Kass calls a top, checklist
Recently on thestreet.com Doug Kass, who made an eternal name for himself by calling a bottom in march in a post titled "bottoms up, mr. market", and who made a call, back in march with the S&P in the 700s, that the market would ramp to the 800's quickly and eventually reach 1050. I guess if he plays it right he could look pretty smart here... pretty smart indeed! However since the S&P hit 950 in late July he's turned very bearish and been wrong quite a bit. By nature, I think, after reading his stuff for a few months, Kass feels a need to go against the prevailing sentiment. That works often, and is probably quite a bit better than going with the prevailing sentiment, but ... Fair value and not opposite-the-current-sentiment is probably the best thing to do.
As for me I've sat down and taken a long hard look at each of my major holdings, and done some hedging ranging from none to significant. For example, I hold casino stocks BYD, MGM, WYNN, and LVS with practically all of the holding bought at prices far, far below today mostly in late february/early march. Alot of my casino holdings are in the form of calls. I've executed all of my WYNN calls and then hedged them significantly. Basically, I can make about 20% from todays prices on WYNN and lose little. (I use options to hedge). I've hedged all of my LVS by selling covered calls to raise about 20% in premium of todays pps. This leaves me with considerable upside in LVS, and reduced downside. Its a semi-bullish hedge. Same for BYD. MGM is unhedged for the most part as i think MGM is one of the most intriguing buys on the markettoday and may ultimately wind up worth $20.
I've hedged my bank shares as well. BAC, USB, WFC, and GRNB are my bank shares. GRNB isn't hedgeable to any significant extent, USB and WFC I've collared (google options collar to see) and I've sold covered calls on all my BAC. At prices well above today, mind, but also at prices that I think represent roughly the upper range of fair value for BAC.
I've hedged my ASH by selling covered calls that've raised about 15% on current prices for roughly 50% upside. My DOW is largely unhedged, but I think, frankly, that DOW is worth quite a bit more than curretn PPS and has migrated back to its former fairly stable, blue-chip status. So i'm ok with letting DOW ride.
My largest holdings are insurance companies. My HIG is very hedged, my XL is semi-hedged, my GNW is semi-hedged, and my CNO is not hedged at this time.
BDCs (business development companies) are one of my largest stakes. And essentially completely unhedged. This isn't because I think they will run forever, but rather because they are in essence unhedgeable. If my best friend walkedinto the room right now and said "name one stock to put all my money in" I'd say ARCC. Sameif my parents asked, probably same if someone held a gun to my head and made me pick just one. That doesn't mean I think its the stock that willgive the best return in the next 2 years...
I think that stock is RJET. RJET is one of my top 5 holdings and i'm only up 25% or so on it, and i'm completely unhedged. RJET, in my view, and I can often be very wrong in life, is going to 20+
BZ is one of my top 10 holdings, and it isn't hedgeable, and I can't unload my shares (which are alot I fear) in 2 days w/o driving the price down, but oh well. I think BZ has good management, is well levered to an improving economy or an inventory re-stocking bump, and will benefit from its rleatively rapid paydown of debt. RCL is hedged.
USG is basically unhedged. I think USG will go far higher in the course of time. I'm willing to sit and wait. And see it go to 10 again, in which case I will again be a buyer. Best company in an eternal industry.
Etc, etc, etc, . I now have considerable protection should the market move down. I am still definitely net long, but the pain of a move lower is considerably mitigated, and I will win in a flat market from time decay on short calls.
I am comfortable with that. If the market is flat for the next year time decay will bring me above my goal of 2-3x my money in this crash/rebound, if the market goes up my hedges stand to limit me to 4-5x my money (i'll take it, trust me), and if the market dips I stand to suffer a whole lot less than I would otherwise.
Only time will tell if these moves are intelligent or folly,... but I'm comfortable with them as I type here tonight.
My next blog will be about a potential benefit of debt held by a company that you are considering buying stock in. Yes, I said it, and I expect some flack, debt can be good. :)