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Upside vs Downside

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June 08, 2009 – Comments (10)

Karl Dinninger at Market Ticker said something very well,

 If you have assets in the stock market, and have thus enjoyed the rally off SPX 666, either sell or hedge that exposure RIGHT  NOW.  The upside risk is what - 10%?  What's the downside risk?  50% or more.  You can hedge effectively with PUTs which have gotten much cheaper as the VIX has fallen, or simply sell out and go to cash.  In my opinion you're insane to play for another 10% gain when you may suffer a 50% loss, but that's my view.  Just don't say you weren't warned if you do nothing and the collapse occurs!

 Certainly that was my sentiment when I decided to leave the market in the fall of 2007.  The upside seemed small compared to the downside risk.

Currently I do not see there being more upside potential then downside risk.  There is still too much bad news that I don't think has worked through the market yet.  The market has rallied in response to some seriously bad news.

If you read Market Ticker you ought to be preparing for a financial crisis, although he does not quite say it like that...

10 Comments – Post Your Own

#1) On June 08, 2009 at 11:55 PM, LongTermBull (94.18) wrote:

Well those are some serious assumptions to make.  What if the upside risk is 50% and the downside risk is 10%?  I am not saying he will be wrong, he could very well be right, but I think people need to look at the other side as well.  If someone could predict what the market was going to do they would be incredibly wealthy and wouldn't be writing about it.  I am sure people would hate to take money out of the market and then watch it go up 50% just as much as they would hate to leave money in and watch it go down 50%.

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#2) On June 09, 2009 at 12:05 AM, dwot (40.33) wrote:

This one is more eloqently written, but it is one of a few I have read lately with concern about a financial crisis.

Far-Reaching Consequences

Never underestimate the impact of surging rates — especially with near double-digit official unemployment and the worst debt crisis since the Great Depression.

Rising rates in this environment will be pure poison for:

- The nation’s insurance companies loaded with long-term corporate and government bonds.

- The nation’s banks counting on low interest rates to raise funds for close to nothing.

- Utilities that must continually borrow huge amounts of long-term money to finance their massive investments in power plants and facilities.

- Home prices that can only fall when available credit in the nation is hogged by Uncle Sam’s massive borrowing and when mortgage rates rise.

- You! Stocks, long-term bonds, and virtually all types of real estate properties are extremely vulnerable to surging interest rates.

 

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#3) On June 09, 2009 at 12:15 AM, portefeuille (99.66) wrote:

#1 thank you. you saved me from writing this. this belief in "knowing where something should be" is very present.

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#4) On June 09, 2009 at 12:15 AM, awallejr (79.49) wrote:

Where does he get a negative 50% risk?  That would be putting the market at worse lows than March.  And while I know some would love that to happen, you would need  worse GDP than last 2 Quarters. 

And as for "surging interest rates" where are they surging?  Depsite the recent runup, you are still at historical lows.  Even 10-year T Bills aren't at anything astronomical.  Lack of demand is what is dropping the T bill values as well as people willing to take on more risk now.

The biggest concern, in my opinion, is the unemployment rate.  Hopefully it will follow general recession patterns in the end.  Time will tell for that.

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#5) On June 09, 2009 at 12:24 AM, Harold71 (22.06) wrote:

>If someone could predict what the market was going to do they would be incredibly wealthy and wouldn't be writing about it. 

Or they could be horribly bad at trading, which makes your premise quite worthless.  You put money in SRS/SKF or even SH at the wrong time, and you're toast, even if the stocks that these funds track decline dramatically.

The extreme paranoid among us (as some smart people were last year) might expect a complete financial meltdown.  Stocks stop trading.  Or how about something totally off the wall -- SHORTING IS BANNED. ETN's (debt obligations) are worthless.  Derivatives implosion.  Who knows.  The US is going banana republic, at warp 9.

So yeah...it's just not quick and easy, as you make it out to be.

 

And yes, this market does have ~50% downside on the S&P.  No idea when.  But I can at least "save" money by not being in a known failing asset class.

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#6) On June 09, 2009 at 1:03 AM, LongTermBull (94.18) wrote:

>If someone could predict what the market was going to do they would be incredibly wealthy and wouldn't be writing about it. 

Or they could be horribly bad at trading, which makes your premise quite worthless.

Really?  That is the line you quote and reply to in my post?  I almost left it out because I had a feeling that would happen.  Totally missed the point of my post.

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#7) On June 09, 2009 at 1:10 AM, LongTermBull (94.18) wrote:

#1 thank you. you saved me from writing this. this belief in "knowing where something should be" is very present.

People choose news that fits their views.  Hey, they said it, not me.  I just think it is important for people to think about the possibility that the market could do anything and they should be as prepared as they can be for whatever happens.  If you just blindly say the market is going down 50% and it doesn't, what do you do then?

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#8) On June 09, 2009 at 4:27 AM, awallejr (79.49) wrote:

And this quote from Martin Weiss, of your link Dwot, really ticks me off:

"And already, the interest rates on 30-year fixed mortgages . . . are going through the roof."

Does he have any experience with real estate closings?  Going through the roof?  Does he forget when people actualy paid 18% interest on home mortgages at one time?  Does he realize that 30 year mortgages are still under 6% for decent credit worth individuals?  It is talk like that that just smacks of Alstry exaggerations.  And since I have been representing clients at closings literally for decades I do have a real life perspective.

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#9) On June 10, 2009 at 9:53 AM, dwot (40.33) wrote:

awallejr, it does not tick me off.  If all was constant then what you are saying would have merit with me, however, at those 18% rates homes cost a lot less, I would expect about 1/3rd of what they'd cost at 6% because of how debt servicing qualifying works.

You are simply better off with a mortgage at 18% that takes 30% of your income then a mortgage at 6% that takes 30% of your income.

Low interest rates are only good for people who are established and have debt at higher rates and can refinance.  They are a disaster for young people starting out.

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#10) On June 10, 2009 at 11:26 AM, awallejr (79.49) wrote:

The point is he is misleading with the term "are going through the roof."  They simply are not.  What impacts home purchases are price and location more than anything.  Whether the interest rate is 5 or 6% won't have any major impact.  What will impact young people will their having to come up with at least some kind of downpayment.  But, depending on their income, the federal tax credit will help.

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