That's enough for me in 2019

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Snowjob
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Re: That's enough for me in 2019

Post by Snowjob » Tue Aug 06, 2019 9:53 am

market timer wrote:
Tue Aug 06, 2019 9:05 am
Snowjob wrote:
Tue Aug 06, 2019 8:37 am
How much do you need to post (or expect to post given fluctuations) to maintain the short position and what qualifies as collateral? I assume the requirement must be generous in order to justify the leverage considering your large cash position in aggregate?
An ultra bond has a notional value of $185K. Collateral must be in cash and is pretty low compared to the notional value and volatility. You only need to post ~$3500 as collateral. It's the day-to-day volatility that requires a larger buffer. To get a sense of the volatility, the YTD range of the ultra contract has been $157-187K. I have a target cash buffer that I maintain to compensate for overnight volatility and have a second buffer kept in a money market account where I sweep excess cash. If the second buffer is exhausted, the third buffer is a short term bond ETF.
Makes sense, so you are obtaining quite a bit of leverage by doing this -- and yet levering a fairly "safe" portfolio". I like it.

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dogagility
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Re: That's enough for me in 2019

Post by dogagility » Tue Aug 06, 2019 4:36 pm

market timer wrote:
Tue Aug 06, 2019 7:42 am
dogagility wrote:
Tue Aug 06, 2019 4:22 am
Interesting. What is now your investment total return over different time horizons compared to a Boglehead strategy (buy and hold; three fund portfolio; annual rebalancing) with a similar risk profile? For the community, it would be beneficial if you posted the comparative returns too. Thanks in advance.
For me, it is really not a contest or about maximizing returns. Risk is not a scalar, it has many dimensions and we are more sensitive to different dimensions at different stages of life. I don't track returns, it just causes stress and fear of missing out.
So..., what is actionable in this thread without a comparison to a Boglehead investment practice?
Taking "risk" since 1995.

staustin
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Re: That's enough for me in 2019

Post by staustin » Tue Aug 06, 2019 4:52 pm

It's certainly been an interesting thread to follow. Market timer is clearly extremely intelligent with the time and expertise to take some unusual, but well thought out, positions. It's not for me but again I found it interesting and thought provoking.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Thu Aug 15, 2019 6:39 am

market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Aug 15, 2019 7:26 am

hdas wrote:
Thu Aug 15, 2019 6:39 am
market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.

goblue100
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Re: That's enough for me in 2019

Post by goblue100 » Thu Aug 15, 2019 7:33 am

market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l).
This would have more credibility if you had posted it in late May / early June. And if you sold long bonds in May and June you've missed out on some really nice bond returns over the last 2 months.

* I missed your post above.
The move in long term bonds has been astonishing.
I agree with this!
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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hdas
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Re: That's enough for me in 2019

Post by hdas » Thu Aug 15, 2019 10:18 am

market timer wrote:
Thu Aug 15, 2019 7:26 am
hdas wrote:
Thu Aug 15, 2019 6:39 am
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
It's not just that, the issue is the overlay of conventional views with naive counter trend execution. There was a time many years ago when this worked ok, just like there was a time to benefit naively from serial correlation. But today's environment requires a lot more nuance. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

Caduceus
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Re: That's enough for me in 2019

Post by Caduceus » Thu Aug 15, 2019 11:51 am

market timer wrote:
Thu Aug 15, 2019 7:26 am

The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
How does a retail investor structure a position that effectively borrows at 2.24% for 30 years? Can you explain exactly how to do this? Does it require rolling over positions at specified times (using options/futures?)? Or can investors short bonds directly? (I didn't realize brokerages allowed individual investors to do this)

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Aug 15, 2019 8:38 pm

Caduceus wrote:
Thu Aug 15, 2019 11:51 am
market timer wrote:
Thu Aug 15, 2019 7:26 am

The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
How does a retail investor structure a position that effectively borrows at 2.24% for 30 years? Can you explain exactly how to do this? Does it require rolling over positions at specified times (using options/futures?)? Or can investors short bonds directly? (I didn't realize brokerages allowed individual investors to do this)
Investors can always choose the tenor at which they borrow. If you buy short term futures (equities, bonds, whatever), you are borrowing at something close to 3-month LIBOR to buy the asset. Let's say you'd rather borrow at a fixed rate for 5 years instead of a floating rate. Then you could short Treasuries of a comparable duration and adjust your position as your remaining term declines. In this post, Matto provided a helpful source of info on Treasury futures data: https://www.cmegroup.com/tools-informat ... ytics.html

Going back to the 5-year example, when you short a 5-year future, you are shorting a basket of Treasuries with similar maturities, and the person who is short the future can determine which bond in the basket is the one to deliver. Of course, this means the cheapest bond in the basket is what gets delivered at settlement, therefore the price of the future is determined largely by the cheapest-to-deliver (CTD) bond in the basket. Currently, the CTD bond in the 5-year basket is a bond maturing on 11/30/2023. So, really, the 5-year future has a maturity of around 4 years and 3 months, based on the CTD. By shorting the future, you are paying the mark-to-market change in the value of the 5-year bond (current yield: 1.46%) and receiving a floating rate that depends primarily on 3-month LIBOR, and is called implied repo rate (currently 2.00%). You're also short the delivery option, which is sometimes material.

