Weighing The Week Ahead: Does The Reddit Rebellion Threaten Investor Portfolios?

  • Total global stock and bond markets now exceed $200 trillion.
  • LTCM was operating with 25-1 leverage. They also had a side derivative book with a notional value of about $1.25 trillion.
  • Many other funds were imitating the LTCM strategies, so they were part of a crowded trade.
  • The rest of the Street understood the problem. There was no “friendly” help in exiting positions.
  • Because of these factors, the banks were on the hook for amounts much larger than might seem obvious. This is why they were willing to join in the bailout.

Fool’s Gold

This advice to “investors” leaves me in what Mrs. OldProf describes as a rare state: Speechless.

Following the more than 330% jump in shares this week, CNBC’s Jim Cramer said investors should take profits.

“Take the home run. Don’t go for the grand slam. Take the home run. You’ve already won. You’ve won the game. You’re done,” Cramer said Friday on “Squawk on the Street.”

Quant Corner

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

Indicators

For a description of these sources, check here.

Comment

Technical measures have turned neutral in both short and long-term time frames.

My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. My own earnings analysis suggests that the recession is not reflected in current, bottoms-up estimates. As always, I expect good times – but not yet. This is going to take a lot longer than people expect.

With the addition of important data, it is time for a review of Jill Mislinski’s Big Four Indicators.

Final Thought for Investors

The Reddit Revolution is an interesting story. Those following financial markets rarely get to enjoy drama. The dangers to investors include the following:

  1. The temptation to join in. Most investors make an occasional speculation or short-term trade. In this case you might well lose your entire bet. And I say that advisedly. Act like you are walking into a casino.
  2. Worry about the increase in volatility. It does not carry a warning signal about the market. Option volatility continues to exceed actual volatility. It is a market with both buyers and sellers.

  1. Overconfidence. If last week’s losses were painful, if they felt serious or caused special worry, you should review your positions ASAP. You have too much risk.

The real market risks relate to the economy. My worry is that the gap to the point of herd immunity will not be filled by more help from Washington.

But for now,

Do not get caught up in the drama. Make sure your risk level fits your personal needs.

My Portfolios

I continue to maintain higher than normal cash levels as a cushion against the continuing recession, but I have replaced a few holdings. New positions are selected based on post-recession expectations as well as current prospects.

I am migrating some clients into a bond substitute program to generate reasonable low volatility returns using a highly selective REIT program. I continue to regard bonds, especially bond funds, as riskier than stocks.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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