Buying The Fear And Hedging With TVIX

By | August 22, 2015

Scalper1 News

Summary Is there reason to fear? Global markets are tumultuous with good reason. The best way to hedge and profit. Buy the fear; sell the greed. A common piece of advice, this is easier to accomplish in theory than practice. It has been a long bull market, one extended unnaturally in the zero interest rate policy environment since the housing crash. The result is elevated PE levels and absurd valuations for momentum-building story stocks. The rounds of quantitative easing under the Fed’s loose monetary policy have left the bond markets historically bloated, a fact substantiated by such notable personae as Bill Gross and Robert Shiller. In spite of these things and because of these things, historical hedges such as gold have been sold-off at an alarming rate. Pessimist blogger extraordinaire Zerohedge reported that as of July 24, 2015 hedge funds were net short gold futures for the first time ever. Hedge funds were selling short the classic hedge. The stock markets shrugged off the alarming fall of crude starting last fall. They shrugged off the 20% rise in the USD and the implications that had on corporate earnings. Earnings “adjusted for currency” became a nice comforting euphemism to bolster revenues hugely supplemented not by improvements in underlying businesses but in widespread financial manipulation via buybacks. Corporations have clearly lacked emphasis on organically growing revenues, opting to organically grow stock prices, touting it as “returning value to shareholders.” The vast majority of shareholders aren’t the ones getting paid in stock options… Russia fell on crude prices, their ruble falling almost 50% in the past year. Then the Chinese stock market started plunging. The Chinese government though, ever resourceful, opted to ban short selling as well as freeze trading on a good many companies in order to halt the precipitous decline ($2 trillion in value lost precipitous). Then in the past month China decided to let their currency, the renminbi decline in value. We’ll just do it once, they said. It will show that our market is becoming more free, they said. The slowdown in manufacturing growth has stymied the engine of global growth, impacting commodities and the countries that relied on their exports of those commodities disastrously. During this tumultuous time the American stock exchanges have remained remarkably consistent. I’ve been seeing a lot of days I thought would end in the red, but luckily for us all someone has been buying the dips and turning the indices green just enough. Today the buying finally lost its luster. The greed palpably began to turn to fear, sending the volatility index (VIX) shooting up over 25% on the day for August 20 . The Dow and S&P 500 both dropped over 2% for the day, and the assuredly-not-irrationally exuberant Nasdaq plummeted over 2.8%. Meanwhile the SPDR Gold Trust ETF (NYSEARCA: GLD ) spiked just shy of 1.75% for the day. Must be pretty worried about rate hikes, huh? That has been the primary focus of investors, as reported by mainstream journalists. How the Fed raising interest rates .25% from effectively zero will cause us all to lose our heads and immediately sell off everything. While markets have certainly responded to FOMC minutes and economic data, these reactions have been little more than knee-jerk ripples for quite some time. I think it is quite apparent that the powers-that-be in the investment world are much more worried about other things: like if our economy isn’t heading for another recession, when Greece will be allowed to default and focus on fixing their economy instead of haggling for more loans, how much China is slowing down, and the absurd amounts of sovereign debt in some pretty important developed countries. Remember when the U.S. sovereign credit rating wasn’t lower than Australia’s? Since S&P downgraded the U.S. in 2011 to AA+ we have added $4 trillion in debt. What’s a trillion a year anyway. What to do The first thing that I had to tell myself: Stop trying to predict the oil bottom. We are awash in an oil supply glut and Iran is gleefully coming to hawk their crude wares to the world. Demand hasn’t caught up to supply, and stock prices in oil companies haven’t caught up to their protracted loss of revenue. Slowdown of Chinese demand made that knife accelerate its fall, and I’m getting far away. it’s simple: when demand starts comfortably outpacing supply it would be wise to evaluate opportunities in the integrated oil market. So what can we do now? If you believe that volatile times are ahead, as I do, you can capitalize on that risk with a hedge that trades in it, the VIX. There are a few ETNs, or exchange-traded notes, whose values track the futures contracts of the volatility index. When the market goes down and the buyers’ market becomes the sellers’, the VIX spikes, and ETNs that track it spike with it. For those who are supremely confident that the economic situation is deteriorating, and fear is coming, there is a VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ), up over 20.5% in market and after-market hours on August 20. If you do not want to expose yourself to leverage (I respect that), you can look into the iPath S&P 500 VIX Short-Term Futures ETN ( VXX), the unleveraged counterpart that tracks the VIX. This simple way to hedge against the market moving against you can be a powerful part of your portfolio. Rather than the small movements of a fund that sells short the Dow or the S&P, you have a hedge that encapsulates fully a diversified buy-the-fear strategy. (click to enlarge) TVIX wasn’t traded on exchanges during the Great Recession, as you can see it only tracks to 2011. That spike in 2011, when the U.S. was bumped down from the highest credit rating and given a negative outlook, could easily be replicated in October. National debt is already over the debt ceiling, as the U.S. treasury website attests, and it is projected to rise through at least 2025. Buckle, up, it’s going to be a volatile fall. If you are more traditional in your tastes, I would suggest the thousands-of-years old gold hedge. China has been buying it en masse, and they seem to be the only ones really controlling the markets, so a follow-the-leader doesn’t seem like too bad of an idea (I jest…sort of). In all seriousness, the rapid devaluation of gold has presented a fantastic buying opportunity. This is a commodity that has held value far beyond the lifespans of empires. For those of us that for some reason can’t have physical gold, a fund that holds gold bars is a suitable substitute, barring a complete shutdown of our financial system. Stan Drunkenmiller, of betting against the pound fame, recently bought $300 million worth of SPDR’s gold ETF that I mentioned earlier . Betting with a billionaire is a good strategy; betting with a billionaire hedging against oncoming catastrophe with an undervalued asset is a fantastic strategy. For long-term peace of mind, buy gold. For short-term profit, buy fear itself. Disclosure: I am/we are long TVIX, GLD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News

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