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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (26384)	9/20/1999 3:03:00 PM
From: John Doyle	Read Replies (3) \| Respond to of 99985

LG - I need your help. What put option would you buy to protect a long portfolio at this time?

To: HairBall who wrote (26384)	9/20/1999 3:48:00 PM
From: Jacob Snyder	Read Replies (1) \| Respond to of 99985

I'm buying Nasdaq 100 index puts because: 1. The overall market is overvalued. Stock prices are a function of expected earnings and interest rates. The most useful equation to measure market valuation is: the inverse of 10-year treasury yields equals fair-value PE for the S&P 500, using forward 12-month earnings. So: the yield is 5.98, the inverse is 17. The current forward PE of the S&P 500 is 23.2. (23.2-17)/23.2 =0.27 By this calculation, the market is 27% overvalued. It is that overvalued, even using some very optimistic forward earnings projections, and interest rates near the lowest rates in a generation. Using the same formula, the market was 20% overvalued exactly one year ago. My point is that the market is priced for perfection, with current PEs only sustainable if we continue to have near-perfection on earnings and interest rates. 2. the market has stopped going up on good news. Market breadth, after widening a bit earlier this year, is once more narrowing. 3. inflation in consumer prices looks very likely for the year 2000. We already have inflation in equities, real estate, wages, commodities, intermediate-goods prices. The dollar is falling relative to the currency of the world's second-largest economy. The labor market is the tightest it's been in 40 years. With consumer spending very strong, and companies' costs going up, companies will be able to raise prices. The East Asia mess is the only thing that stopped this scenario from happening in 1998 and 1999, but that region is now recovering. 4. The Fed has very clearly and consistently told us what their response will be to rising wages and consumer prices. I predict a total of 3 to 6 more quarter-point Fed hikes from now through the end of 2000. 5. I chose nasdaq 100 puts, because the big cap techs are the most overvalued segment of the market. They are also about the only broad sector that is still near their peaks. Internets, drugs, financials, have already faltered. Small-caps never took off. The PEs of CSCO, AMAT, INTC, etc are still at their all-time highs, and will contract the most, if I'm right about the market direction. 6. I've already spent 5% of my portfolio on these puts, over the last week. I'll double that stake, over the upcoming earnings season. I expect a repeat of what happened last earnings season. That is, I expect the market to focus on the wonderful earnings during earnings season, and then go back to worrying about interest rates and inflation as soon as earnings season is over. 7. My exit strategy is to sell the puts, in 1/3 increments, when the nasdaq 100 (symbol qqq) falls 10%,15%, and 20% off its highs. For example, if today's 127 turns out to be the high, I'd sell at 114, 108, and 102. With the cash from selling the puts, I'll buy the longest-term out-of-the-money calls available on those same big-cap techs. 8. Anyone see any holes in my logic or facts, or any better way to hedge my overvalued portfolio against an expected 20% market decline?

To: HairBall who wrote (26384)	9/20/1999 8:28:00 PM
From: P.Prazeres	Read Replies (1) \| Respond to of 99985

LG, with all due respect...if you read my newsletter, you'd get the backround behind my views. Actually, a few weeks ago I mentioned on the BK thread that I could see the case for Dow 13,400 in the year 2000... You must have me confused with someone else! Paulo