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Thank you Nick and Rhyssan for posting links to the Grantham articles (PDFs) parts one and two.

http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf
http://www.gmo.com/websitecontent/JGLetterPart2_1Q11.pdf

After reading these articles I agree with several of Grantham's points. The probability that the SP500 keeps rising seems relatively low since the economy isn't truly healthy. Grantham mentioned the market could continue to rise until October before a correction occurs. He also mentioned he's usually too early with his predictions.

What do you think about a 12 Jan $40 synthetic long using SH. Since SH moves inverse to the SP 500 then SP 500 rises 10% SH drops 10%.

I wouldn't have to spend the money for the stock today. This trade could be made for a mid-point net debit of $.50 (as of last Friday's close.)


Market Move Price Max Gain Max Gain (Loss)/Risk
--------------- ----- -------- -------------
10% SP 500 gain $36 $-.5-$4 = ($4.50) ($4.50)/$40 = (11%) loss
10% SP 500 loss $44 $4-$.50 = $3.50 $3.50/$40 = 9% gain
20% SP 500 loss $48 $8-$.50 = $7.50 $7.50/$40 = 19% gain


Even if I buy SH at $36 this implies the eventual (if ephemeral thus far) correction is closer at hand. The probability of a correction seems more likely than a return to recession, but either event would benefit this strategy.

I'd rather be long a crash in NFLX but I don't think a 50% haircut is in the offing. (Apologies to those who are long NFLX. I bear you no ill will. My grudge is with NFLX itself, the great white whale. I want to go Ahab on the one that got away.)

I also chose this strategy since change to the SP 500 should be more predictable than trying to guess how badly single stocks (EBIX and TDSC come immediately to mind) will crater when the news and quarterly earnings seem positive. This hedge avoids the twitchy movements of single stocks.

Am I missing something? If you've got other suggestions I'm receptive.
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