Steam Catapult » U.S. economy

Me on Bloomberg TV

David Pinsen — Fri, 09 Dec 2011 22:16:50 +0000

Well, my tweet, actually. This one got mentioned Margaret Brennan’s “InBusiness” show yesterday morning:

@margbrennan You nearly died once from riding 90 mph on the NJ Turnpike without a seatbelt. Was that emblematic of your approach to risk? $$

— David Pinsen (@dpinsen) December8, 2011

I was hoping to embed a clip of Ms. Brennan reading that tweet (Bloomberg helpfully added some footage of Corzine’s horrible wreck), but I couldn’t find it on YouTube or Bloomberg TV’s website. So instead, here’s the tweet from her producer letting me know the tweet was going to be aired:

@dpinsen that question was brilliant! you’re in the show at the top of the 10a!

— Sonja Van Sacker (@svansacker) December8, 2011

BTW, the ability to embed tweets like those examples above was just added to Twitter. Fred Wilson blogged about it earlier today.

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What $41 million in venture capital won’t buy you

David Pinsen — Sat, 27 Aug 2011 06:07:19 +0000

Revenues, apparently. Remember Color, the mobile app that received $41 million in venture financing a few months ago?

I have AppShopper’s top-200 grossing finance app rankings bookmarked (and was pleasantly surprised to see Portfolio Armor crack into the top-5 on Thursday), but after being reminded about Color by a chapter about it (“Color and Mania in the Valley”) in Tim Knight’s new book, The Slope of Hope Bathroom Reader, I looked up Color out of curiosity.

Appshopper classifies it as a social networking app, so I looked for it on AppShopper’s top-200 grossing ranking of social networking apps (Color is a free app, but free apps still appear in the top-200 grossing rankings, if they generate enough revenue from in-app sales or other sources). It wasn’t anywhere on the list.

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Living in interesting times

David Pinsen — Sun, 07 Aug 2011 20:25:42 +0000

Last week was an interesting week for stocks, and, if the performance of one foreign stock market that was open today is any guide, tomorrow may be interesting too. Here’s a snapshot of how stocks did on Israel’s Tel Aviv stock exchange this Sunday:

Last week was also the best week yet for subscriptions to Portfolio Armor and downloads of the Portfolio Armor iOS app.

My two latest Seeking Alpha articles:

“After the Downgrade: Hedging US Treasuries”

“Lessons from Thursday’s Market Meltdown“

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Hedging Update — Post Debt Ceiling Edition

David Pinsen — Thu, 04 Aug 2011 05:50:38 +0000

Hedging costs after the debt deal

Last week, with the debt ceiling negotiations dragging on, we looked at the costs of hedging a handful of equity index, gold-, Treasury bond-, and dollar index-tracking ETFs. Below is a snapshot showing the current hedging costs of the same basket of ETFs.

Hedging against a >30% correction in stocks

The table below shows the costs, as of Wednesday’s close, of hedging the same 5 equity index ETFs against greater-than-30% corrections over the next several months, using optimal puts.

Hedging against a >15% correction in bonds, gold, and the dollar

The table also shows the costs of hedging the same gold-, U.S. dollar-, and Treasury Bond-tracking ETFs against greater-than-15% declines over the next several months using optimal puts. First, a quick reminder about what optimal puts are, and a note about costs, followed by a couple of observations.

Optimal puts

With Portfolio Armor (available on the web, and as an Apple 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 risk (your threshold – you can enter any percentage you like, but the larger the percentage, the greater the chance there will be optimal puts available for the position). Then the app uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

A step by step example

There is a step by step example of finding optimal puts for a security, with screen shots, in our previous post, “Hedging against a Dollar Drop“. A note about costs

To be conservative, Portfolio Armor calculates hedging costs using the ask price of the optimal puts. In many cases, you may be able to buy the puts for a lower cost (between the bid and the ask prices).

Hedging Costs as of Wednesday’s Close

Symbol	Name	Cost of Protecting against >30% Decline, as % of position

	Equity Index ETFs
QQQ	PowerShares QQQ Trust	1.23%*
SPY	SPDR S&P 500	0.98%*
DIA	SPDR Dow Jones Industrial Avg	0.87%*
EFA	iShares MSCI EAFE Index	2.62%*
EEM	iShares MSCI Emerging Markets	1.61%*

Symbol	Name	Cost of Protecting against a >15% Decline, as % of position

	U.S Dollar ETF
UUP	PowerShares DB US Dollar Index	0.38%*
	U.S. Treasury Bonds
TLT	iShares Barclays 20+ Yr Treas	1.47%*
	Gold
GLD	SPDR Gold Trust	1.50%*

Observations

Two observations jump out here. The first is that hedging costs of TLT have dropped considerably — 1.47% for about 7.5 months of protection this week versus 1.49% for about 5.5 months of protection last week. That makes sense intuitively, considering that the risk of near term default, however remote it was, is off the table now (though the risk of a downgrade in medium term isn’t).

