For a non-brazilian investor, its tricky because you take on FX risk. And the real might be the variable the changes and makes the economy more sustainable (specially given that politicians are not doing their job). For me its ok because most of my costs are in BRL, so the FX risk is not a problem
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Global Macro Trading Journal
- Thread starter Daal
- Start date
One better example to illustrate this, imagine if in Zimbabwe (back on the hyperinflation days) the stock market didn't rise. Companies would be able to buy back all their stock with their cashflows, dividend yields would be gigantic, buyouts would be rampant. In an inflationary economy stocks tend to rise to reflect that, when they don't its usually a short-term anomaly. I don't think the brazilian situation is as bad as to the point to lead to hyperinflation but at some point the negative nominal returns have to reverse.One thing is for sure, what is going on in Brazilian stocks right now is very unsustainable. Inflation is high, this pushes NGDP up. NGDP is going up even though the country is in recession. Despite all of this the index is going down. That after having gone down for several years straight. The only way this can happen is if the market is getting cheaper. If this were to continue forever, at some point, companies would be able to announce dividends and overnight have 20-30% dividend yields or something ridiculous like that. Right now the avg price to cashflow is around 5x (3x for EWZS, the small cap ETF). 10x PE. Some of that can change as companies struggle but recessions don't last forever.So its certain that this will reverse.
A lot of the time people don't want to buy because its going down, they keep waiting for a signal to get in. Buyers pullback and sellers panic. But when the buyers get the signal that they want, they pile in like nuts because they know its very cheap and the only reason they didn't buy was because they didn't want to fight the momentum
I happen to think it won't be just nominal returns either, at some point things will switch from a recession level of valuation to a more normal level of valuation and the whole time, companies will be raising their prices. stocks tend to be inflation hedges too
One better example to illustrate this, imagine if in Zimbabwe (back on the hyperinflation days) the stock market didn't rise. Companies would be able to buy back all their stock with their cashflows, dividend yields would be gigantic, buyouts would be rampant. In an inflationary economy stocks tend to rise to reflect that, when they don't its usually a short-term anomaly. I don't think the brazilian situation is as bad as to the point to lead to hyperinflation but at some point the negative nominal returns have to reverse.
I happen to think it won't be just nominal returns either, at some point things will switch from a recession level of valuation to a more normal level of valuation and the whole time, companies will be raising their prices. stocks tend to be inflation hedges too
Yes very true about stocks being good inflation hedges - which again is what makes investing in (a basket of diversified) consumer staples stocks so good. People are unlikely to reduce their consumption of toilet paper or toothpaste if prices are raised to reflect CPI inflation.
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yes, I believe Assness had a paper where the explained the success of Buffett. Its essentially a leveraged play on low beta stocks (with consumer staples being a major component). he gets the leverage from the insurance companiesYes very true about stocks being good inflation hedges - which again is what makes investing in (a basket of diversified) consumer staples stocks so good. People are unlikely to reduce their consumption of toilet paper or toothpaste if prices are raised to reflect CPI inflation.
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Because his insurance companies make an underwriting profit, he effectively gets paid to lever up and buy safe stocks. Even guys like Ackman have to pay 5.5% a year to lever up on stuff. We can borrow at less than 2% from IB but then, we are subject to margin calls. 0% or small payments without margin calls is just incredible cheap capital
Are we witnessing a huge short squeeze in the bond market? if you are short bond futures, eurodollars or Fed funds futures and the Fed goes negative, your losses will be huge so that seems to be driving the shorts to cover and cover now.
I don't think thats going to happen so I'm using this rally to sell some bonds
I don't think thats going to happen so I'm using this rally to sell some bonds
Thats a mistake I made in the new year ramp. I should have sold ES/SPY calls for strikes above 2120. That and more duration in my bonds, less 5ys and more 10ys.In the future I plan to sell SPY/ES calls to hedge a bit my longs and generate some income. I find hard to believe that a rally to 2000 would be sustainable, so perhaps its an opportunity to sell OTM calls
The more I study options the more I see them as a valuable tool for an investor. For example, while a lot of people recommend selling puts in order to get in a stock at a cheap price that you like (as opposed to the current stock price, which you might not like as much) I don't see people recommend the inverse of this strategy, that is to sell calls at a price where you no longer would like to own a stock. Either because it reached its intrinsic value or because you believe the balance of short-term risks and rewards favor a prudent sell or at least a size down. This way you can get paid to wait for the stock to reach its IV or the point where you think its prudent to lighten up
The idea of selling SPY/ES calls as markets go higher is a variation of that. I will essentially give away some of the upside of my long positions if the market keeps running. But I believe that will be prudent given that the Fed is likely to come back to the hawkish side if the S&P500 rallies too much (they will remove things from the statement, etc, people might also realize the S&P could be stuck in this range where CBs tank it down, save them at the lows, then tank them down again)
I was wrong the Fed was going to save the day, turns out it was the BOJ but I think the dynamic is likely to continue this year
The idea of selling SPY/ES calls as markets go higher is a variation of that. I will essentially give away some of the upside of my long positions if the market keeps running. But I believe that will be prudent given that the Fed is likely to come back to the hawkish side if the S&P500 rallies too much (they will remove things from the statement, etc, people might also realize the S&P could be stuck in this range where CBs tank it down, save them at the lows, then tank them down again)
I was wrong the Fed was going to save the day, turns out it was the BOJ but I think the dynamic is likely to continue this year