Assuming that short overview of bond futures was clear, we can move ahead to duration hedging. Ultimately, thinking of your 5-year borrowing commitment as a liability, you want your futures hedge to have a similar mark-to-market response to interest rate movements as your borrowing commitment. This is best summarized by the DV01, which shows how much the future changes in value for a parallel 1 basis point move in interest rates across the yield curve. The CTD 5-year has a futures DV01 of $46.96 (futures DV01 is different from DV01 on the cash bond because you need to divide the cash bond by the Treasury Conversion Factor). This means if interest rates move up by 1 basis point (.01%), the futures price will decline by $46.96. If you borrowed a lump sum $100K for 5 years, at let's say 2%, then you could calculate the opportunity cost of locking in 2% if rates moved down to 1.99%. This is the DV01 of your loan. For example, if you borrowed $100K at 2% with all interest and principal due in 5 years, you'd owe $110,517 in 5 years (I used daily compounding assuming 360 days in a year). If interest rates moved down by 1 basis point, you could have borrowed an extra $50, i.e., $100,050 at 1.99%, and you'd have owed the same $110,517 in 5 years. The purpose of futures in this example is to simulate the mark-to-market behavior of a longer term loan, allowing you to borrow at short term rates and convert them to any tenor you like. So let's say nobody wants to offer you a 5-year loan under 2%. That's no problem. You can borrow at 3-month LIBOR using a variety of instruments--futures, options, leveraged ETFs--and swap those short term rates into a longer term fixed rate by shorting futures with the DV01 of your hypothetical 5-year loan. For example, if you really wanted $100K for 5 years, it turns out the current 5-year future has a DV01 very close to $50 (see above, it's $46.96). All you'd need to do is short a single 5-year future contract and then reevaluate each quarter when you roll.

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Last edited by market timer on Sat Aug 17, 2019 1:16 am, edited 1 time in total.

Caduceus
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Re: That's enough for me in 2019

Post by Caduceus » Fri Aug 16, 2019 2:48 pm

market timer wrote:
Thu Aug 15, 2019 8:38 pm

...

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Thanks, Market Timer, for taking the time to explain this to me! I appreciate it very much. I understand the theory (shorting bond futures is like selling the fixed rate and buying the variable rate). But I don't understand everything about the mechanics of trading it. What is the significance of the column stating "delivery date" under the "Cheapest to Deliver" section? Those all have dates in 2019 - I don't understand what they are referring to. Why do they also present the "On the Run" information and not just the CTD information - does the comparison reveal something important?

The 5 year future in your example has a price of 119 and the DV01 is 46.94. I still don't get what the DV01 is - is it a measure of dollar duration? But if the interest rate goes up by, say, 3%, 3 x 46.94 is more than 119 - how can the futures price be negative? (Or is it just re-set every day, as it is marked to market?)

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market timer
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Re: That's enough for me in 2019

Post by market timer » Fri Aug 16, 2019 8:19 pm

Caduceus wrote:
Fri Aug 16, 2019 2:48 pm
market timer wrote:
Thu Aug 15, 2019 8:38 pm

...

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Thanks, Market Timer, for taking the time to explain this to me! I appreciate it very much. I understand the theory (shorting bond futures is like selling the fixed rate and buying the variable rate). But I don't understand everything about the mechanics of trading it. What is the significance of the column stating "delivery date" under the "Cheapest to Deliver" section? Those all have dates in 2019 - I don't understand what they are referring to. Why do they also present the "On the Run" information and not just the CTD information - does the comparison reveal something important?

The 5 year future in your example has a price of 119 and the DV01 is 46.94. I still don't get what the DV01 is - is it a measure of dollar duration? But if the interest rate goes up by, say, 3%, 3 x 46.94 is more than 119 - how can the futures price be negative? (Or is it just re-set every day, as it is marked to market?)
Delivery date = last day the person short the future has to deliver the bond. In practice, retail investors will close or roll the contracts prior to delivery, so more relevant is the last trading date the broker allows for the future. You are looking at September 2019 futures, which is why the delivery date is in 2019.

The OTR info is provided as a reference. OTR bonds are the most recently issued bonds with the tenor of the future. The info is most relevant to futures market makers who track whether futures prices are deviating materially from OTR bonds. Personally, I assume the futures market is efficient enough for my objectives without comparing to OTR bonds.

