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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: OT: Went Long 100sh of UNG Date: 3/22/2012 9:35 PM
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All,

Yes, my buying UNG was a stupid mistake, done with inexcusable ignorance, as several posters have now pointed out and with whom I now fully agree. So, tomorrow I'll fix the mistake and unwind the position. Meanwhile, my shorts are making money, up another 1.35% today on one, and another 2.29% on the other, which strongly suggests that strategy is working the way it was intended. So, some background is in order.

The upside to bonds in a moderately-down market is that "flight to quality" tends to push prices higher on assets that are mostly interest-rate plays. The downside to bonds in a rising interest-rate environment is that re-pricing tends to push prices down. That's part of the tug of war now being played out. The Fed/Treasury cartel is using every trick it can to keep the rates offered by Treasuries from rising, because rising rates would exacerbate the Federal debt/deficit problem. However, there are also external forces at play, like China backing way from rolling over its short-term Treasury holdings, as a recent John Maudlin guest essay details.

Meanwhile, in the credit-risk portion of the bond market, yield-hungry investors are still pushing prices higher even as the economy is stalling. So that portion of one's holdings (if one invests across the credit-spectrum) are showing mixed signs. Some are still moving up in price even as stock prices back off a bit, and some are rolling over. But I'm seeing is what I generally see. When stocks do well, bonds do poorly, and vice versa, which provides the rational for the traditional, 60/40 balance fund and the opportunity for risk-adverse investors to make this choice: "Do you want to eat well, or to sleep well?" Those who favor the former tend to favor equities, and those who favor the latter, the latter, which works well in theory until markets blow up and all long correlations go to one. Thus, enter the role of shorting as a means to diminish left-tail volatility.

No one but a rabid indexer worries about right-tail volatility. But left-tail volatility is what kills overall returns, because the gains needed to make up losses are geometric. (It takes an 11% gain to make up a 10% loss, a 100% gain to make up a 50% loss.) So losing money is Not a Good Thing, but, also, it is unavoidable if gains are to be achieved. ("Afraid to lose is afraid to win.") So that's a conservative investor's conundrum. For lots of reasons (that are mostly due to the fact that equities re-price inflation) markets tend to have an upward bias that is daunting to swim against. In fact, most investors don't attempt it. But anyone who suffered through the 2008-2009 declines, horrified at what was happening and was too frozen in fear to respond appropriately (to which I'll plead guilty) and who failed to get massively short as a means of offsetting on-going losses should be considering a dipping a toe into that water this time around as a means of hedging one's longs (whatever their asset-class).

IMHO, 'natch
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