Pabst On Volatility-- A Must Read!

Discussion in 'Educational Resources' started by marketsurfer, Nov 19, 2008.



    Metals and Commodities: Like stocks, real estate and non-guaranteed debt securities - commodity prices including metals have taken it on the chin due to deleveraging by hedge funds, a stronger dollar and the prospect of slower global growth. Stocks in commodity related companies have performed worse still.

    Will commodities rise up once again? Will we see global food shortages? Will future coordinated currency devaluations cause gold to become a de facto number currency? Will Asia recover and continue consuming vast energy reserves? None of us know for certain. It's equally possible that a battery engine is soon invented and 10 years from now gasoline doesn't even exist.

    I consider inflation sensitive commodities to be a must have in a balanced portfolio but I'm well cognizant that commodity prices could succumb further to continued asset erosion. Buyers in this sector should start with reasonable size and with room to add on further weakness - particularly in food related groups.

    Treasury Securities: As we've witnessed the past year and half not all credit markets are the same. In fact not all segments of the yield curve are the same either. Non Treasury backed issuance remains soft with default risk spread out among an array of mortgage, municipal and corporate backed securities. In general be cautious of any high yielding paper. We haven't seen the last default and municipals are going to be the next wave of collapsing securities.

    While the front end (short dated paper) remains on all time low yields due to flight to quality and an ever easing Federal Reserve, the long end of the Treasury curve remains in flux. Bulls cite economic weakness and safety as the prime catalysts for lower yields, while the bear case is fear of increasing deficits, possible selling by over committed Asian central banks and the chance of severe inflationary pressure.

    I suggest that if you prudently seek some diversification in the Treasury market, try to stay at an average duration of around five years. The Five year will give you an additional 100 plus basis points in yield over the two year, with much less price risk than the ten or thirty year. Don't assume that a few years from now a chart of the 30 year T-Bond can't resemble today's beleaguered financials.

    Cash too is an asset: I've probably scared some of you away from any investment vehicle other than good old cash. Think again. Cash too has a risk factor we've rarely before seen. Clearly most of us sat through the pain this decade of seeing our cash reserves lose parity with a host of foreign currencies, but in the past few months many of those exchange rates have corrected in stunning fashion.

    In many currencies, 5 years of dollar weakness was negated by virtually 5 weeks of dollar strength. The Australian dollar for example rose from 60 cents U.S. in early 2003 to 96 cents this past July before breaking all the way back to 62 cents late last month! As Americans we hear incessantly about our high national debt and entitlement liabilities but the rest of the world is in the same boat. Right now cash is king but the cheap assets cash can buy may someday dethrone the king. Stay agile, proactive and ready to overweight sectors only as conditions become clearer.
  2. rc5781


    surf, i'm sorry but your posts are too long....can you put up the meats and potatoes of that?
  3. mxjones


    Why is it a must read? Because he is a racist who can string together a few sentences?
  4. try too hard with insufficient skills.


    There's exactly jack shit about P's article that involves Vol.

    Otherwise... P himself has admitted on more than one occasion that he's a perma-bear. He should start a newsletter...and see what the market bears.
  5. about because I'm both smarter and a much more successful trader than you.....
  6. True bro-I'm a perma bear. On gold and grains I'm a perma BULL though. In many ways I think the U.S. economy in terms of real output topped in 1989 and everything since has just been the money pump.

    That being said I'm long stocks from this morning and looking to add.

    And you're right the article had nothing to do with volatility per se'. I don't title these things....
  7. jem


    Thats also about the time MBAs became the rage. We became a nation of horseshit consultants and managers who knew how to inflate their own pay and bonuses. (and lawyers and frequently overpaid general practice doctors)

    The IT boom put off our day of reckoning for a about a decade.
  8. So did the peace dividend vis a vis the Soviet collapse Jem. Tech productivity, cuts to defense, the Gingrich Congress, the Greenspan put, 10% annual GDP growth in China, a trade friendly (i.e. cheap) dollar, full employment-though as you say much in unproductive jobs- all contributed to the perfect storm of higher asset prices.

    While I'm ST bullish on stock prices I'm 150% negative on the economy.
  9. Daal


    how do you rate the odds of depression?At one point today my news service announced that the sp500 was at -47% and it was the worst start of a year in history. It doesn't seem that people are any more panic prone today than 100 years ago so the market is speaking
  10. Cutten


    I would just point out that the 5 year Treasury has a *duration* of less than 5 years. I think he meant time to maturity.
    #10     Nov 20, 2008