DV01 is the change in value due to a single basis point move in rates, i.e., .01%. In your example, a 3% move is 300 basis points, so you'd multiply $46.94 x 300 = $14,082. The future has a notional value of $119K, so about a 12% loss in value. This makes intuitive sense, given the duration is approximately 4 years and you are increasing rates by 3%. However, in reality, the DV01 changes as you change rates--this is called convexity. Therefore, the linear approximation starts to break down for very large moves in rates.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Wed Aug 28, 2019 9:30 am

market timer wrote:
Thu Aug 15, 2019 7:26 am
hdas wrote:
Thu Aug 15, 2019 6:39 am
market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Wed Aug 28, 2019 10:38 am

hdas wrote:
Wed Aug 28, 2019 9:30 am
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
Nice trade. I added slightly an hour ago, a single future, to my short position at 199'28. While I have traded around a little, I've been on the wrong side of the move most of the way from 175 to 200. Precious metals have offset most of the loss, so overall I'm down 2% from my highs. The current level of global yields feels like insanity to me, but perhaps the rules of the game will change and it will all make sense later.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Mon Sep 09, 2019 11:57 am

market timer wrote:
Wed Aug 28, 2019 10:38 am
hdas wrote:
Wed Aug 28, 2019 9:30 am
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
Nice trade. I added slightly an hour ago, a single future, to my short position at 199'28. While I have traded around a little, I've been on the wrong side of the move most of the way from 175 to 200. Precious metals have offset most of the loss, so overall I'm down 2% from my highs. The current level of global yields feels like insanity to me, but perhaps the rules of the game will change and it will all make sense later.
Im out of short Ultras @193-00 this morning. However my retirement portfolio is still 20% long term bonds, the only thing I did there was:

>> Rebalance to equities in August (to keep weights in line after the massive move)
>> Switch from EDV to the more vanilla VGLT (lower duration)

I suspect LTT will be a drag in my portfolio, hopefully the occasional trade in futures + small caps (value) and international compensate somewhat.

Good Luck :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Sep 12, 2019 7:52 pm

hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Fri Nov 08, 2019 12:20 am

market timer wrote:
Thu Sep 12, 2019 7:52 pm
hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

Maybe I’m misreading it but how can you be down 25% in cash? Is it just accumulating losses from closed positions?

Dudley
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Re: That's enough for me in 2019

Post by Dudley » Fri Nov 08, 2019 7:00 pm

dmcmahon wrote:
Fri Nov 08, 2019 12:20 am
market timer wrote:
Thu Sep 12, 2019 7:52 pm
hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

Maybe I’m misreading it but how can you be down 25% in cash? Is it just accumulating losses from closed positions?
I understand that MT went from 60% cash to 35% cash - i.e. change in allocation of 25 percentage points.

CheepSkate
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Re: That's enough for me in 2019

Post by CheepSkate » Mon Nov 11, 2019 11:49 am

@market timer

What do you think about the portfolio I describe here? viewtopic.php?f=10&t=294506

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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Tue Nov 26, 2019 9:29 pm

Any update?

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Re: That's enough for me in 2019

Post by abuss368 » Wed Nov 27, 2019 9:24 pm

I can’t help but wonder if we are pulling gains from the future.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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market timer
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Re: That's enough for me in 2019

Post by market timer » Wed Nov 27, 2019 11:23 pm

dmcmahon wrote:
Tue Nov 26, 2019 9:29 pm
Any update?
I have sold into the recent rally and am now slightly short on equities. YTD up 20%. I'm happy whether the party continues and I can save at a high rate or we go into a downturn and I can invest a reasonable valuations.

New allocation (+allocation change since Sep):
22% precious metals (flat)
13% crude oil (flat)
0% long term bonds (-10%)
-20% US equities (-10%)
0% int'l equities (-30%)
85% cash (+50%)

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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Wed Nov 27, 2019 11:28 pm

market timer wrote:
Wed Nov 27, 2019 11:23 pm
dmcmahon wrote:
Tue Nov 26, 2019 9:29 pm
Any update?
I have sold into the recent rally and am now slightly short on equities. YTD up 20%. I'm happy whether the party continues and I can save at a high rate or we go into a downturn and I can invest a reasonable valuations.

New allocation (+allocation change since Sep):
22% precious metals (flat)
13% crude oil (flat)
0% long term bonds (-10%)
-20% US equities (-10%)
0% int'l equities (-30%)
85% cash (+50%)
Excellent, and better than me. My long-only portfolio has bonds and international equities which have dragged down my performance. I trimmed a bit of the US equities into the rally but really only because it’s become incredibly overweight. Happy Thanksgiving!

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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Wed Nov 27, 2019 11:30 pm

abuss368 wrote:
Wed Nov 27, 2019 9:24 pm
I can’t help but wonder if we are pulling gains from the future.
Any time the P/E is over 15 I think you can safely assume that.

