Question: what index is up 65% so far this month at a time when stocks have shed 15%-20%?
Answer: The VIX, also known as the CBOE Volatility Index.
I don't know about you, but anytime I see a parabolic move like that, I can't help thinking, ''There's no way this can last." But to actually man-up (sorry ladies, just a figure of speech) and short it here, well, that takes actual guts. Or "conviction," as Harry Rady of Rady Asset Management says.
"It is by far our largest position," the self-described "deep value, tactical contrarian" says in talking about being short the VIX. "Given how wild the swings are and how significant they are, it creates real opportunity and creates real inefficiencies," he says.
While Rady concedes that the VIX could still push higher from here, over the coming months he believes that volatility will compress, as it has "95% of the time."
If you like that call, try this one on for size: "I am short gold." I'll let him explain.
"That's more of a short-term play. Like the tech bubble of 2000, if you go to cocktail parties, all you hear people talking about is gold," Rady says. "We think that there's a bubble building and that in the short-term there's going to be a little pop...that it's overcooked."
And he's not done there. If you're among the masses who have sought refuge in Treasuries lately, let's just say that you might want to get near some water.
"I look at Treasury investors right now as investors that are hiding in a burning bush," Rady says. "It seems like it's the only place to hide but I wouldn't hide there too long because you could end up on fire," Rady says in describing his intermediate call that rates are headed higher and thus, Treasury prices lower.
In fact, Rady says in the coming months and years, rates could double as investors around the world demand a higher risk premium from a borrower whose balance sheet Rady describes as "a mess."
Are you listening, Tim Geithner?
"We are short long-dated Treasuries in a big way," says Rady. "It's a very high conviction trade. We just think there is very low probability that rates go much lower and stay there for a significant period of time but the probability that they go higher is much higher."
If you care, he calls this "an asymmetric risk-reward ratio skewed to the downside."
I just call it smart.
But alas, all is not aflame at Rady. They are also building long positions in high quality, dividend paying, multi-nationals that are economically insensitive and can deliver consistent growth.
Vodafone (VOD) and Telefonica (TEF) get the green light for their fat dividends and slender PE ratios. He also likes specialty pharmaceutical companies like Warner-Chilcott (WCRX), Valeant (VRX) and Teva Pharmaceutical (TEVA).
"We go when others are coming and come when others are going," he says. "That's how we make money."
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