"The true "end game" is probably 100 to 200 years away"
Not a good bet, imo. Like technology, which accelerates geometrically -- and largely because of it -- political, social and economic change will accelerate. Not so long ago, empires lasted centuries and basic social orders, millenniums.
I don't dismiss the Chairperson of the Fed saying stocks look high, given the background of her prior statements that the Fed is looking to raise interest rates. The Fed knows were in a liquidity trap, just as Japan has been for years. It's a serious concern. And I'm seriously considering closing out my longs until this plays out some more. Do we get hike or not? And is that enough to correct the market when rates will still be so low that there's no other good place to put your money? ( I also expected a bigger push up from this earnings season, given the low price oil stimulus.)
About the prediction that this is the beginning of the BIG ONE -- don't see a concrete reasons to bet on that now. But as always good reasons to keep that possibility in mind. . . .
" I might exit around Oil at 50 or so, depending on price action."
Even though I'm long oil, I think short at 59 and exiting around 50 is a sound bet; thinking about it. But almost all my short term calls are bad, so I hesitate. If I do, I'll cover if it convincingly breaks 60.
By shorting SCO and DTO, went long oil starting when oil was at 75; continued to short those stocks thru oil at 45, with shorts most concentrated at oil 55. My average was around oil 60, about where we are now. But I'm almost 20% up. With an average trade being about 3 to 4 months old. So with respect to inverse leveraged funds -- especially commodities -- this is a testament to decay when a stock boomerangs, as well as to the costs/fees regardless of direction.
Gonna take a little profit, but will add if we get a nice dip.
"Separate issue that I didn't make clear"
Thanks, rq. I really appreciate your posts, though admittedly I'm challenged to follow frequently challenged to follow you.
"And of course the compounding is equally devastating to the leveraged funds that are on the wrong side of the trend."
Agree that time -- fees and costs really -- is not the major fact in leveraged etf decay. But don't understand your theory about etf's 'holding futures in two different months.". What is the compounding?
"I would like to see someone like Scott Walker a guy that has a proven track record"
The board has really improved without all the political bs. Like this. Walker is bought and paid for by the conservative wealthy, like -- one on the worst -- gambling boss Sheldon Adelson. Yeah, Walker's really going to expose the "fraud on the masses."
"The most ironic part of all this is that a dem was in the WH for the entire time and won because they are for the people."
Basically agree, though I'd replace "ironic" with "important." The appointment of Timmy -- author of the GS/AiG bailout (legalized theft) -- as Treas Secretary, well, that said it all. The Dems can't compete with the GOP without a least ONE major power/money base. That would be the hometown industry of the Northeast -- finance.
"Today we are transitioning into the the information economy. Great for the educated in science and computer science"
Not really good for anyone except the super-wealthy. This is not because we're producing different products. Automation and foreign competition plays a part. Ask the doctors -- whose slice increasingly goes to insurance and drug corps. Or the lawyers recently graduated. Most can't find ANY legal job, and most of the rest don't get good ones.
"Then the GOP Senators' letter to Iran expressly split US authority, signaling that the nuclear deal – whatever it might turn out to be – would not be ratified."
This part of my post is probably wrong. The nuclear deal with Iran -- because what US would be giving is only to limit or end sanctions -- can probably be done by executive action. A treaty would not be necessary, so neither would Senate ratification But otherwise I think my speculation about events seems plausible. And, btw, if the GOP Presidential candidate wins in 2016, the deal could be undone by exec action. (Though the political and diplomatic cost might be too great even for the GOP.) Of course, there's no deal yet. . . .
""One of the knocks on shorting has always been that the potential gain is limited to 100% while the potential gain from being long is theoretically unlimited."
Aapl, I think this point applies to equally leveraged etf's. You can't make 200%, for example, shorting a 2x bear or bull etf. Because the max gain is when the etf falls to zero, and you have zero to buy in order to cover -- so you just make the amount that you put down ('sold" short),. What leverage does get you when you short a leveraged etf is greater speed in approaching your potential 100% (and decay is working for you). The downside, of course, is there's greater speed of loss if market turns against you, and there's no upper limit to your loss. All this suggests that perhaps I should have saved more powder to buy UCO when the market might be turning -- something that all the 'experts" say is simply not on the horizon. But timing is so hard -- I'll be satisfied with a 25-50% gain, which seems realistic on this trade, albeit a long way off.
"One of the knocks on shorting has always been that the potential gain is limited to 100% while the potential gain from being long is theoretically unlimited."
A good point, certainly true for regular stocks. Not sure about etf's; i'll have to think it about it some more. Might be different because they value tracks percentage gain or loss. Empirically, the returns on the long and short etf's (for example SPXL and SPXS) are comparable going up or down. But I'll get back to you on this.
" If oil went to zero tomorrow, I assume SCO would be up 200% (double 100%)."