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market timer
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Re: That's enough for me in 2019

Post by market timer » Wed Nov 27, 2019 11:31 pm

CheepSkate wrote:
Mon Nov 11, 2019 11:49 am
@market timer

What do you think about the portfolio I describe here? viewtopic.php?f=10&t=294506
Replied in your thread

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TierArtz
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Re: That's enough for me in 2019

Post by TierArtz » Wed Nov 27, 2019 11:33 pm

Your 20% YTD beats my 19.3% YTD on a 60/40 mix of indexes, a slice of ESPP selling, and stuffing lagging indexes with biweekly bucks - congratulations! You probably had more fun too :P

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Re: That's enough for me in 2019

Post by abuss368 » Wed Nov 27, 2019 11:44 pm

dmcmahon wrote:
Wed Nov 27, 2019 11:30 pm
abuss368 wrote:
Wed Nov 27, 2019 9:24 pm
I can’t help but wonder if we are pulling gains from the future.
Any time the P/E is over 15 I think you can safely assume that.
Not so sure or we would all be shorting the market correct?
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ » Wed Nov 27, 2019 11:47 pm

dmcmahon wrote:
Wed Nov 27, 2019 11:30 pm
abuss368 wrote:
Wed Nov 27, 2019 9:24 pm
I can’t help but wonder if we are pulling gains from the future.
Any time the P/E is over 15 I think you can safely assume that.
You can't safely assume anything.
The J stands for Jay

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HomerJ
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Re: That's enough for me in 2019

Post by HomerJ » Wed Nov 27, 2019 11:53 pm

market timer wrote:
Wed Nov 27, 2019 11:23 pm
dmcmahon wrote:
Tue Nov 26, 2019 9:29 pm
Any update?
I have sold into the recent rally and am now slightly short on equities. YTD up 20%. I'm happy whether the party continues and I can save at a high rate or we go into a downturn and I can invest a reasonable valuations.

New allocation (+allocation change since Sep):
22% precious metals (flat)
13% crude oil (flat)
0% long term bonds (-10%)
-20% US equities (-10%)
0% int'l equities (-30%)
85% cash (+50%)
Long term bonds didn't do much in the past 3 months, but International Equities up 10% (same as U.S.) over the past 3 months, so I guess that's the rally you speak of.

But you were shorting U.S. equities back in Sept, so you lost money on the U.S. rally.

But now you're basically all cash, and shorting U.S. equities even more. Seems strange to be shorting for someone who doesn't need to bet anymore. You actually won't be happy if the party continues. You will lose money if the party continues.

But bold move Cotton. Let's see how it works out for you.
Last edited by HomerJ on Thu Nov 28, 2019 12:35 am, edited 1 time in total.
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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Thu Nov 28, 2019 12:05 am

abuss368 wrote:
Wed Nov 27, 2019 11:44 pm
dmcmahon wrote:
Wed Nov 27, 2019 11:30 pm
abuss368 wrote:
Wed Nov 27, 2019 9:24 pm
I can’t help but wonder if we are pulling gains from the future.
Any time the P/E is over 15 I think you can safely assume that.
Not so sure or we would all be shorting the market correct?
No. Let’s say you have company A and company B, both with exactly the same earnings and all other metrics. Suppose also you have perfect knowledge of the future courtesy of a visit from yourself in a time machine from 2040. Your future self tells you that company A will grow earnings at the market average of, say, 2%, but company B will grow earnings at 20%, after which it will mean-revert to become exactly like company A. Now given this information, if company A and B are trading at exactly the market average multiple of, say, 15, then obviously company B is a better investment. You can compute just how much better it is mathematically, on the assumption that once it mean-reverts it will again have the market average multiple, but on a much bigger earnings number. Now suppose that everyone else in the market also got a visit from their future selves because time machines are the hot new holiday gift of 2040. So you all rush to bid up the price of company B until it’s priced in all those years of future growth.

Now that you have that in mind, replace the time machine with a crystal ball well known to sort-of work but also to sometimes produce spectacular errors. I guess my point is high multiples inherently price in future growth. But lack of certainty keeps you from betting against the crowd.

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Re: That's enough for me in 2019

Post by hdas » Thu Nov 28, 2019 6:06 am

market timer wrote:
Wed Nov 27, 2019 11:23 pm
-20% US equities (-10%)
Care to share price and instrument of this short? Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: That's enough for me in 2019

Post by livesoft » Thu Nov 28, 2019 6:14 am

market timer wrote:
Wed Nov 27, 2019 11:23 pm
dmcmahon wrote:
Tue Nov 26, 2019 9:29 pm
Any update?
I have sold into the recent rally and am now slightly short on equities. YTD up 20%. I'm happy whether the party continues and I can save at a high rate or we go into a downturn and I can invest a reasonable valuations
For reference also up 20% YTD through 11/27:
Vanguard Balanced Index fund which is an index fund of about 60% US equities and 40% US bonds.
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Re: That's enough for me in 2019

Post by market timer » Thu Nov 28, 2019 8:37 am

hdas wrote:
Thu Nov 28, 2019 6:06 am
market timer wrote:
Wed Nov 27, 2019 11:23 pm
-20% US equities (-10%)
Care to share price and instrument of this short? Cheers :greedy
Nasdaq 100 e-mini futures. Avg price 8270 (currently 8441).

