WindRock - Displaying items by tag: Equities

20 Minutes with Doug Casey

Published in Podcasts
Wednesday, 29 November 2017
Few investment experts have the unique background, opinions, and uncanny timing possessed by Doug Casey.
In this podcast, Mr. Casey discusses: what the future holds for European bonds and the euro given excessive debt levels and active secessionist movements; why the Federal Reserve's planned "unwinding" of its bond hoard is not feasible; what other risks may increase U.S. interest rates dramatically and derail the stock market; and why the future bull market in commodities warrants investment consideration.  November 2017.


Investment Theme Series-Cannabis

Published in Articles
Wednesday, 07 June 2017

Financial Market Update-1Q17

Published in Articles
Friday, 05 May 2017

Irrational Complacency

Published in Blog
Wednesday, 29 March 2017
March, 2017

complacency (noun):

      a feeling of quiet pleasure or security, often while unaware of some potential danger, defect, or the like.

The financial markets feel complacent.  Time and time again, stock market investors merely shrug at adverse financial, economic, and political news.  Even the Federal Reserve’s rate hike on March 15th failed to elicit a negative reaction.  And the statistics support the anecdotes.

Financial markets typically equate risk with volatility.  The greater the volatility generated by stock prices, the greater the risk of the stock market.  The most common measure of risk is the Chicago Board Options Exchange (CBOE) Volatility Index, also known as the VIX.  Constructed from the implied volatilities of a wide range of S&P 500 index options, it purports to measure expectations about near-term (30-day) volatility.

If high VIX levels indicate fear within the stock market, low levels surely suggest complacency.  It is not unexpected, as long bull markets often breed complacency.  But the level of worry and fear of a stock market decline has dropped to unusually low levels.

For much of March (through the 24th), the VIX ranged between 11.0 and 13.1, far lower than its median (17.5) or average (20.7) since the summer of 2008.  And far, far below highs observed as recently as 2015.1

Even the Federal Reserve appears worried.  In its January 31st to February 1st Federal Open Market Committee meeting minutes, the central bank “expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook.”2

What are these uncertainties?  To name but a few in the near term:

  • Potential additional rate hikes by the Federal Reserve;
  • Likelihood of a European banking crisis with a probable summertime Greek default;
  • Monetary instability if the European election cycle disrupts the future of the eurozone;
  • Potential trade war with China; and
  • U.S. fiscal issues and legislative stalemates delaying or obstructing tax reform.

In December 1996, then Federal Reserve Chairman Greenspan famously implied stock market levels at the time reflected “irrational exuberance.”3  He was early, but he was right (and, quite frankly, he should have been right as he was almost singularly responsible for the bubble).

If the 1996 stock market reflected irrational exuberance, today’s stock market reflects irrational complacency.  Combined with extreme market valuations, investors should be wary, for while sentiment may move markets, eventually reality moves sentiment.

1) Federal Reserve Bank of St. Louis.
2) Minutes of the Federal Open Market Committee, January 31-February 1.
3) "The Challenge of Central Banking in a Democratic Society."  Remarks by Chairman Alan Greenspan at The American Enterprise Institute for Public Policy Research,
     (Washington, DC) 5 December 1996.


Profiting When Stock Markets Fall

Published in Podcasts
Thursday, 21 January 2016

With increasing signs of a global recession, stock markets throughout the world have experienced one of the worst annual starts in history.

Many investors fear 2016 will bring another stock market downturn similar to 2000 and 2008.  While investors can protect themselves by selling equities or even shorting the stock market, both of these approaches involve potential problems.  An options strategy offers a third alternative with the potential for sizeable profits.

WindRock interviews Ed Walczak, Senior Portfolio Manager of the Catalyst Hedged Futures Fund, about the use of an S&P options strategy.

January 2016.

