Thursday, October 10, 2013

Market trading on hope for a short term deal.  Emphasis on "short".  The more I think about the situation, the more I think the politicians are trying to act like celebrities - if they are not getting enough press, then start a commotion.  Make a public display and you are back!  It's hard to explain it any other way.  I understand that they feel they are trying to be fiscally prudent, I don't think it is right to hang up the works and hold the country hostage.  They are truly acting like children throwing themselves on the floor (parents out there will understand :).

The upshot though, is that I don't think this is over by any stretch.  I bought back some of my hedge and am up to about 25% equity exposure - still way under my benchmark (as usual).  I will probably be varying the exposure between 40% (on a big down move to say around 1575) and 10% at 1725.

I don't recommend this type of short term trading for most, I am just communicating what I am doing personally.  Stocks right now have an earnings yield (inverse of forward PE) of around 6.7%.  With 10yr Treasury at 2.6, that is a spread of over 4%.  Historically this is still a good level to buy stocks.  Hence, why I don't like the idea of short term timing for most people.  Long term, you should still be better off holding a significant stock position.

I also still think rates are going lower before they go higher and so I like fixed income positions.  That said, the market is providing such good opportunities in credit (high yield, high grade, muni, preferreds, loans) that one can build a portfolio of these ETF's and hedge out the bond risk and still earn over 3%!


MHN,
This is still a big position for me and will continue to be.  One thing to be aware of and perhaps another reason it has come down is that it has some exposure to Puerto Rico and the fiscal situation is pretty bad there.  Not Detroit, but pretty close.  I believe this to be priced in, but there may be some downside if they default.


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