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Re: That's enough for me in 2019

Post by abuss368 » Thu Nov 28, 2019 8:59 am

dmcmahon wrote:
Thu Nov 28, 2019 12:05 am
abuss368 wrote:
Wed Nov 27, 2019 11:44 pm
dmcmahon wrote:
Wed Nov 27, 2019 11:30 pm
abuss368 wrote:
Wed Nov 27, 2019 9:24 pm
I can’t help but wonder if we are pulling gains from the future.
Any time the P/E is over 15 I think you can safely assume that.
Not so sure or we would all be shorting the market correct?
No. Let’s say you have company A and company B, both with exactly the same earnings and all other metrics. Suppose also you have perfect knowledge of the future courtesy of a visit from yourself in a time machine from 2040. Your future self tells you that company A will grow earnings at the market average of, say, 2%, but company B will grow earnings at 20%, after which it will mean-revert to become exactly like company A. Now given this information, if company A and B are trading at exactly the market average multiple of, say, 15, then obviously company B is a better investment. You can compute just how much better it is mathematically, on the assumption that once it mean-reverts it will again have the market average multiple, but on a much bigger earnings number. Now suppose that everyone else in the market also got a visit from their future selves because time machines are the hot new holiday gift of 2040. So you all rush to bid up the price of company B until it’s priced in all those years of future growth.

Now that you have that in mind, replace the time machine with a crystal ball well known to sort-of work but also to sometimes produce spectacular errors. I guess my point is high multiples inherently price in future growth. But lack of certainty keeps you from betting against the crowd.
My point was it is not automatic. Scary to think the bull market could go much higher.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: That's enough for me in 2019

Post by jdilla1107 » Thu Nov 28, 2019 9:28 am

It's interesting how the OP almost perfectly mistimed a huge run up in bonds. When this was written, who would have guessed that intermediate bonds would go up ~12% less than a year later?

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Re: That's enough for me in 2019

Post by HomerJ » Sun Dec 01, 2019 9:44 pm

jdilla1107 wrote:
Thu Nov 28, 2019 9:28 am
It's interesting how the OP almost perfectly mistimed a huge run up in bonds.
Although I have a ton of respect for the OP, he mistimes A LOT.

He makes a ton of money, has great discipline on the spending side, and has ZERO reason to market time anything.

He would probably be richer today if he just had a boring old Boglehead portfolio for the past 12 years. A good chunk of his market-timing appears to lose him money, but he keeps doing it.

But there's no reason to try and beat the market. He's won the game. He doesn't have to predict the future correctly. He NEVER had to. It's all an exercise in futility.

I would be totally on board with him going super conservative at this point, because he's won the game, but he's actually betting against the market right now. There's no reason to do that... He doesn't need the extra gains, and he's adding risk where none is warranted.
The J stands for Jay

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Re: That's enough for me in 2019

Post by HEDGEFUNDIE » Mon Dec 02, 2019 1:58 am

market timer wrote:
Thu Nov 28, 2019 8:37 am
hdas wrote:
Thu Nov 28, 2019 6:06 am
market timer wrote:
Wed Nov 27, 2019 11:23 pm
-20% US equities (-10%)
Care to share price and instrument of this short? Cheers :greedy
Nasdaq 100 e-mini futures. Avg price 8270 (currently 8441).
Why Nasdaq 100 and not S&P?

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Re: That's enough for me in 2019

Post by Dudley » Mon Dec 02, 2019 10:16 am

market timer wrote:
Wed Nov 27, 2019 11:23 pm
New allocation (+allocation change since Sep):
22% precious metals (flat)
13% crude oil (flat)
0% long term bonds (-10%)
-20% US equities (-10%)
0% int'l equities (-30%)
85% cash (+50%)
Curious how you hold your "cash". Is precious metal just gold and at what avg price you got that position ?

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Re: That's enough for me in 2019

Post by market timer » Mon Dec 02, 2019 11:09 am

HEDGEFUNDIE wrote:
Mon Dec 02, 2019 1:58 am
market timer wrote:
Thu Nov 28, 2019 8:37 am
hdas wrote:
Thu Nov 28, 2019 6:06 am
market timer wrote:
Wed Nov 27, 2019 11:23 pm
-20% US equities (-10%)
Care to share price and instrument of this short? Cheers :greedy
Nasdaq 100 e-mini futures. Avg price 8270 (currently 8441).
Why Nasdaq 100 and not S&P?
My labor income is more highly correlated with Nasdaq. Also, growth is arguably where sentiment has run a bit ahead of itself.

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Re: That's enough for me in 2019

Post by market timer » Mon Dec 02, 2019 11:17 am

Dudley wrote:
Mon Dec 02, 2019 10:16 am
market timer wrote:
Wed Nov 27, 2019 11:23 pm
New allocation (+allocation change since Sep):
22% precious metals (flat)
13% crude oil (flat)
0% long term bonds (-10%)
-20% US equities (-10%)
0% int'l equities (-30%)
85% cash (+50%)
Curious how you hold your "cash". Is precious metal just gold and at what avg price you got that position ?
I had a fairly complicated cash position described earlier, buying intermediate corporates (VCIT) and hedging duration with T-notes. Now I just own T-bills (BIL).

