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Higher vol, higher hedging costs
The Chicago Board Options Exchange Market Volatility Index (VIX) declined 6.77%, to 36.36 on Friday. To illustrate how this level of volatilty affects hedging costs, I've included the two tables below — one showing the hedging costs of a basket of ADRs and ETFs on Friday, August 12, and another showing the hedging costs of the same basket on August 2nd, with the VIX under 25. Before that, though, a quick note of thanks to Tim and my fellow Slopers.
EWZ (Brazil) ETF
I entered a short on the Brazil ETF today after it managed to fight a great fight back from the $56 area all the way to overhead resistance at $61.50. For several days I've been highlighting this area as a great place to enter a short as the $61.50 area served as great support previously and now serves as overhead resistance. I also like the trade because I can now have a clear stop out point on the trade that will limit my downside risk if markets continue to move skyward.
Here are the key numbers.
Exit target on this short – $56.50
A deeper target is $48
Stop = $62
If the trade is wrong, this could go to a high of $69, so there is even a possiblity of a reversal and going long here.
EMERGING BULLISHNESS DESPITE THE BONE CRUSHING FALL
You might ask what would cause me to look for a short here since it has been so hurt in recent weeks. First, the chart presents a good risk reward entry with a very defined exit point on both sides. Second, I see comments like these found below in a recent Financial Times Article. I've underlined and put in bold the craziness that he is spewing.
http://www.ft.com/intl/cms/s/0/962942a6-c27b-11e0-9ede-00144feabdc0.html#axzz1UbAWJBHG
"Jerome Booth, head of research at London-based Ashmore Investment Management, says investors “had to get their heads around” the idea that emerging markets are no longer the main sources of risk in the world. While developing countries engage in a process of deleveraging that could take decades, the main pools of global liquidity today reside with emerging market central banks, which hold most of the world’s foreign exchange reserves.
“If you are a conservative investor like me (you are) 90-95 per cent invested in emerging markets,” he says. "
Perhaps he should come work for the Department of Communication for our Government. "I'm conservative!!!" Wow!
As usual, I want to present as many views as possible. Here is another article from Bloomberg that reinforces that emerging markets are down with their sickening swoon and now is the time to buy. – http://www.bloomberg.com/news/2011-08-09/emerging-stocks-priced-for-profit-tumble-signal-bottom-to-morgan-stanley.html
HOW ABOUT THE BEAR PERSPECTIVE
Finally, last evening, Market Sniper provided this link that isn't as glowing on Brazil. This is from John Maudlin who presents some analysis by Stratfor.
http://www.johnmauldin.com/images/uploads/pdf/mwo081111.pdf
As of the completion of this typing the trade is going my way, but that doesn't mean that it can't reverse. Holding over the weekend is probably crazy these days — heck holding overnight is insane, so if I squeeze out a few dollars today I might just be out looking to enter again down the road.
GOATMUG
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