Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Hedging Update (by Dave Pinsen)

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Hey Fellow Slopers,

In our last hedging post, we looked at the cost of hedging the Dow (via the SPDR Dow Jones Industrial Average ETF DIA) and its components. This time, we'll compare the current costs of hedging the Dow with the costs of hedging the NASDAQ 100 (via the PowerShares ETF QQQ) and the S&P 500 (via the SPDR S&P 500 ETF SPY) and a few of their most widely-traded components. First, a quick recap of why an investor might consider hedging now. 

We mentioned a couple of reasons last week:

1) Hedging had gotten cheaper recently, as volatility has declined. Volatility has come down a little more since our last post, with the VIX closing at 16.90 on April 6th, not far from its 52-week low of 14.86.


2) Prudence may be warranted with the end of QE2 scheduled for the end of June. Last week we quoted David Rosenberg, chief economist at Gluskin Sheff & Associates (formerly chief North American economist at Merrill Lynch, who noted that there had been an 88% correlation between the movements in the Fed balance sheet and the direction of the S&P 500 over the last two years. Rosenberg thought there would be a QE3, but maybe not until next year. I didn't catch it until this week, but apparently Marc Faber told Bloomberg last week that he also expects that there'll be a QE3, but not right away. Faber also said that the Fed might welcome a stock correction as a rationale for implementing QE3 ( at about 3:30 of this clip). 

With that covered, below is a table showing the current costs of hedging the Dow, NASDAQ, and S&P 500 tracking ETFs and a few of their components, against greater-than-20% declines over the next several months using the optimal puts (I used the Portfolio Armor iOS app to pull up the optimal puts for these securities, but you can also use the web app versions of Portfolio Armor). First though, a reminder of what "optimal" means in this context, and also an explanation of why I picked 20% decline thresholds.

The optimal put options are the ones that will give an investor the level of protection he wants at the lowest possible cost. Portfolio Armor uses a proprietary algorithm developed by an all-but-dissertation finance Ph.D. candidate to find the optimal contracts to hedge stocks and ETFs.

You can enter any percentage you like for a threshold when using Portfolio Armor(the the higher the percentage, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes from a comment fund manager John Hussman made in a market commentary in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

In the table below, unless marked with an asterisk, the optimal put option contracts for the security expire in October; one asterisk indicates the options expire in September; two asterisks indicate that the options expire in November.

Disclosure: I'm holding a few puts on DIA.



Cost of Protection (as % of Position value)





Cisco Systems









Bank of America












Wells Fargo









PowerShares QQQ Trust



SPDR S&P 500



SPDR Dow Jones Industrial Average



*Based on optimal puts expiring in September, 2011.

**Based on optimal puts expiring in November, 2011.

Google Has Gone Full ‘Tard

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Well, if you didn't think the Silicon Valley was in the midst of a bubble, I offer incontrovertible proof: this article reveals how two Google VPs were offered $100 million and $50 million not to leave the company for Twitter.

These are middle managers, people. We're not talking about Steve Jobs here.

I would never want to be starting a company in this environment. I've been there before, and it's awful. You have to do everything in your power to hang on to people. My challenge in 1999 was to keep people around for their $80,000 salary when they were being offered $90,000 elsewhere. That's a battle I can win. But I would not want to be dealing with a situation where mid-level managers were being offered nine-figure retention bonuses (!!!!!!!!!) just for sticking around at their normal jobs.

Take it from someone who has built a small business; this is the worst environment for entrepreneurs. The easy VC cash may make it seem like a panacea, but it's not. The time to start great businesses is in the middle of a recession when people are happy to work hard for reasonable salaries. What's going on now is grotesque, and we all know how it's going to end.

Google is making a horrible cultural mistake. How would you feel if you were one of Google's 20,000+ employees that weren't being offered a huge fortune to not leave? A little resentful, perhaps? A little less interested in doing a good job? And maybe a lot more interested in applying to Facebook, Zynga, or Twitter so that you could extort cash from your employer as well?

Google, Google, Google. I thought you guys were smart. You are shooting yourself in your multi-colored foot.

News/Equities Correlation

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As a public service, I offer an updated guide to news events, their correlating effect on equity markets, and the longevity of aforementioned effects:

Event: Calamitous nuclear plant catastrophe following epic earthquake and deaths in five figures

Equities: Down 5%

Longevity: 2 weeks

Event: Severe follow-up 7.4 earthquake in beleaguered worldwide economic power

Equities: Down 0.5%

Longevity: 12 minutes

Event: Worldwide nuclear war

Equities: Down 7%

Longevity: 5 weeks

Event: Five-mile wide asteroid impacting earth, destroying all life forms

Equities: Down 12%

Longevity: Permanent, but only because computer systems obliterated

Event: Steve Jobs seen walking down street without extreme signs of physical distress

Equities: Up 30%

Longevity: Indefinite