Metals include gold and silver purchased last year in the low-1200s (gold) and mid/high-14s (silver), both up ~20% from purchase.

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Re: That's enough for me in 2019

Post by james22 » Mon Dec 02, 2019 11:59 am

market timer wrote:
Mon Dec 02, 2019 11:17 am
22% precious metals
13% crude oil
What do you think of PME (GDX/GDXJ)? EE (VGELX)? CCF (VCMDX: 30% Energy, 18% Precious Metals)?

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Re: That's enough for me in 2019

Post by LiterallyIronic » Mon Dec 02, 2019 12:10 pm

jdilla1107 wrote:
Thu Nov 28, 2019 9:28 am
It's interesting how the OP almost perfectly mistimed a huge run up in bonds. When this was written, who would have guessed that intermediate bonds would go up ~12% less than a year later?
Don't forget the ~8% increase that stocks had over the last seven months:
LiterallyIronic wrote:
Sat Mar 16, 2019 3:08 pm
market timer wrote:
Sat Mar 16, 2019 7:41 am
This is my top-calling post. Feel free to bump as we make new highs.

$1.5M x 2.5% interest / 365 days. Wow, I could get paid over $100/day just for sitting there and waiting. So that's what I'm doing. I got out of risk assets and went to cash yesterday.
Frankly, if I had $1.5 million, I'd be out of the stock market, too. Not because "this is the top and I'll jump back in later", but because I'd have "won the game" and I'd have no reason to keep money on the table. However, jumping out because "this is the top" and I'll get back in later is a losing proposition.

For the record, the DOW is currently 25,848.87. OP is claiming that it won't be higher than that at any point between today and December 31, 2019.

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Re: That's enough for me in 2019

Post by market timer » Tue Dec 03, 2019 9:48 am

james22 wrote:
Mon Dec 02, 2019 11:59 am
market timer wrote:
Mon Dec 02, 2019 11:17 am
22% precious metals
13% crude oil
What do you think of PME (GDX/GDXJ)? EE (VGELX)? CCF (VCMDX: 30% Energy, 18% Precious Metals)?
I own commodities to preserve long run purchasing power, especially for bad future scenarios. The poorer you are, the higher the share of your consumption that is tied to raw materials (fuel, food you cook at home, etc.). So commodities are nice building blocks to ensure survival--kind of like the bottom of Maslow's Hierarchy of Investments (with WeWork stock options at the top). Precious metals, in particular, hedge against scenarios where it is hard to find a job, so I find them attractive while I'm still working and not sure which currency I'll use when I retire.

Mainly for transparency, I prefer to own the commodities themselves rather than surrogates like those you listed above. However, as a value play (some might say a value trap), I kind of like the energy index right now, and am short some puts on oil majors (likely to add to this soon). Have never been a fan of CCFs, as I've always suspected the market impact costs could harm returns if the fund is forced to roll contracts regularly, like every month. It's the same reason I don't like holding leveraged ETFs for long periods of time. If you have >$100K to put into commodities, in my view, it's better just to manage futures positions on your own.

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Re: That's enough for me in 2019

Post by james22 » Thu Dec 05, 2019 7:39 am

Thanks, mt.

How about real estate/REITs?

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Re: That's enough for me in 2019

Post by market timer » Thu Dec 05, 2019 8:04 am

james22 wrote:
Thu Dec 05, 2019 7:39 am
Thanks, mt.

How about real estate/REITs?
Generally a big fan of both for people with long horizons. Rents/dividends tend to rise with inflation, so you're basically buying an inflation-adjusted income stream with a bit of credit risk (hence the higher yield than TIPS). I backed up the truck on health care REITs last spring and have since sold out of the positions. Long term yields are so low right now that most REITs are expensive. Would be happy to allocate 20% to REITs at higher yields. Actually thinking of starting to acquire some Ventas (VTR) at 58.

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Re: That's enough for me in 2019

Post by SovereignInvestor » Thu Dec 05, 2019 8:37 am

Market Timer, really appreciate the information.

1) Just trying to clarify the futures borrowing.

So if you're short a 5 year note, it'd basically equivalent to borrowing at 5Yr T rate and then you're talking about hedging off the mark to market changes if T note yields change? Just trying to see if there is way to literally borrow at near 1.5% T note rate for 5 years via shOrting and then get a pile of cash that I can "invest", until 4 years or so when I can liquidate the investment and return the bond by covering etc?

2)
To others, as an aside regarding PE. Be careful waiting for 15. The 10Y note is 1.7%, that is the Gravity holding down stocks and it's low gravity.

