Gotham Capital invested with, was down 18% in 2006 (after several years of spectacular returns), due to early, illiquid bets against subprime mortgages — bets that Burry wanted to hold to fruition? From p.190 of Michael Lewis’s book, "The Big Short,"

Immediately … Gotham Capital threatened to sue him.

…

What distinguished Gotham was that their leaders flew out from New York to San Jose and tried to bully Burry into giving them back the $100 million they had invested with him. In January 2006 Gotham’s creator, Joel Greenblatt, had gone on television to promote a book and, when asked to name is favorite "value investors," had extolled the virtues of a rare talent named Mike Burry. Ten months later he traveled three thousand miles with his partner, John Petry, to tell Mike Burry he was a liar and to pressure him into abandoning the bet Burry viewed as the single shrewdest of his career.

Flash forward to the end of 2007. Mike Burry’s hedge fund is up about 130%, as his shorts on subprimes pay off. From p. 223 of "The Big Short,"

Still he [Burry] heard not a peep from his investors.

…

To his founding investor, Gotham Capital, he shot off an unsolicited e-mail that said only, "You’re welcome." He’d already decided to kick them out of the fund, and insist that they sell their stake in his business. When they asked him to suggest a price, he replied, "How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?"

If the billionaire professional investor Joel Greenblatt — who, due to his funds’ short positions isn’t as exposed to market risk as long-only, un-hedged Magic Formula investors — has trouble stomaching an 18% decline, why would he expect retail investors to suck it up when they get hammered by a 40% drop?

Note that I’ve only singled out Greenblatt here because of the juxtaposition between his advice and his actions in that case; he’s got plenty of company in telling regular equity investors to just suck it up next time the market tanks. About the only form of risk management that gets mentioned frequently in popular investment columns is diversification. Diversification has a significant limitation though.

Diversifying among a basket of different stocks reduces idiosyncratic (or, stock-specific) risk, but not market risk. An example of idiosyncratic risk would be if news broke that the CFO of a company you owned stock in had been cooking the books. In that case, you’d obviously be better off if you’d had your money diversified among five or ten different stocks instead of having all of your money in that one, shady stock. When the market tanks though, nearly all stocks get hammered. That’s market risk.

In fact, not only does diversifying among a bunch of different stocks not protect you from market risk, but diversifying among different, putatively non-correlating asset classes (e.g., stocks, bonds, commodities) doesn’t always help you either. The problem there is that when the worst happens, correlations go to one: almost everything tanks. For example, when the stock market crashed in 2008, so did commodities, corporate bonds, and other asset classes (about the only asset that did well was U.S.Treasuries, but that doesn’t mean that they’ll do well next time the market tanks).

So how can a long investor protect himself against market risk?  He can hedge. One way to do that is by buying puts on ETFs that track market indexes. Here are a few examples of market indexes and the ETFs that track them:

  • The Dow Jones Industrial Average: SPDR Dow Jones Industrial Average ETF DIA
  • The S&P 500: SPDR S&P 500 ETF SPY
  • The Nasdaq 100: PowerShares ETF QQQ

You can find a list of put options available on those index ETFs by clicking on the "options" tab on their quote pages on sites such as Yahoo! Finance, Morningstar, or Google Finance. For example, here’s the list of options available for DIA, the ETF that tracks the Dow (scroll down on that page for the put options). As you can see from clicking that last link, there’s a whole lot of them. Which one should you buy if you want to hedge?

First, you have to ask yourself how much of a market decline you’re willing to stomach (all things equal, the bigger the decline you’re willing to tolerate, the cheaper it will be to hedge against — similar to how car insurance will be cheaper when you have a higher deductible). The threshold I usually use when I hedge is 20% (i.e., I want protection against any decline worse than that). The idea for a 20% threshold came from a comment fund manager (and Stanford finance Ph.D.) John Hussman made in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Once you know how much risk you’re willing to risk (whether it’s a 20% decline or some other threshold), you’ll want to find the optimal puts — the ones that will give you the level of protection you want at the lowest possible cost. That part can be a little complicated. Portfolio Armor was built to make it simpler.

With Portfolio Armor (available as a web app and an iOS app), you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to accept (your threshold), and then the app uses an algorithm developed by a finance Ph.D. candidate to scan for the optimal puts.

A couple of reasons (both of which we've mentioned here before) why this might be a good time to consider hedging:

  1. + With stock market volatility declining recently, it has gotten cheaper to hedge. For example, as of Friday, the cost of hedging against a >20% decline in the Dow-tracking ETF DIA over the next several months was 0.84% of your position
  2. + Prudence may be warranted with the end of the second round of the Fed’s quantitative easing (QE2) scheduled for the end of June. In a recent Bloomberg TV appearance, economist David Rosenberg (formerly, Merrill Lynch’s chief North American economist) noted that there’d been an 88% correlation between the movements in the Fed balance sheet and the direction of the S&P 500 over the last two years (Rosenberg did think there would be a QE3, but probably not until next year).

Disclosure: I am long puts on DIA