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.

Warning Signs — And Ways To Hedge — For High Yield Investors

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Warning Flags For High Yield

In a Slope post Wednesday morning (“An Interesting Divergence“), Tim highlighted a comment by Dollar, citing a market technician who warned that the price action of the junk bond ETFs HYG and JNK, relative to SPY, could signal a stock selloff ahead. Also on Wednesday, over at the CFA Institute website, fixed income manager David Schawel argued, essentially, that high yield bond price action offered warnings of its own for high yield investors. Schawel focused on two specific risks for high yield:

– Valuation Risk. Schawel quoted Loomis Sayles Bond Fund manager Dan Fuss on the state of high yield:

High yield is as overbought as I have ever seen it. This is absolutely, from a valuation point, ridiculous.

Incidentally, Fuss made a similar point about the bond market in general to Bloomberg recently, saying that bonds were more overbought than any time in the last 55 years (Fuss has been in the industry for 55 years).

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Hedging a $500k Portfolio

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A reader recently emailed me, asking how he could hedge a "typical $500k
mutual fund portfolio". I'm going to walk through a step-by-step
example of doing that in this post.

Step One: Choose A Proxy Exchange-Traded Fund

If you own a portfolio of
stocks or stock funds, you can hedge that portfolio against market risk
by buying optimal puts* on a suitable exchange-traded fund, or ETF. The
first consideration is that the ETF will need to have options traded on
it, but most of the most widely-traded ETFs do. The second
consideration is that the ETF be invested in same asset class as your
portfolio. Let's assume your portfolio consists primarily of blue chip
U.S. stocks. An ETF you could use as a proxy would be the SPDR Dow Jones
Industrial Average (DIA), which, as its name suggests, tracks the Dow
Jones Industrial Average. You could then enter its ticker symbol, DIA,
in "Ticker Symbol" field in the Portfolio Armor app, as in the screen
capture below.

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Hedging TLT

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A Bearish Consensus Growing On Bonds

In a post on Monday (“Hedging to a Hundred“), Tim predicted a ~15% drop for the iShares Barclays 20 year+ Treasury Bond ETF (TLT). There seems to be a bearish consensus growing on bonds in general. Also on Monday, in an interview on Bloomberg TV, GAMCO Investors portfolio manager Larry Haverty offered this warning for bond investors:

We
have a bond bubble… And the public, I am totally convinced, does not
understand it’s going to be possible to lose money in bonds

Haverty
didn’t make as precise a prediction as Tim, but it’s interesting to see technical and fundamental views align here, as Haverty becomes the latest prognosticator to warn about bond bubble.


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Wrong For All The Right Reasons (by Mark St.Cyr)

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One can’t help but look at the financial markets close as of Friday
and not shake their head in bewilderment. For anyone (including myself)
that has expressed caution since the beginning of this historic rise we
are left scratching our heads. The mantra of “Don’t fight the Fed” has
just been spot on. However, that saying was used far before, and for
other reasons than to explain what we are currently witnessing today.

Some only read the headlines trying to extrapolate any discernible
information for what we see taking place. Others just use a “going with
the flow” type strategy because they don’t know what else to do. It can
work for a time however, it can set oneself up to do exactly the wrong
things at the wrong times.

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