The historical risk premium of stocks to 10Y note is 5% or so. At current market valuations for SPX the buyback + dividend yield is around 4.5% (assume 0.5% annual shsre dilution) and add in EPS growing with nominal GDP of 4.0% (2.5% real reflecting blend of US and world, and 2% assumed inflation, haircut 0.5% to be safe). That would lead to 8.5% long run returns assuming no valuation changes and earnings growth with GDP in aggregate (but faster on per share basis due to buybacks which was accounted for).

8.5% is a fat risk premium to 1.7% 10Y note wider than past averages. Even if valuation contract 20% from here or 2% annually for next decade that would mean still strong returns, as buyback + dividend yield would rise to near 5.5%, plus the 4.0% nominal earnings growth to track GDP, minus 2.0% annual loss from valuation contraction still is 7.5% or near 6% risk premium to.10Y note.


IMO stock valuations aren't high enough to reflect the current rates.

Recommend rule of 20, 20 minus 10Y note is suggested forward PE. S&P traded in lockstep to this from late 1970s to 1995, then by 2000 it went to 25 forward PE with 10 at 6% when PE should have been 14, hence bubble.

By 2003-6 after first 50% stock crash it was fair value in the 15-16 range with 10Y around 4-5%.

Then by 2011 it was super cheap after second 50% stock crash with forward PE at 11 ish while 10Y was barely 2% or indicated was 18 PE.

By early 2018 forward PE was 18 when 10Y was 3% or indicated of 17 and market was flat for 18 months and had 20% drop to correct minor over valuation


In late 2018 bottom forward PE touched 13.5 against 2.5% 10Y or indicated 17.5, so stocks very cheap.

Now forward PE is 17.5, among highest since 2001 except for early 2018, but 10Y is 1.7%, so indicated PE is 18.3, meaning SPX still slightly below indication.

Just my 0.02, yes stocks are higher valuation than historical but bonds have so much lower yields thsn historically, stocks are relative cheaper to bonds than historically and the latter relatI've comparison is more relevant than former absolute comparison.

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Re: That's enough for me in 2019

Post by market timer » Thu Dec 05, 2019 8:49 am

SovereignInvestor wrote:
Thu Dec 05, 2019 8:37 am
Market Timer, really appreciate the information.

1) Just trying to clarify the futures borrowing.

So if you're short a 5 year note, it'd basically equivalent to borrowing at 5Yr T rate and then you're talking about hedging off the mark to market changes if T note yields change? Just trying to see if there is way to literally borrow at near 1.5% T note rate for 5 years via shOrting and then get a pile of cash that I can "invest", until 4 years or so when I can liquidate the investment and return the bond by covering etc?
If the goal is to mimic issuing a 5-year bond (as if you were a corporation issuing debt), then you'd need to adjust for the declining maturity of the hypothetical bond. You could start off shorting 5-year futures, then shift to a mix of 5-year and 2-year futures, then entirely 2-year futures. However, it is unclear why you would do this. From your explanation in point 2, it sounds like you would like to bet on a convergence between inverse PE and bond yields, not borrow for a specific amount of time.

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Re: That's enough for me in 2019

Post by SovereignInvestor » Thu Dec 05, 2019 1:27 pm

market timer wrote:
Thu Dec 05, 2019 8:49 am
SovereignInvestor wrote:
Thu Dec 05, 2019 8:37 am
Market Timer, really appreciate the information.

1) Just trying to clarify the futures borrowing.

So if you're short a 5 year note, it'd basically equivalent to borrowing at 5Yr T rate and then you're talking about hedging off the mark to market changes if T note yields change? Just trying to see if there is way to literally borrow at near 1.5% T note rate for 5 years via shOrting and then get a pile of cash that I can "invest", until 4 years or so when I can liquidate the investment and return the bond by covering etc?
If the goal is to mimic issuing a 5-year bond (as if you were a corporation issuing debt), then you'd need to adjust for the declining maturity of the hypothetical bond. You could start off shorting 5-year futures, then shift to a mix of 5-year and 2-year futures, then entirely 2-year futures. However, it is unclear why you would do this. From your explanation in point 2, it sounds like you would like to bet on a convergence between inverse PE and bond yields, not borrow for a specific amount of time.
Was looking to see if there's a way to borrow at basically Treasury rates. The opinion about valuation of market is totally separate and I should have been more clear.

Say I have 1M of equity in futures account invested in mostly stocks and I was wondering if there is way to short 100K say of 5 year treasurys and withdraw proceeds and then pay it towards mortgage and let equities be buffer for the T note short and then take the proceeds and pay down my mortgage say it was 4.0%, then one can pocket the spread. In 4 years when one refinances he can take money out of house to cover the T bond short.

Was wondering if there was way to basically issue 5 year note at Treasury rate and borrow and then lend higher.


Otherwise the closest way I know of is selling deep ITM calls or Puts on an index taking cash proceeds put and lending them since it is implied borrowing at ris free rate...issue here is lonest option duration I see is 2 years for equities and there's lot of slippage.

