Trading options isn’t as easy as trading stocks, but it’s a great way of hedging a portfolio’s position and getting some leverage for a low cost. As a hedge, options work like insurance contracts, protecting for “damages”. As a leveraged instrument, options offer traders a way of making huge profits with few funds. But, unfortunately, […]

Shiller published several research articles about asset prices, but it was on “Irrational Exuberance” that he better explained why stock prices couldn’t grow forever without accompanying gains in dividends and earnings. The Yale professor believes we should look at historical values before engaging in any buying frenzy, especially those characterized by the tech and housing bubbles. When prices grow faster than dividends or earnings, P/E and P/Div multiples deviate from the mean. The market is then overvalued, and it will have to catch up with fundamentals sooner or later. Investors should avoid those assets.

Tradespoon’s valuation model includes measures that look at a stock’s deviation from mean valuation multiples as a way of screening the best investment opportunities.

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Last week, the Nobel Foundation announced the winners for the Nobel Prize in economics. This year, they decided to split the prize among three American academics: Eugene Fama and Lars Hansen of Chicago University, and Robert Shiller of the University of Yale. All three of the men have conducted their research on asset prices and […]

The VIX (or the “fear index” as many like to call it) has been trending downwardly. This downward trend has occurred after the VIX was able to record an absolute maximum of $89.53 on October 24, 2008. At that time, liquidity problems, sudden bankruptcies, and downward spiraling equity market all pressured investors out of risky assets. This […]

Just a little less than half of the total national debt is in foreign hands (46.7%). The Chinese are the largest holder, currently holding 10.5% of total U.S. debt, which amounts to $1.28 trillion. It is no surprise why the Chinese have been showing some discomfort with the current deadlock. China is the holder that stands to lose the most out of all creditors.

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The second largest holder on the list is Japan. Japan holds $1.14 trillion of US debt. Both Japan and China have the same goal. They want to maximize exports, thus desiring a strong US dollar. They buy Treasuries in order to help inflate the dollar and indirectly improve their trade balances.

After Japan, no other country has a strong weight in the list. The Caribbean center is the third, followed by a group of oil exporters, Brazil, Taiwan, and some European countries (including the UK). Notably, for those who didn’t know, the Caribbean center is an anonymous group of investors who own US securities but don’t want it to be known. It usually includes hedge funds and oil exporters.

Also included in the list is the whole position for the BRICS (Brazil, Russia, India, China, and South Africa). This is because I believe that we should be careful with their role in international trade, especially because this group has been very vocal at times against the current monetary policy followed by the Federal Reserve. To these countries, it has been perceived as a competitive devaluation. They currently hold 31.1% of US foreign debt, which represents a non-negligible 14.5% of total national debt.

The current strategic games played between Republicans and Democrats may be very effective for either party involved, but their effect on the international community has been neglected. For creditors, it doesn’t only matter if you end up servicing the debt, but also how you do so. If you scare a creditor, they won’t be likely to lend anything to you the next time. If they do, it definitely won’t be given at the same rate because they will perceive extra risk deriving from it.

It would not be the first time that some of the BRICS pushed for a substitute to the dollar in international trade. With the dollar exposed to unconventional measures of monetary policy and fiscal and political uncertainty, it is losing its appeal. When the problem is solved, China will certainly be happy to re-invest in US Treasuries, but they will also be searching for long-term alternatives. The oil exporters group, for example, has always been looking to conduct part of the oil business in Euro. The current uncertainty has left them pushing for it more than ever, as the possibility of the US dollar being damaged looms overhead.

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While President Obama searches for alternative strategies that would allow him to reopen the government without House approval, some foreign investors are becoming increasingly worried about what will happen next. For these investors, trillions of dollars are at stake. Even if approving funding solved the issue of the shutdown, it  still wouldn’t contribute any solutions […]

The Future

When all these things are considered and the consequences of the financial crisis the United States is, it becomes obvious that something needs to be done regarding the current debt level. Pretending debt isn’t a concern and that debt ceilings could be pushed infinitely higher without negative consequences certainly isn’t a wise way of dealing with the problem. Many European countries had to apply some austere policies in order to avoid the worst. It is becoming clear that America will have to do the same to some degree.The Federal Reserve won’t be able to buy Treasuries forever. At some point, interest rates will start rising and it would become increasingly harder for the government to repay what it owes.

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For the time being, we are assisting in the same war we saw in the past between Republicans and Democrats. Obama doesn’t want to see his healthcare program delayed any further and insists on keeping it as it is. However, Republicans are pressing the President and threatening with the possibility of shutting down government due to a lack of funding. The Senate voted in favor of keeping the government running  however, the House decided to allow a government shut down.

The risk of a governmental shut down is due to the fact that both the Republican and Democratic parties felt they could push blame and responsibility off on the other. However, the consequences of their inability to pick up responsibility before it is too late may end up being disastrous for the future of the USD. The international community will perceive the American dollar as weaker than it was in the past and may reclaim higher interest rates to hold Treasuries (by reducing demand). This would either push interest rates higher or tie the Federal Reserve to a QE4EVA program.

At this point it would be  best if Republicans and Democrats would find a balance, working together to find solutions rather than making the problem harder to solve by focusing only on their differences  and put an end to their fight. It is time to start looking at ways of fighting the current debt levels, That means not only cutting on some expenses, but also raising taxes. If Obamacare is to move forward, taxes will have to raise even more. There’s no other option if we want to service the debt.

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Just two years after experiencing one of the worst months in stock market history, the market has the possibility of reviving the period. Republicans and Democrats are continuing to fight each other while the country financially sinks. In August 2011, the debt rating for the U.S. was cut by S&P from AAA to AA+. This […]