The second observation is that the costs of hedging GLD relative to TLT have jumped this week: 1.50% for GLD versus 1.47% for TLT this week, compared to 0.64% for GLD versus 1.49% for TLT last week.

*Based on optimal puts expiring in March, 2012.

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Hedging against a dollar drop

David Pinsen — Wed, 03 Aug 2011 15:14:19 +0000

Chafing at the world’s reserve currency

After the excitement of the U.S. debt ceiling negotiations going down to the wire, Russian Prime Minister Vladimir Putin offered these comments about the U.S. and its dollar:

They are living like parasites off the global economy and their monopoly of the dollar.

[...]

If over there (in America) there is a systemic malfunction, this will affect everyone,” Putin told the young Russians. “Countries like Russia and China hold a significant part of their reserves in American securities … There should be other reserve currencies.

With Putin’s sentiments in mind, let’s look at a way to hedge against a further drop in the dollar

Hedging the dollar

The steps below show how to hedge the dollar by buying optimal puts on the PowerShares DB USD Index (UUP) as a proxy for it. First a quick reminder about what optimal puts mean in this context.

About optimal puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web and as an Apple 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 risk (your threshold). Then the app uses an algorithm developed by a finance Ph.D to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

A step by step example

Step 1: Enter a ticker symbol

In this case, we’re using UUP as a proxy for the dollar we’ve entered UUP in the Ticker Symbol field below.

Step 2: Enter a number of shares

For the purposes of this example, let’s assume an investor has a $1 million portfolio, all in dollar-denominated assets. So, since we’re using UUP as a proxy, the number of shares we’ll enter will be $1,000,000 / the most recent share price of UUP ($21.17, as of after hours Monday) = 47,236.7. We’ve rounded that up to 47,237 and entered that number in the “Shares Owned” field in the screen cap below.

Step 3: Enter a decline threshold

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). I’ve entered 15% in the “Threshold” field below.

Step 4: Click the red button

A moment after clicking the red button, you’d see the screen cap below, which shows the optimal put option contracts to buy to hedge against a >15% drop in UUP between now and March 16, 2012. The cost of this protection on a $1 million position would be $6,608, or about 0.66% of the position value.^{1, 2}

¹Note that, in this case, Portfolio Armor rounded down the number of shares of UUP we entered to the nearest hundred (since one put option contract represents the right to sell one hundred shares of the underlying security), and then presented us with 472 of the put option contracts that would slightly over-hedge the 47,200 shares of UUP they cover, so that the total value of our 47,237 shares of UUP would be protected against a greater-than-15% decline.

²To be conservative, Portfolio Armor quoted that cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.

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Hedging Update — Default Watch Edition

David Pinsen — Fri, 29 Jul 2011 13:08:50 +0000

Credit Suisse on the consequences of a default

On Thursday, Credit Suisse’s global strategy team said that a U.S. default was still unlikely. However, they predicted that if the U.S. did default, stocks would suffer a 30% drop.

Hedging against a >30% correction in stocks

With that in mind, the table below shows the costs, as of Thursday’s close, of hedging 5 equity index ETFs against greater-than-30% corrections over the next six months, using optimal puts.

Hedging against a >15% correction in bonds, gold, and the dollar

The table also shows the costs of hedging gold-, U.S. dollar-, and Treasury Bond-tracking ETFs against greater-than-15% declines over the same time period using optimal puts. First, a quick reminder about what optimal puts are, and a note about costs.