Wondering if there is way to.borrow at risk free rate via futures because then all interest implied is tax deductI Le as a loss...not often case for mortgage.

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Re: That's enough for me in 2019

Post by market timer » Thu Dec 05, 2019 8:58 pm

SovereignInvestor wrote:
Thu Dec 05, 2019 1:27 pm
Was looking to see if there's a way to borrow at basically Treasury rates. The opinion about valuation of market is totally separate and I should have been more clear.

Say I have 1M of equity in futures account invested in mostly stocks and I was wondering if there is way to short 100K say of 5 year treasurys and withdraw proceeds and then pay it towards mortgage and let equities be buffer for the T note short and then take the proceeds and pay down my mortgage say it was 4.0%, then one can pocket the spread. In 4 years when one refinances he can take money out of house to cover the T bond short.

Was wondering if there was way to basically issue 5 year note at Treasury rate and borrow and then lend higher.
Yes, you can build it as follows:
1. Sell $150K of stocks (ideally something like SPY).
2. Buy 1 S&P e-mini future (notional value ~$150K).
3. Withdraw $150K of cash from your account.

You have just created a $150K loan with a floating interest rate near 3-month T-bills.

The problem is that short term interest rates could rise above your 4% hurdle, so you would like to hedge against that possibility and lock in a 2.5% spread.

Now do this:
4. Sell 1 5-year future (notional value $119K).

This hedges $119K of your $150K exposure to short term rates. One option is to say, "Close enough," and take the interest rate risk on $31K. Alternatively, you can sell $31K of intermediate bonds if you have them. Another option is to sell a 2-year future in addition to the 5-year future, the duration of the combination should be roughly $150K.

At this stage, you are hedged against changes in interest rates. However, your futures will need to be rolled each quarter. Also, you need to maintain two things: (1) size of loan, (2) duration of hedge to match duration of loan. The size of the loan will fluctuate with the S&P. Consider an extreme example where stocks drop by 50%. Suddenly your loan is only $75K. You would need to sell another $75K of stocks and buy another S&P e-mini future to get back to a $150K loan. The duration of the hedge will decline as you approach the date you plan to end the trade. Initially, you hedge for 5 years (using 5-year futures), eventually you'll want to hedge for only 2 years (using 2-year futures). In the final few months, you will not need to hedge any interest rate risk.

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Re: That's enough for me in 2019

Post by SovereignInvestor » Thu Dec 05, 2019 9:13 pm

market timer wrote:
Thu Dec 05, 2019 8:58 pm
SovereignInvestor wrote:
Thu Dec 05, 2019 1:27 pm
Was looking to see if there's a way to borrow at basically Treasury rates. The opinion about valuation of market is totally separate and I should have been more clear.

Say I have 1M of equity in futures account invested in mostly stocks and I was wondering if there is way to short 100K say of 5 year treasurys and withdraw proceeds and then pay it towards mortgage and let equities be buffer for the T note short and then take the proceeds and pay down my mortgage say it was 4.0%, then one can pocket the spread. In 4 years when one refinances he can take money out of house to cover the T bond short.

Was wondering if there was way to basically issue 5 year note at Treasury rate and borrow and then lend higher.
Yes, you can build it as follows:
1. Sell $150K of stocks (ideally something like SPY).
2. Buy 1 S&P e-mini future (notional value ~$150K).
3. Withdraw $150K of cash from your account.

You have just created a $150K loan with a floating interest rate near 3-month T-bills.

The problem is that short term interest rates could rise above your 4% hurdle, so you would like to hedge against that possibility and lock in a 2.5% spread.

Now do this:
4. Sell 1 5-year future (notional value $119K).

This hedges $119K of your $150K exposure to short term rates. One option is to say, "Close enough," and take the interest rate risk on $31K. Alternatively, you can sell $31K of intermediate bonds if you have them. Another option is to sell a 2-year future in addition to the 5-year future, the duration of the combination should be roughly $150K.

At this stage, you are hedged against changes in interest rates. However, your futures will need to be rolled each quarter. Also, you need to maintain two things: (1) size of loan, (2) duration of hedge to match duration of loan. The size of the loan will fluctuate with the S&P. Consider an extreme example where stocks drop by 50%. Suddenly your loan is only $75K. You would need to sell another $75K of stocks and buy another S&P e-mini future to get back to a $150K loan. The duration of the hedge will decline as you approach the date you plan to end the trade. Initially, you hedge for 5 years (using 5-year futures), eventually you'll want to hedge for only 2 years (using 2-year futures). In the final few months, you will not need to hedge any interest rate risk.
This is very helpful. I am trying to follow an appreciate your patience.

I honestly am not concerned with the interest rate risk so I would just stick with the first part about replacing stock with E mini futures. The only issue there is my stock I plan to never sell and defer taxes but with futures it forces taxation of gains.

So no matter what one has to rollover E mini S&P futures quarterly?

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