If oil went to zero from it's current level, SCO would be up MANY multiples higher than 200%. Think about the percentage gain going the other way say if you bought when oil was 10 cents and it goes to $50. The two simple principles that apply to etf' based on percentage gain in whatever is the measuring stick; a boomerang market increases decay, the bigger the swing, the more decay. this is math. And a directional market actually accelerates the gain (and I think may actually decreases the loss -- not so sure about that). I think this is also math but never thought it out; just observed leveraged etf's.
"The end to the hissy fit in Yemen and Iran having sanctions lifted will send oil down in a hurry."
Hissy fit? I obviously don't what will happen in Middle East or with oil, but the ME is on the cusp. Netanyahu's pre-election comments and conduct publically defied and embarrassed the Obama Administration on the critical issue of a nuclear deal with Iran. And for the first time, an Israeli Prime Minister effectively made an overt territorial claim to the West Bank. Then the GOP Senators' letter to Iran expressly split US authority, signaling that the nuclear deal – whatever it might turn out to be – would not be ratified. This is the most OVERT ACT splitting U.S authority in major U.S. foreign policy that I recall offhand. (And btw, it is more about national US politics than the Middle East, with the GOP striving to increase its inroads into what had been traditionally the Dem territory of US Jewish power players in Wall Street and Hollywood.) When the Obama Administration provided air support to Houthi attack upon ISIS and al Queda groups (not against the Yemen government, such as it is), Saudi Arabia attacked the Houthis. I doubt the Saudis would have overtly and militarily opposed U.S. military action but for the overt split in U.S. authority. But that of course is guess on my part; the Saudis have more at stake than we do. What's next?
Hissy fit? Look, delta, I'm was inclined to agree with you (though I didn't actually bet on it) that the oil spike would be temporary. Low oil prices right now seem to b e firmly supported by important U.S. and Saudi policy and economic goals. But the global/regional struggle in the Middle East is very real and volatile. So who knows?
I don't like talking politics on this board. In situations like this where it is directly related to market moves, it seems relevant. Also maybe a great example of how you can really be burned if your ideological beliefs reign supreme.
"As far as whether the ETF has done this or that during periods of whatever, keep in mind the history of it is not that long."
Don't doubt that market forces other than the daily swings affect decay. But the math of etf decay from daily swings doesn't change. Today, with oil closing at 48.9, UCO closed at 7.07; SCO closed at 84. On January 7, only about 10 weeks ago, oil was at this level, and UCO's range was 8.16 to 8.68; SCO's range was 89 to 95 . That's serious decay in both the bull and the bear leveraged etf's. Even USO – not leveraged – closed today at 17.14, but on Jan. 7 ranged between 18.05 and 18.65.
Aapl, that's for the short clear explanation of contango and backwardation. Since the bear etf's are based upon the Bloomberg WTI Crude Oil Subindex, which measures the price of oil by futures contracts, they are, as you say, very material to the performance of the index. I can see how contango would negatively influence my bet on long oil regardless of when I'm long the long etf or short the short etf. Remains to be seen how much. That's the sort of calculation I am confident that I can't begin to formulate.
Looking on the bright side of my bet, it's just simple math that an eff decays when it declines and then advances (though I take it that decay could be offset to some degree by contango). If there's any substantial period when the price of oil boomeranged but the bear etf didn't decay, I don't know about it. And ultimately I'm betting on some recovery in the price of oil -- spot and futures. Also, please correct if I'm wrong, but wouldn't a consistent contango represent the market's expectation that oil prices will rise? Also, is it unreasonable to expect at some point a change to backwardation (which would help my bet)? Particularly after a significant rise in oil prices?
"bj, long term the curve isn't always in contango. Sometimes it's in backwardation, which benefits the long oil ETFs and hurts the bear ETFs. Right now you've got massive contango. The bear ETFs are very unlikely to decay in this environment."
Truth is, I don't understand contango/backwardation. What I do understand is that LEVERAGED etf's -- and more so generally the bear etf's -- decay enormously on a large boomerang move. At least in part it's pure math. The basic standard for pricing an etf is the percentage of the move. It takes a greater bigger move percentage-wise to get back to even after a drop. I started shorting SCO and DTO when oil was in the 80s and have added to those positions all the way into the 40s. Even now (never mind a year from now), if oil climbed back to 60, I expect even my trades at 80 would be in the black.
"Bear oil funds benefit hugely from contango."
Haven't done the short-medium term math. Long-term -- especially when there's some boomerang with large swings -- they decay amazingly. Except in a directional market -- like it's been pretty much -- relatively straight down. But even in this market, there were ups and downs that I bet registered some decay. If you can short the bear etf, especially a leveraged one, and hold it, almost a sure thing. But holding might be a problem. Haven't looked at the oil options -- wonder how far out you can go. Probably should have looked into that before now, since I'm close to my long oil limit.