Optimal puts

A note about costs

Hedging Costs as of Thursday’s Close

Symbol	Name	Cost of Protecting against >30% Decline, as % of position

	Equity Index ETFs
QQQ	PowerShares QQQ Trust	1.17%*
SPY	SPDR S&P 500	0.73%*
DIA	SPDR Dow Jones Industrial Avg	0.62%*
EFA	iShares MSCI EAFE Index	1.57%*
EEM	iShares MSCI Emerging Markets	1.17%*

Symbol	Name	Cost of Protecting against a >15% Decline, as % of position

	U.S Dollar ETF
UUP	PowerShares DB US Dollar Index	0.14%*
	U.S. Treasury Bonds
TLT	iShares Barclays 20+ Yr Treas	1.49%*
	Gold
GLD	SPDR Gold Trust	0.64%*

*Based on optimal puts expiring in January, 2012

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Cost of Hedging Treasury Bond Exposure Still Low, but Rising

David Pinsen — Tue, 26 Jul 2011 22:58:20 +0000

The chances of a debt ceiling deal

The Intrade prediction market enables participants to bet on whether Congress will approve an increase in the U.S. debt ceiling to $15.1 trillion on or before three dates: July 31st, August 31st, and September 30th. As of Tuesday evening, these were the chances of debt ceiling deals by those respective dates:

July 31st: 16.2% chance of a deal raising the debt ceiling to $15.1 trillion
August 31st: 75% chance of raising the debt ceiling by that much
September 30th: an 88.9% chance of raising the debt ceiling by that much

Unfortunately, Intrade doesn’t offer a market for betting on whether a debt ceiling deal will be reached by August 2nd, the putative deadline.

Breaching the debt ceiling need not lead to an imminent default

If Congress can’t come to a deal raising the debt ceiling in time, the U.S. government will not be able to borrow to pay all of its obligations, but that doesn’t mean this will necessarily lead to an imminent default. The government could instead prioritize payments so that holders of Treasury securities get their interest payments as scheduled, while withholding payment from other parties (e.g., by furloughing some Federal workers, or by delaying some transfer payments).

Nevertheless, a failure of Congress to reach agreement on raising the debt ceiling would be inauspicious for holders of Treasury bonds. Another point to consider is that, even if a debt ceiling deal is reached, U.S. debt may still be downgraded at some point, which could lead to forced selling by funds which are required to own only AAA-rated bonds.

Hedging against a failure to raise the debt ceiling

In a post elsewhere earlier this month (“Helping House Majority Leader Hedge His Treasuries Exposure“), we noted reports that the House Majority Leader held “up to $15,000 in shares of the 2x levered ProShares Trust Ultrashort 20+ Year Treasury ETF (TBT)”, an amount, we suggested, was probably too low to provide much of a hedge for his exposure to Treasuries.

A more precise way to hedge

As we mentioned in a previous post, precision is one of the advantages of using optimal puts, rather than inverse ETFs, to hedge:

Precision. Say you own 824 shares of Exxon Mobil, and you’d like to know how to hedge that position against a greater-than-17% loss. Using Portfolio Armor (available as a web app and as an Apple iOS app), you could simply enter “XOM” in the symbol field, “824″ in the number of shares field, and “17%” in the threshold field, and then Portfolio Armor would use its algorithm to scan for the optimal puts to give you that level of protection at the lowest cost.¹

The example above mentions a stock, but as we noted in that post earlier this month, Rep. Cantor could find optimal puts on the U.S. Treasury bond-tracking ETF, iShares Barclays 20+ Year Treasury Bond (TLT), as a proxy for his exposure to Treasury bonds, in the same way.

Hedging costs as of Friday’s close

The table below shows the costs, as of last Friday’s close, of hedging against greater-than-15% and -20% declines, respectively, in TLT until January 20th, 2012.

Symbol

Name

Decline Threshold

Cost as % of Position

TLT

iShares Barclays 20+ Year Treasury Bond

15%

1.22%*

TLT

iShares Barclays 20+ Year Treasury Bond

20%

0.66%*

Hedging costs as of Tuesday’s close

The table below shows the costs, as of Tuesday’s close, of hedging greater-than-15% and -20% declines, respectively, in TLT until January 20th, 2012. Note that the costs are still relatively low, but have increased since Friday.

Symbol

Name

Decline Threshold

Cost as % of Position

TLT

iShares Barclays 20+ Year Treasury Bond

15%

1.48%*

TLT

iShares Barclays 20+ Year Treasury Bond

20%

0.77%*

*Based on optimal puts expiring in January, 2012.

¹In that case, Portfolio Armor would round down the number of shares you entered to the nearest hundred (since one put option contract represents the right to sell one hundred shares of the underlying security), and then present you with eight of the put option contracts that would slightly over-hedge the 800 shares they cover, so that the total value of your 824 shares would be protected against a greater-than-17% loss.

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