Defense Wins Games

Published in Blog
Friday, 04 September 2015

September, 2015

Football fans always get excited about offensive prowess, but they also know that when it counts, it is defense that wins games.  After a seven-year run in the U.S. stock markets leading to near-record valuations, veteran players know it is time for some solid defense by reducing risk in equity portfolios.   The question for investors is: how to play defense in this increasingly uncertain world?

There are three primary ways to reduce equity risk.  First, by significantly reducing equity exposure or exiting the equity markets completely.  Traditionally, proceeds from equity sales are reinvested in bonds to await cheaper equity prices.  This strategy has often worked in prior market downturns – and it may initially work with the next one – but we foresee a day when bonds sell off along with the stock market.  It also requires some market-timing expertise.

The second strategy is the traditional diversification model touted by mainstream financial advisers.  This model includes a broad mix of higher risk-assets in order to reduce overall portfolio risk.  The theory states that, by mixing U.S., international, small and large-capitalization stocks, overall risk is reduced since these stock categories typically do not move in lockstep.  This theory has led many investors to actually increase their overall equity portfolio risk (as we have recently experienced) since equities in different corners of the globe can all quickly tumble together during a contagion.  So although traditional diversification may prove beneficial during normal times, it fails miserably during periods of systemic crises such as 2008.  In our view, record debt levels throughout the world, combined with unprecedented monetary expansion, increase the likelihood of systemic risk.

Hedging, the third and most compelling method to reduce equity risk, uses assets which should increase in value as stock markets decline.  Traditionally bonds have performed this task, but as discussed above, those days may be ending.  An asset which may now fulfill that role is volatility itself.  Today, volatility is a tradable investment vehicle.  Commonly referred to as the “VIX”, volatility reflects levels of risk in the stock market and rises as investors become more fearful.  In two consecutive trading days in late August (2015), volatility rose by over 45% each day.  The increase in volatility from the August low-to-high was over 230%!  However, other than periods of turmoil, the VIX is often flat or slowly declining.  Therefore, an active-management approach is essential.

There are several investment funds which employ strategies that allow participation in rising equity markets, yet utilize volatility to eliminate or at least mitigate the risk of bear markets.  Some volatility investment vehicles can even have exceptional returns during deep equity drawdowns.  Even small positions in volatility can provide substantial benefits during market downturns.  Today, volatility should be considered a key asset class and legitimate strategy for playing defense against the risk of a systemic crisis.

Could Equities Fall Back to 2009 Levels?

Published in Blog
Wednesday, 10 September 2014

October, 2014

Yes, according to historical data on previous bear markets.  The average bear market has wiped out over five years of gains with an average decline of 38%.  However, the three deepest downturns (as measured by the duration of the previous bull market wiped out) each negated approximately 12 years of returns on average.  During the last downturn ending in 2009, a 60-year old investor would have seen their wealth evaporate back to age 48!  We are not calling for an imminent crash, although we think valuations look dangerously lofty and built on the false pillars of low interest rates, accelerated stock buybacks, and government money printing.  These forces can keep pushing the equity markets higher, but they are all artificial and the pendulum will swing back once they falter.

Most investors are blinded into focusing on how they are keeping up with the S&P 500 on a quarterly basis and lured into buying more stocks as the market rises (so called “rear-view investing”).  The real experts know that building and maintaining wealth is largely an exercise of compounded math.  Making money on the upside, yes, but avoiding the big haircuts that bear markets bring.  Keep in mind that an investor who loses the average 38% during a bear market needs a return greater than 60% just to get back to even.  If an investor was able to get more defensive near the market top and held losses to half of the decline (or 19%), they would need a much more reasonable 23% to get back to even.

The experts also realize that wealth is created in bursts.  They’ve gotten rich by doing the opposite of the crowds at inflection points, but patience is a virtue.  Just when emotions tug average investors into buying more equities, the experts scale back, remain patient, and avoid the full damage of these bear markets. By doing so, they are then positioned to “play offense” near market bottoms and buy into cheap valuations as fear and uncertainty consume the masses.  For investors whose emotions are tugging them into the rising equity markets, buyer beware.

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